(P)urchase-(M)oney (M)ortgage
The definition in my book says -
Any new mortgage taken as part of the purchase price of real property by the seller.
The text in my book says-
"A purchase-money mortgage is any new mortgage accepted by the seller as part of the purchased price. The seller "takes back" a mortgage. Title to the property passes to the buyer, and the seller retains a lien right as security for the debt.
Typically, the buyer will secure a larger loan (or assume an existing loan) and use the PMM to help finance the down payment. The PMM in such instances is structured as a second mortgage, and the buyer's lending institiution is the senior lienholder."
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My question is - Can someone explain to me what a PMM is in "newbie" terms. Also, who is the PMM benefitting; the buyer, the seller, or both? What situation would call for a buyer or seller wanting to do this?
Thanks, i'm so new I didn't know what a mortgage was 3 days ago. Later.
Hi, fear not, there are lots of things I don't know.
A seller is selling a house and he knows that if it is inspected the mortgage company would probably turn it down. So he takes the mortgage back at time of sale.
The Buyer has the kind of Credit that prevents him from running an account at the local store. So not having to qualify he gets the Seller to take back the mortgage and thus gets a house with no credit. The house is perfect for the buyer even has the basement with the torture stuff already installed. He loves it.
Those are some of the reasons. There are a lot of them. Sometimes you can slide taxes when you sell by taking back the mortgage. Then you go into the bank and borrow against the mortgage for any cash you might need.
Hope this helps. Cheers Lucius
Hi, fear not, there are lots of things I don't know.
A seller is selling a house and he knows that if it is inspected the mortgage company would probably turn it down. So he takes the mortgage back at time of sale.
The Buyer has the kind of Credit that prevents him from running an account at the local store. So not having to qualify he gets the Seller to take back the mortgage and thus gets a house with no credit. The house is perfect for the buyer even has the basement with the torture stuff already installed. He loves it.
Those are some of the reasons. There are a lot of them. Sometimes you can slide taxes when you sell by taking back the mortgage. Then you go into the bank and borrow against the mortgage for any cash you might need.
Hope this helps. Cheers Lucius
Thanks, but I'm still not sure I know exactly what is happening when a purchase-money mortgage takes place.
What does the, "any new mortgage accepted by the seller as part of the purchase price" mean? Does that statement mean that there is actually another mortgage in the picture besides what the seller has already been paying on the house?
And, "the seller takes back a mortgage" is also confusing me. I know the definition and explanation of a PMM is staring me in the face. But I don't really know what the seller and buyer are actually doing in this situation.
So, I came up with a scenario of what I think is happening between the buyer and seller. Correct me if i'm wrong.
Lets say a house is worth $100,000 and is selling for what it's worth ($100,000).
The buyer wants to buy the house all paid off so he asks the seller how much is still owed on the house. The seller tells the buyer he has $20,000 that he still owes on the house. Therefore, the buyer asks the seller if he can include the mortgage that is still owed ($20,000) in the selling price ($100,000). So then the buyer ends up buying the house for $120,000 which now includes the mortgage payments and makes the house all paid off.
This that a PMM? or is it much more complex than that? Thanks
Okay,
Its now the day after the last post I wrote above. With some "relative" research (asking my mom, who for some reason, knows everything about everything), I now completely understand PMMs.
Lufos,
Thanks for your response earlier, I now understand the what you were explaining to me (reasons why a seller would take back a mortgage).
Thanks. Later
would you mind posting a summary to seem if my understanding is correct?
Okay cjmazur and anyone else interested in this topic,
I believe your asking me to explain what a PMM is so I will explain it as simply as I can articulate. This had to be explained to me in baby talk, speaking no more than 15 words per minute and drawing pictures of houses, banks, and stick figure buyers and sellers, so believe me, I know how hard it can be to picture in your head what a textbook is trying to explain. Well here it goes.
In on a conventional mortgage (using a bank), the buyer of a house usually needs financing so the buyer goes to the bank and takes out a loan, which is what a mortgage is.
Sometimes the buyer can't get a loan from a bank for whatever reason or just doesn't want to. If the buyer is rich enough to buy the house from the seller all money down then the buyer is all free and clear of paying mortgage.
But lets say the buyer can't or doesn't want to get a loan from the bank and can't pay for the entire house all at once. He will ask the seller to "Take Back" a mortgage. In this case, the buyer is basically asking the seller if he would allow the buyer to pay for the house in payments.
Lets say the house is selling for $100,000 and the buyer only has 10,000 to put down on the house. (Remember, the buyer is not going to deal with a bank in a PMM / "take back" situation.) The seller says to the buyer, " OK buyer, I'll let you put $10,000 down on the house and then you pay me the rest of the $90,000 over the next 15 years." Then the seller goes on to say, "also, since i'm not a bank and i'm doing you the favor of letting you finance your house, i'm going to charge you a little bit more interest then a bank would." The buyer agrees and the terms of the contract are then made and signed by both parties.
The buyer puts the $10,000 and moves into the new house and the seller moves on to his new house. And the buyer makes his monthly payments with interest until the $90,000 is paid off.
The seller also benefits from doing this favor for the buyer because since he is charging interest on $90,000, he will actually end up with more money than 100,000 dollars in the long run. It's a good deal for the seller, especially if the buyer CAN"T go to a bank and really likes the house because then the seller could charge more interest than the bank and make even more money. The buyer benefits because he can still finance the house even though he cannot go to a bank. He is theoretically using the seller as a bank.
Hmm....I hope this helps everyone who didn't know this before. Later.
I think much of the confusion comes from trying to understand the 'why' rather then the 'what'.
As the thread says, a PMM is when the seller agrees to be paid in installments for some of all of their selling price.
Why a seller would want to do this or why the buyer would agree has nothing to do what what a PMM is.
The why's presented are pretty good examples but do not change the definition of a PMM.
John
[addsig]
Yea, I know what you mean Active-re-investor,
My book put it like this and didn't go into to much more detail after that -
"A purchase-money mortgage is any new mortgage accepted by the seller as part of the purchased price.
I think I'm just to new to real estate for a definition like that to make any sense in my head. Just about a week or so ago, I didn't even know what a mortgage was.
Its was hard for me to understand the definition of what a PMM is without the use of a story-like explanation. And without the use of the "why's", a story-like explanation of this concept could not exist. (I don't think).
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Active-Re-Investor,
If you know of any other reasons why a buyer or seller would want to do this could you post them?
Thanks
Derek D.