🏡 What Is a Purchase-Money Mortgage in Real Estate?

A purchase-money mortgage is a special type of financing where the seller provides the loan to the buyer instead of a bank. The buyer makes payments directly to the seller, and the property is used as collateral—just like with a traditional mortgage.

How a Purchase-Money Mortgage Works

Instead of getting financing from a bank or lender, the buyer finances the property through the seller. This is common when:

  • The buyer cannot qualify for a traditional mortgage.
  • The property does not meet lender requirements.
  • Both parties want a faster, simpler closing.

The buyer signs a mortgage or deed of trust with the seller, and the seller becomes the lender.

Key elements:

  • Down payment (negotiated)
  • Interest rate and loan term
  • Payment schedule
  • Default and foreclosure rights (seller can foreclose)

Why Purchase-Money Mortgages Matter

Benefits for Buyers:

  • Easier qualification than bank financing.
  • Lower closing costs.
  • Flexible terms negotiated directly with the seller.

Benefits for Sellers:

  • Attract more buyers.
  • Earn interest on the loan.
  • Faster sale of hard-to-finance properties.

Example of a Purchase-Money Mortgage

Suppose a buyer cannot qualify for a loan because the home needs repairs. The seller agrees to finance the purchase:

  • Buyer pays a $15,000 down payment.
  • Seller finances the remaining $185,000.
  • Buyer makes monthly payments directly to the seller.
  • If the buyer defaults, the seller may foreclose.

This arrangement allows the sale to move forward without traditional bank approval.

Why Purchase-Money Mortgages Matter for FSBO Sellers

  • Can help sell properties that won’t qualify for conventional loans.
  • Attracts buyers who cannot get bank financing.
  • Gives sellers steady monthly income from interest.
  • May result in a higher sale price due to favorable terms.