Buying Without Your Spouse? What to Know About a Purchase Money Mortgage

Sometimes a homebuyer who’s married wants to buy property as an individual. They want to be the sole buyer, with no other name on the closing papers.

How can it work? Consider the purchase money mortgage.

As Cleveland’s CrossCountry Mortgage® company explains, “if a married person wants to purchase a property without their spouse being on the loan OR on the title, they can classify the transaction as a purchase money mortgage.”

With this mortgage, the marriage partner is (a) not responsible for repaying the lender for the mortgage; and (b) not named on the deed.

What Situation Leads to a Purchase Money Mortgage?

Sometimes, a couple is separating, and one of them is buying a separate home — a home that is clearly not the “matrimonial residence” — in the lead-up to a divorce decree.

This type of purchase is an exception to the norm. When both life partners aren’t on a title, the nontitled partner generally has, as defined by the home state’s law, a right to live in the home, or a right to “equitable distribution” of its value in a divorce. That’s why a buyer’s affidavit of title must disclose a pending divorce case.

Lawyers can write documents that appropriately extinguish any marital rights under state law, at the current time and forever. See a local real estate lawyer or consult with a family law firm in the home’s state for guidance in a purchase money mortgage.

After reading about a purchase money mortgage for divorcing couples, you might still be confused about this topic. Perhaps that’s because an internet search brings up wildly different descriptions of a purchase money mortgage. You might have found Deeds.com in a quest for clarity. We’ve got you covered.

Read on to take a look at other definitions of the term purchase money mortgage.

Seller Financing Is Also Sometimes Called a “Purchase Money Mortgage”

Some people use the term purchase money mortgage when they’re talking about a seller-financed home purchase. But what’s that?

Imagine a $250K condo for sale. A hopeful buyer offers to pay for a mortgage on the condo as a component of the bargain.

This purchase money mortgage is using the mortgage as part of the money the buyer puts into the deal.

Say the buyer pays for the condo by taking out a regular $200K mortgage, because that’s what they can qualify for. Where’s the other $50K coming from? Perhaps the buyer offers $30K in cash, and the remaining $20K in a purchase money mortgage — basically a loan from the seller. (That second mortgage typically has a higher interest rate than the rate on the traditional loan).

What About Assuming the Seller’s Mortgage as Part of the Deal?

A variation on the purchase money theme can happen where a buyer assumes the homeowner’s mortgage, and the parties’ agreement covers the gap between the debt left on the assumed mortgage and the home price.

FHA loans and other government-backed mortgages are typically assumable (if the buyer meets the lender’s criteria). Buyers cannot normally get permission to assume a mortgage backed by Freddie Mac or Fannie Mae. Read more about assumable mortgages on Deeds.com.

So the term purchase money mortgage sometimes refers to a mortgage that makes up part of the purchase funds.

Sometimes, two mortgages are needed for the deal to work, and one is the purchase money mortgage (a.k.a. second mortgage). If this is going on, then the mortgage from the institutional lender (first mortgage) gets #1 priority for payments.

But sometimes there is the seller’s loan only.

In any case, the seller keeps a mortgage note, representing the loan. The seller records the note with the county. It’s now a publicly visible and binding document, officially known as a security instrument.

What Situation Prompts This Type of Purchase Money Mortgage?

This purchase strategy can make an otherwise unworkable deal work. Consider the following situations:

A buyer has credit issues and cannot get approved for enough financing from a bank or credit union.

A seller wants to get the full value from the home sale, but has to sell promptly — because of a problem like a breakup with a partner, loss of employment, or the need to move quickly.

The parties have decided to cut out the institutional lender because they want to save costs.

The parties have decided to cut out the institutional lender because they want control over the interest rate and the other terms of their bargain.

A seller wants the regular income generated by owner financing, and is comfortable with the buyer paying for the home’s value in this way.

The buyer, too, might be comfortable as a homeowner without an escrow account for taxes and insurance. That said, the seller, like a bank, has to know the collateral (the home) is insured, and its value maintained. If the loan goes into default, the seller could have to take back the property.

But let’s say everything goes according to plan.

All’s Well That Ends Well (But Still)…

Remember, the seller recorded a note for the parties’ agreed-upon purchase price. That’s a lien. So, the seller has kept a lien on the title. Meanwhile the buyer has faithfully made monthly payments to the seller. The buyer has paid principal and interest according to an amortization schedule provided by the seller. And, ultimately, the buyer pays back all that’s owed. Then it’s time for the previous homeowner to sign a satisfaction of mortgage document, which legally releases the lien from the title.

And the parties live happily ever after.

Granted, while this seem like a good idea for the parties in certain circumstances, it presents special risks as long as the lien exists. The buyer normally pays for those risks, by agreeing to an interest rate that’s higher than the prevailing bank rates. And there’s often a balloon payment expected from the buyer at the final payoff time. In that case, the buyer will have to pay off or refinance the loan to satisfy the parties’ contractual agreement.

Note of caution! An acceleration clause in an institutional mortgage could rule out a second mortgage agreement. Placing a second lien on the home without the institutional lender’s approval can put the first mortgage at risk of coming due all at once. A home’s state also has particular mortgage lending rules. Consult a local real estate lawyer to be sure your nontraditional lending agreement conforms to applicable laws.

Supporting References

Brett Leschinsky for the CrossCountry Mortgage® Resource Center Blog via CrossCountryMortgage.com: What Is a Purchase Money Mortgage?

Cornell Law School Legal Information Institute: Purchase Money Mortgage.

Stewart Title Guaranty Company, via VirtualUnderwriter.com: Marital Rights Bulletins by State – Bulletin NJ000033 V 1 (New Jersey), citing N.J.S.A. 3B:28-3.1 (c) and N.J.S.A. 2A:34-23 et seq.

Brai Odion-Esene for Forbes Advisor, from Forbes Media LLC via Forbes.com: What Is A Purchase Money Mortgage? (updated Jun. 29, 2023).

Garden State Home Loans Inc. via GardenStateLoans.com: What Is a Purchase Money Mortgage? (Dec. 4, 2017).

And as linked.