While a home purchase loan can come in handy in some situations, it’s important that you know as many details as possible so that you can plan properly and avoid any extra headaches. The Home Loan Expert team has compiled some of the key facts about these loans so you can make your decision with confidence.
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What Is a Home Purchase Loan?
A home purchase loan, usually referred to as “seller financing,” is a scenario in which the buyer and seller of a home come to an agreement to work out payment amongst themselves, with limited intervention by a third party. The circumstances necessitating a home purchase loan are generally uncommon, and they require certain criteria to be met by both buyer and seller. But in cases where the buyer is unable to attain a traditional mortgage, it can be a good way for both parties to arrive at a sale.
In some cases, a purchase money loan may be provided by a larger, more traditional agency like us.. These situations are less common, however, and usually only arise in extenuating circumstances, such as when the initial mortgage was insufficient to cover the full cost of a house. If this happens, a lender may issue an additional loan valued at up to 20% of the original sale price of the house. Depending on your situation, the Department of Veterans Affairs or the Federal Housing Administration may back these loans.
Keys to a Home Purchase Loan
For the most part, your ability to get a purchase loan is entirely at the discretion of the seller. If you’re having trouble obtaining a traditional loan(usually due to poor credit),a seller may offer you the opportunity to take over their mortgage, or to pay them directly if they’ve fully paid off the house. Buyers looking to get into a house quickly may circumvent the approval process in favor of closing a deal quickly with an agreeable seller.
If you’re a buyer looking to take advantage of this unique financing option, here’s what you need to know:
- Interest rates are typically higher for buyers on a purchase money loan. Sellers are well aware that your credit situation might preclude you from a traditional loan, and in order to cover their risk, they’ll often require a greater down payment (though this may sometimes be paid in installments) and higher interest rates.
- Closing costs are usually lower than with a traditional mortgage. By cutting out the mortgage broker, you don’t have to deal with additional fees or percentages going to anyone outside the transaction itself.
- Even though you are operating without a mortgage broker, a direct sale is still governed by mortgage laws. While your interest rates may be higher, there are still limits to prevent a seller from taking advantage of you in regard to licensing or the length of the mortgage.
How a Home Purchase Loan Pays Off
While it may seem like this type of mortgage has buyers both literally and figuratively in debt to a seller, a purchase loan is a two-way street and provides benefits to both parties. Here’s how this type of loan can pay off for sellers:
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Faster Closing
A faster closing means that a seller can quickly move on to their next home without having to worry about payments or upkeep on an old home. Especially in a competitive market, this can prevent you from getting stuck in the past.
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Competitive Markets
Speaking of competitive markets, seller financing can be a great way to stand out in a situation where there are more homes than buyers. In a buyer’s market, you don’t want to be left holding the bag, and broadening your list of potential suitors can be a major help. A purchase money loan will draw more people to you as a seller—including people who might be having difficulty with financing.
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Recurring Income
While a traditional sale can get the seller a nice lump sum at once, seller financing can provide them with a consistent stream of income on a monthly basis. It can also help them pay lower taxes if they are being paid in installments.
How Can The Home Loan Expert Team Help?
If you’re considering a home purchase loan(or are unsure of what loans are best for you), our Experts are happy to walk you through your options. Or maybe you’re a seller looking to explore this type of negotiation in order to move on to your next real estate horizon, in which case we’d love to discuss that as well.
Generally a purchase money loan involves some out-of-the-ordinary circumstances, and our team may be able to find a path to conventional financing you hadn’t noticed. The Home Loan Expert team is here to provide mortgage help quickly—whether you want to purchase a home or refinance your existing mortgage, fill our our application and we will show you your options in no time!
Whether it’s giving you a better understanding of what the numbers mean or helping you decide between loan options once you’ve been approved, our team is here to help. Check out our handy mortgage calculator, give us a call today!
Learn About Other Loan Types
Adjustable Rate Mortgage
When you’re shopping for a new home, one of your most important decisions will be what kind of mortgage to take out to finance your home. Your mortgage type will be the top factor that influences how much you can borrow(and thus what kind and size of home you purchase), as well as your monthly budget moving forward. For a variety of reasons, an adjustable-rate mortgage (ARM) can be an appealing choice in the short term, but it can seem scary as well. However, it’s important to understand how ARMs work, since this type of loan has repayment terms that may become less desirable over time.
FHA Loan
The home buying process can be overwhelming and stressful, especially if you’re buying your first home (or if your financial circumstances make it more difficult to get an affordable loan). For many home buyers, getting a loan insured by the Federal Housing Administration (FHA) can be extremely helpful in not only securing the necessary financing to buy but also achieving the dream of owning a home (even while facing tough financial situations). FHA loans allow lenders to make home buyers better deals, resulting in lower down payments, lower closing costs, and easier credit qualifying. Here, we’ll go over the ins and outs of FHA loans, including what they are, who qualifies, and what the process of securing one looks like.
Fixed-Rate Loans
Fixed-rate mortgages—also called “conventional mortgages”—are basically the bread and butter of the mortgage industry. And that’s because this loan type is still the most reliable way to finance your home, offering affordability, flexibility, and so much more. As their name suggests, fixed rate loans have the same rate throughout the entire term of the loan. So even if interest rates rise while you’re paying off your loan, your rate and payment amount are locked in for the entire loan term. That’s why fixed-rate mortgages are so popular–they offer protections that ARMs can’t.
