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A purchase-money mortgage is a type of seller financing often used when a borrower cannot qualify for a traditional mortgage loan. The seller of the property, instead of a bank or other mortgage lending institution, becomes the mortgage holder. The interest rate for purchase-money mortgages will often be higher than a conventional loan rate due to the risk incurred by the seller for carrying the financing.
If you are unable to obtain a loan approval for a home you want to buy, the seller may offer to finance your purchase in order to complete the sale. This is risky for the seller, because she will not receive the entire purchase amount for the house at the time of the sale. There is no risk to you, because you are the legal owner of the home.
Some sellers will use a purchase-money mortgage as a long-term investment. If the mortgage is paid as agreed, the seller makes money from the finance charges. This nets her a total amount greater than she would have received by getting the full amount of the purchase at the time of the sale.
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