A Seller stepping into the shoes of an institutional lender is a creative way to ensure that a Purchaser will be able to buy a home. For Seller it can be a very attractive option. Sellers taking back a mortgage (referred to as a “purchase money mortgage”) are able to obtain a secure investment collateralized by the home being sold and earn an interest rate higher that a lot of other investments that are currently available. Additionally, a Seller can defer a portion of the gain from the sale of a property to the extent that loan principal is paid back to the Seller over the term of the loan. This is also a very attractive alternative for a purchaser in that they would be assured of obtaining financing and would save on the cost of fees typically charged by an institutional lender. Customarily the Purchaser will pay the cost of the legal fees associated with drafting the mortgage and note prepared by the Seller’s attorney. The cost of such preparation should really be agreed upon under the terms of the contract if contemplated at the time the agreement was executed by the parties. The downside for the Seller is that sale proceeds incorporated into the loan principal cannot be received until the expiration of the loan term. If a Seller does not wish to tie up the sales proceeds for an unusually long time, the purchase money loan term may only be a year or two. This means the Purchaser who enters into a purchase money loan will need to refinance the mortgage at the end of this period. The attorney who represents Purchasers entering into a purchase money loan should review the proposed loan terms and ensure that the Seller will agree to assign the mortgage to a subsequent institutional lender to save mortgage recording tax utilizing a CEMA (consolidation, extension and modification agreement). Please be advised that some institutional lenders will not accept an assignment from a private lender or an individual.
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