Purchase Money Mortgage

A “purchase money mortgage” is a home loan used to purchase a piece of property, whether it be a principal residence, a second home, or an investment property.

If you’re looking to buy a home, you’ll generally need to apply for a purchase money mortgage to obtain financing, unless of course, you plan to pay with cash.

Most of us aren’t lucky enough to have the necessary amount of funds on hand to buy a home outright, so we must turn to a bank or mortgage lender for financing.

Purchase Money Mortgages Are Easier to Qualify For

The good thing about home purchase loans is that they generally come with the most flexible mortgage underwriting guidelines.

In other words, you’ll be able to borrow the most amount of money at the highest loan-to-value ratio (LTV ratio) if the purpose of the loan is a home purchase.

For example, the FHA allows home purchase financing with as little as 3.5% down, and specialty programs such as Fannie Mae’s Homepath only require 3% down, with gifts or grants permitted to cover the down payment.

Conversely, those looking to pull equity from their homes via a cash-out refinance may be limited to 80% LTV or lower, with higher credit score requirements to boot.

At the same time, the credit score requirement for a purchase money mortgage will likely be the lowest out there.

Purchase Mortgages Come with Lower Interest Rates

Another benefit of a purchase money mortgage is that the associated mortgage interest rate will be lower than that of a refinance.

When you refinance your existing mortgage, mortgage lenders typically hit you with a pricing adjustment, which will increase your mortgage rate and/or closing costs to some degree.

With a purchase money mortgage, there won’t be a pricing hit, and you may even be entitled to a pricing rebate. Sometimes lenders offer purchase specials, such as .25% credit to help cover some of your closing costs.

Similar to any other type of home loan, a purchase mortgage may come in the form of a fixed-rate mortgage or an adjustable-rate mortgage, with varying terms, such as 30-year and 15-year options.

You can also get a second mortgage at the time you take out the first mortgage – this is known as a piggyback second, or a purchase money second mortgage. Typically, these come in the form a home equity loan/line, often from a different bank than where you get your first mortgage. However, both loans must close concurrently.

This is one way to put less down on a home purchase, while also avoiding mortgage insurance if you keep the first mortgage at or below 80% LTV. A first mortgage kept at or below 80% LTV should also result in a lower interest rate, assuming one high-LTV loan is the alternative.

Real Estate Agents Will Strongly Influence Where You Get Your Mortgage

If you’re in the market for a home purchase mortgage, be sure to do plenty of shopping. I’m going to assume you didn’t buy the first house you came across. The same should be true for the first mortgage rate quote you receive. Sure, it might be the best out there, but it’d be foolish not to see what else is out there.

While your real estate agent may have their preferred lender, and the home seller may have theirs, it’s important to get some independent quotes as well to see how they stack up. Try your local bank, rival banks, credit unions, and mortgage brokers to obtain mortgage rates and to compare available loan programs.

There are seemingly endless scenarios, so be sure to exhaust all your resources, as buying a home is likely going to be one of the most significant decisions you’ll make in life.

For that reason, make sure you choose a reputable lender, not just the bank that supposedly offers the lowest rate. You can get away with a few mistakes on a refinance, but a home purchase has a strict timeline that must be met. Errors can be costly and extremely stressful.

Note: A purchase money mortgage may also refer to seller financing, in which the home seller provides some of the financing to enable the buyer to purchase the property.

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