When buyers use a purchase-money mortgage, they work out a deal with the seller. Since it’s a private mortgage, buyers and sellers have few regulations or requirements to meet. Below are the purchase-money mortgages that buyers and sellers most often use. A land contract is a mortgage from the seller. The seller could own their home free and clear or have an existing mortgage, which would change the way the title reads. In either case, a land contract occurs when the buyer and seller agree on the down payment amount, interest rate and payment frequency. The buyer pays the seller the agreed-upon amounts on the agreed-upon dates. Once the buyer pays off the mortgage, the seller transfers the deed to the buyer, and the buyer owns the property.Land Contract
Lease Option Agreement
A lease option agreement is a rental agreement with the option to buy the home during the lease or when it expires. The buyer and seller work out the lease details and the chance to buy when negotiating the real estate transaction.
Most lease option agreements use a portion of the monthly rent toward the down payment to purchase the home. If you don’t exercise your right to buy the house, you forfeit the extra money paid each month to put toward the purchase.
Lease-Purchase Agreement
A lease-purchase agreement is also a rental agreement, but the buyer commits to purchasing the home at a later date. The buyer generally pays an option fee for the exclusive right to buy the property and secures financing at a later time in order to complete the purchase. The buyer usually pays additional money each month to apply toward a down payment. If the buyer is unable to secure financing, they typically forfeit the option fee and the additional monthly amount they have been paying toward the future purchase of the home.
Assumable Mortgage
If the seller has a mortgage on the property that has more favorable terms than are generally available for new mortgages at the time of the home’s purchase, the buyer may be able to assume the mortgage. This means the buyer takes over the loan where the seller left off, making the same payments at the same rates.
An assumable mortgage and a purchase-money mortgage usually have different interest rates and terms. It’s important to note that buyers must qualify with the lender to assume a mortgage before taking it over. Generally, the option to assume a mortgage is applicable to government-backed mortgages such as FHA, VA or USDA loans.
Hard Money Loans
Another option is a hard money loan, which is from private investors who focus on the property itself rather than the borrower’s qualifications. The only problem with hard money loans is they’re short-term and carry much higher interest rates. They are commonly used for commercial property transactions.
A hard money loan can be a viable option if the buyer doesn’t have great credit but will fix it within the next couple of years, allowing them to qualify for traditional financing to pay off the hard money loan.
Not sure if these options sound right for you? Make sure you explore all your options.
