LOAN PURPOSE
Purchase Loan
A purchase loan is made to finance a portion of the purchase price of the security property. The intended
occupancy of the borrower/buyer should be determined at the outset. This status will affect the type of loan
product available for the transaction. Owner-occupied conventional purchase loans typically require a down
payment of from 5 to 25%. The greater the down payment, the better the rates and terms will be. Minimum
down payments and loan-to-value ratios in excess of 80% will generally require mortgage insurance. FHA
insured and VA indemnified loans are often used in purchase transactions.
Refinance Loan
A refinance loan is one made to replace an existing loan to borrowers who hold title to the security property. In
most cases:
■ It occurs for the borrower to obtain more attractive interest rates and loan terms (the interest rate is
adjusted to more closely reflect the current market and to achieve a new schedule of payments);
■ Some additional credit may be extended (“cash-out”); and,
■ The lender and borrower may desire to substitute a basically different kind of loan (e.g., a
conventional fixed rate loan to replace an adjustable rate or a negatively amortizing loan).
(Note: As previously discussed, the character of the loan and the deed of trust or mortgage against the security
property may be changed through refinancing from that of a purchase money mortgage to a non-purchase
money mortgage resulting in personal liability for the borrower and a possibility of a money judgment for
deficiencies against the borrower.)