A “purchase money mortgage” is a mortgage 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 purchase 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.
Purchase Money Mortgages Easier to Qualify For
The good thing about a home purchase mortgage is that it generally comes with the easiest mortgage underwriting guidelines.
In other words, you’ll 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.
The credit score requirement with a purchase money mortgage will also likely be lower than that tied to refinances for example.
With a refinance mortgage, you will probably be more limited as to what you can borrow, including reduced LTV ratios and higher credit score requirements.
Purchase Money Mortgages Come with Lower Rates
Another benefit of a purchase money mortgage is that the associated mortgage rate will be lower than that of a refinance.
When you refinance, mortgage lenders typically hit you with a pricing adjustment, which will up your mortgage rate and/or closing costs.
With a purchase money mortgage, there won’t be a pricing hit, and you may even be entitled to a pricing rebate.
Types of Purchase Money Mortgages
Similar to a refinance, a purchase money mortgage may come in the form of a fixed-rate mortgage or an adjustable-rate mortgage.
You can also get a second mortgage at the time you get the first mortgage – this is known as a piggyback second, or a purchase money second mortgage.
This is one way to put less down on a home purchase, while also avoiding mortgage insurance if you keep the first mortgage at 80% LTV or below.
Where to Find a Purchase Money Mortgage
If you’re in the market for a home purchase mortgage, be sure to do plenty of shopping.
Assuming you shopped around a lot to find your home, it’d be foolish to skimp when it comes time to obtain financing.
Try your local bank, rival banks, credit unions, and mortgage brokers to obtain mortgage rates and to see available loan programs.
There are seemingly endless scenarios, so be sure to exhaust all your resources, as a home purchase is likely going to be one of the most significant in your lifetime.
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.
