Purchase Money Mortgages

Purchase Money Mortgages: Overview

Generally, to qualify as a true purchase money mortgage, the following must occur:


      A buyer must secure a loan made by a third party lender. A mortgage taken back by a seller for all or a portion of the purchase price is also considered a purchase money mortgage;   

      All of the loan proceeds must be applied to the purchase price of the property;  

      The loan must be secured by the purchased property;   

      The mortgage must be dated and recorded concurrently with the deed transferring the property to  the mortgagor. 


Provided the purchase money mortgage complies with the above, in most states it will enjoy priority over any prior or subsequent claims or liens attaching to the property through the mortgagor, except prior Federal Abstracts of Judgment. 


The Internal Revenue Service has ruled that a purchase money security interest or mortgage, valid under local law, is entitled to priority even though it may arise after a notice of federal tax lien has been filed against the purchaser/borrower. (In the state of Louisiana, however, the forgoing does not apply. Federal tax liens (FTLs) filed against purchasers in that state will take priority over the purchase money mortgage. For this reason, it is mandatory that the purchasers’ names are searched for federal tax liens in Louisiana and all discovered FTLs either paid or listed as exceptions.) 


If secondary financing is being insured, the purchase money doctrine will not protect the secondary lender, and an exception for a federal tax lien or any other intervening liens must be taken.