A purchase money mortgage is a mortgage on a piece of real property given by the buyer to the seller or a third-party as part of the deal to buy the property.
Purchase money mortgages are executed simultaneously with the deed, such that the title to the property passes through the purchaser and vests in the mortgagee, so the mortgage has preference over other judgments and liens against the purchaser.
The arrangement is called a purchase money mortgage because this type of mortgage usually replaces part or all of the cash that the buyer would otherwise pay the seller. For example, a buyer might pay for a $500,000 house with a $400,000 bank mortgage, $60,000 in cash, and a $40,000 purchase money mortgage.
Purchase money mortgages have higher interest rates than traditional bank mortgages. They are often used by buyers without enough savings to cover a traditional down payment, or who are ineligible for a large enough bank mortgage due to poor credit or other financial constraints.
[Last updated in February of 2024 by the Wex Definitions Team]