What Is Purchase-Money Mortgage?
When a seller "carries back" financing, they're creating a purchase-money mortgage. You buy the property, and instead of paying the full price to a bank, the seller accepts a down payment and a note for the balance. You pay the seller monthly (or on whatever terms you negotiate). This is a form of seller-carryback and creative financing. PMMs are common when institutional lenders won't fund a deal—distressed sales, unique properties, or buyers who don't qualify. The seller acts as the bank. Terms are negotiable: rate, term, balloon payment, and prepayment penalty (or lack thereof).
A purchase-money mortgage (PMM) is a mortgage provided by the property seller as part of the sale. The buyer makes payments to the seller instead of a bank, and the seller holds a promissory note and deed of trust as security.
At a Glance
- What it is: Seller-provided mortgage as part of the purchase
- Also called: Seller-carryback, seller financing
- Security: Promissory note + deed of trust
- Typical use: Buyer can't get bank financing; seller wants installment sale
- Flexibility: Terms fully negotiable between parties
How It Works
The structure
You agree to buy a property for $250,000. The seller accepts $50,000 down and carries a $200,000 purchase-money mortgage. You sign a promissory note (the promise to pay) and a deed of trust (the lien on the property). You make payments to the seller. When the note is paid off, the seller releases the deed of trust.
Why sellers do it
- Installment sale: Spreads capital gains over years, potentially reducing tax hit
- Higher price: Sellers may get a premium for offering financing
- Faster sale: Attracts buyers who can't get bank loans
- Income stream: Monthly payments replace a lump sum
- Estate planning: Heirs may prefer ongoing payments
Why buyers do it
- No bank approval: Credit, income, or property issues don't matter
- Flexible terms: Negotiate rate, balloon payment, or interest-only periods
- Speed: No underwriting delays
- Creative financing when conventional loans aren't available
The documents
- Promissory note: Amount, rate, term, payment schedule, default provisions, acceleration clause
- Deed of trust: Secures the note with a lien; allows foreclosure if you default
- Purchase agreement: Reflects the financing terms
Have an attorney draft or review. Seller financing has pitfalls—due-on-sale if there's an underlying bank loan, balloon payment timing, and tax implications for both parties.
Real-World Example
Linda finds a fourplex in Kansas City listed for $320,000. It needs $40,000 in repairs. Banks won't lend on it—too much deferred maintenance. The seller, an elderly owner who inherited it, doesn't want the hassle of a full rehab before sale.
They negotiate: $60,000 down, $260,000 purchase-money mortgage at 6% for 20 years. Payment: $1,863/month. Balloon payment at year 5: Linda must refinance or pay off the $235,000 balance. No prepayment penalty—she can pay early if she refinances.
Linda closes in 2 weeks. She rehabs over 6 months, rents all four units for $3,200/month total. At year 5, she refinances with a commercial loan at 7% and pays off the seller. The seller received 5 years of payments plus a lump sum; Linda acquired a property she couldn't have bought with bank financing.
Pros & Cons
- Access to deals when banks say no
- Negotiable terms—rate, balloon payment, prepayment
- Faster closing than institutional loans
- Creative financing expands your options
- Seller may accept lower down payment than banks
- Seller may want a balloon payment—you must refinance or sell
- Underlying bank loan may have due-on-sale—seller's lender could call the loan
- Less regulatory protection than institutional mortgages
- Seller could die or sell the note—you'd have a new payee
Watch Out
Due-on-sale clause: If the seller still has a mortgage, their lender can accelerate when the property transfers. The seller would need to pay off their loan at closing—or you're buying subject-to their loan (different structure). Verify the seller owns free and clear or has lender consent.
Balloon timing: Many purchase-money mortgage notes have a balloon payment at 5–7 years. Plan your refinance or sale before that date. Don't assume you'll qualify—markets and your situation can change.
Note sale: Sellers can sell the promissory note to an investor. Your payment obligation continues; you just send checks to a new address. The new note holder may be less flexible if you need to modify terms.
Title and lien priority: Ensure the deed of trust is properly recorded and that there are no prior liens that could jeopardize the seller's security.
The Takeaway
A purchase-money mortgage is seller-carryback financing—the seller becomes your lender. It unlocks deals that banks won't touch and gives you room to negotiate. Plan for the balloon payment if there is one, and get proper legal documentation. It's a powerful creative financing tool when used correctly.