When it comes to buying a property, there are various ways to finance the transaction. Two common methods are purchase money mortgage and agreement of sale. Both options have their own set of advantages and disadvantages, and it`s important to understand them fully before making a decision.
What is a Purchase Money Mortgage?
A purchase money mortgage is a type of financing where the seller of the property provides the mortgage to the buyer. In this scenario, the seller acts as the lender and the buyer becomes the borrower. The terms of the mortgage are negotiated between the two parties and typically involve a down payment, interest rate, and repayment period.
One of the advantages of a purchase money mortgage is that it can be easier to qualify for compared to a traditional mortgage from a bank. Since the seller is providing the financing, they may not require a high credit score or other stringent qualifications. Additionally, a purchase money mortgage can save the buyer money on closing costs and other fees associated with a traditional mortgage.
However, there are also some potential drawbacks to consider. The interest rate on a purchase money mortgage may be higher than the market rate for traditional mortgages. Additionally, the seller may have less incentive to keep up with maintenance and repairs on the property if they no longer have a financial stake in it.
What is an Agreement of Sale?
An agreement of sale, also known as a land contract or contract for deed, is a type of financing where the buyer makes payments directly to the seller over a period of time. The buyer does not receive the title to the property until the full purchase price is paid off.
One of the advantages of an agreement of sale is that the buyer can purchase the property with little or no down payment. Additionally, the terms of the agreement can be negotiated between the buyer and seller, allowing for more flexibility in terms of interest rates and repayment periods.
However, there are also potential drawbacks to consider. The seller may not have clear title to the property, which can lead to legal issues down the line. Additionally, if the buyer defaults on payments, the seller may have to go through a lengthy foreclosure process to regain ownership of the property.
Which Option is Right for You?
Deciding between a purchase money mortgage and an agreement of sale ultimately depends on your personal circumstances and financial goals. If you have a low credit score or limited funds for a down payment, a purchase money mortgage may be a good option. However, if you want more flexibility in terms and are comfortable with a longer repayment period, an agreement of sale may be a better fit.
Regardless of which option you choose, it`s important to work with a reputable and experienced real estate attorney to ensure that the transaction is legally sound and properly executed.
