Purchase Money Mortgage vs Refinance: Key Rule Differences

The distinction between a purchase money mortgage and a refinance is more than semantic. It affects title insurance requirements, rescission rights, interested party contribution limits, and anti-deficiency protections in some states.

Purchase Money Mortgage Defined

A purchase money mortgage is any first-lien loan used to acquire a property. The borrower does not have an existing ownership interest prior to the transaction. Key characteristics: no right of rescission under TILA (rescission applies only to refinances on primary residences), seller concessions are governed by agency IPC rules, and in most states purchase money mortgages are protected by anti-deficiency statutes that limit the lender's recourse to the collateral if the borrower defaults.

How Refinances Differ

• ✦Three-day right of rescission: TILA requires a three-business-day waiting period after signing on a refinance of a primary residence; waiver is allowed only for genuine financial emergency
• ✦IPC rules do not apply to refinances in the same way because there is typically no seller; closing cost credits from the lender are governed by the no-cost refinance rules rather than IPC caps
• ✦Cash-out refinances face additional restrictions: Fannie Mae requires a 6-month seasoning period from purchase before cash-out refinance; some non-QM lenders require 12 months
• ✦Rate-and-term refinances may allow up to 2% in closing costs to be rolled into the loan on certain programs without triggering cash-out classification
• ✦Anti-deficiency protections may not extend to refinances in states where they apply to purchase money mortgages only (e.g., California)

The Delayed Financing Exception

The delayed financing exception allows a borrower who purchased a property with cash to do a cash-out refinance immediately after closing without waiting the standard 6-month seasoning period. The loan amount is limited to the original purchase price plus documented closing costs. The cash-out proceeds reimburse the buyer for the cash used at purchase. This is a purchase money refinance hybrid that follows specific documentation requirements outlined in the Fannie Mae Selling Guide.