Who takes back mortgage in a purchase money mortgage (PMM)?

1. Seller
2. Buyer
3. FHA
4. 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.