Who takes back mortgage in a purchase money mortgage (PMM)?
- Fannie Mae
A few weeks ago, a student told me this was on the Florida real estate sales associate state exam. A purchase money mortgage is when the seller holds the mortgage, or when the seller takes back the mortgage, so the answer is A.
This concept is pretty foreign to a lot of people. Back in the good old days, this was how people always bought property. It still happens today, but it’s not as common.
Let’s say you own a house free and clear. I come along and want to buy it for $100,000. I don’t have that much money, but I do have $30,000. I ask you to hold the mortgage. You deed the property to me, so I now own the property. But you are holding the mortgage. You are acting as the bank. I send you a payment every month. If I don’t make the payments, you can have the house foreclosed on. You do everything the bank would do. That’s called a purchase money mortgage – when the vendor is the lender.
Real life application: Let’s say your buyer finds the home of her dreams for $150,000. The bank is going to give her $100,000. She has $30,000 cash. So she’s $20,000 short. Ask the seller to hold a $20,000 purchase money mortgage.