ABA Family Legal Guide

Buying and Selling a Home

Financing a Home Purchase

The Basics

What forms of financing are available?

Today, a wide variety of financing mechanisms exists to finance a purchase.

The most common form of financing is with a financial institution such as a bank or a savings and loan institution. The buyer agrees to pay interest on the money borrowed and the lender retains a lien (that is, a mortgage) on the property. Some buyers may qualify for federally insured loans that permit smaller-than-normal down payments and lower interest rates than prevailing market rates. In order to increase the amount borrowed (or reduce the down payment), it may be possible to place two mortgages on the property at the time of purchase--one that the buyer intends to pay off in the short term (generally, a home equity loan), and a second that the buyer views as more long term.

In some cases, buyers are able to obtain financing directly from the seller, which can take a variety of forms. In one type of seller financing, the seller acts just like a conventional lender; the buyer pays a certain amount at closing and also pays principal and interest on the balance. The seller then places a mortgage lien on the property. In another form of seller financing, a buyer is able to assume the seller's mortgage. In such a case, the buyer pays the difference between what is owed on the existing mortgage and the purchase price and takes over the seller's payments on the mortgage. (Note that this can occur only if provisions in the mortgage state specifically that it is assumable. Most mortgages written today include a due-on-sale clause that prohibits assumption of a mortgage without the lender's consent.) In the event that a buyer assumes the seller's mortgage, the seller should remember that he or she remains liable to pay the mortgage unless the seller's lender specifically and in writing releases the seller from this obligation. One final form of seller financing, the land contract, provides that the seller retains title for a certain period, during which the buyer pays the seller a monthly amount. When the buyer pays the seller in full, title is conveyed to the buyer.