In other words, you’ll be able to borrow the most amount of money at the highest loan-to-value ratio (LTV ratio) if the purpose of the loan is a home purchase.
For example, the FHA allows home purchase financing with as little as 3.5% down, and specialty programs such as Fannie Mae’s HomeReady program only require 3% down, with gifts or grants permitted to cover the small down payment.
You can also get USDA loans and VA loans with no money down.
Conversely, those looking to pull equity from their homes via a cash-out refinance may be limited to 80% LTV or lower, with higher credit score requirements to boot.
At the same time, the credit score requirement for a purchase money mortgage will likely be the lowest out there.
Purchase Mortgages Come with Lower Interest Rates
- Purchase mortgages often come with rebates or other pricing incentives
- So the interest rate is often lower on a purchase home loan
- Relative to a comparable refinance loan
- Which may include pricing adjustments to account for more risk
Another benefit of a purchase money mortgage loan is that the associated mortgage interest rate will be lower than that of a refinance.
When you refinance your existing mortgage, mortgage lenders typically hit you with a pricing adjustment, which will increase your mortgage rate and/or closing costs to some degree.
With a purchase money mortgage, there won’t be a pricing hit, and you may even be entitled to a pricing rebate. Sometimes lenders offer purchase specials, such as a .25% credit to help cover some of your closing costs.
Similar to any other type of home loan, a purchase mortgage may come in the form of a fixed-rate mortgage or an adjustable-rate mortgage, with varying terms, such as 30-year and 15-year options.
You can also get a second mortgage at the time you take out the first mortgage – this is known as a piggyback second, or a purchase money second mortgage.
Typically, these come in the form a home equity loan/line, often from a different bank than where you get your first mortgage. However, both loans must close concurrently.
This is one way to put less down on a home purchase, while also avoiding mortgage insurance if you keep the first mortgage at or below 80% LTV.
A first mortgage kept at or below 80% LTV should also result in a lower interest rate, assuming a single high-LTV loan is the alternative.
Tip: If you do use a purchase-money subordinate mortgage to obtain financing, it can later be refinanced with your first mortgage and be considered a rate and term refinance (as opposed to a cash out refi), which may result in more favorable and/or higher LTV limits.
Real Estate Agents Strongly Influence Where You Get Your Purchase Mortgage
- Many home buyers use their real estate agent’s recommended lender
- Without speaking to other lenders or shopping interest rates
- Don’t feel obligated to use their preferred bank or lender
- And certainly don’t limit your search to a single lender or rate quote
If you’re in the market for a home purchase mortgage, be sure to do plenty of shopping. I’m going to assume you didn’t buy the first house you came across.