What Is a Purchase Money Loan?

by Karina C. Hernandez ; Updated July 27, 2017
Mortgages help homebuyers get a home with less of their own monetary investment.

Most homebuyers don't have the means to cover a home's entire sale price or they simply don't want to invest 100 percent of their own money into a house. Homebuyers finance a portion of a home's price using purchase money loans, more commonly known as mortgages. Either the property seller or a third-party mortgage lender can provide a purchase money loan.

Institutional Purchase Money Loans

Purchase money loans, as opposed to refinance loans, allow buyers to acquire a property. A bank or mortgage company funds the sale price, less the buyer's down payment. To obtain an institutional mortgage, you need a good credit record, a sufficient down payment and the ability to make future monthly payments. Institutional mortgages typically have repayment periods of 15 or 30 years.

Seller-Financed Purchase Loans

Less common are purchase money loans from individual sellers, also known as "seller take-back" loans. In this type of financing, the seller finances the difference between the purchase price and the buyer's down payment and any mortgage the buyer may acquire. Homebuyers with insufficient credit or down payment funds might use seller financing until they can qualify for a mortgage refinance and pay off the original purchase money loan.

About the Author

Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.

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