Purchase Money Mortgages

Purchase Money Mortgages: Underwriting Guidelines

Although the insured mortgage will generally have priority over Federal Abstracts of Judgment against purchasers, Agents National Title agents must diligently search the records for Federal Abstracts of Judgment filed against the purchasers. If detected, these liens should be listed as exceptions in both the title commitment and under Schedule B of the final title policy. If the agent has been given constructive notice that a judgment creditor is actively pursuing the enforcement of its lien, an exception to the lien must be made in the commitment and final policy. 


When insuring a mortgage which secures purchase money and additional sums, such as payment of credit cards or construction of improvements, its priority is unclear. Therefore, when insuring this type of transaction, an exception must be taken for any existing claims or liens against the mortgagor. 


In some jurisdictions, to qualify as a purchase money mortgage, a mortgage must also:


1.  Encumber property which is a residential dwelling with not more than four residential units (1-4 family residential property); and 

2.  The property must be occupied by the purchaser/borrower as a primary residence. 


These additional requirements, however, are not the usual requirements in most states. Consult your Agents National Title underwriting counsel for applicability of these additional qualifications in your jurisdiction. Some transactions involve multiple purchase money mortgages. For example, a property acquisition may include both a new loan from a third-party lender and a seller carry-back loan for a portion of the purchase price.  Most institutional third-party lenders will require that the mortgage securing the third-party loan must have priority over the seller carry-back mortgage. As a result, the third-party mortgage is usually recorded in first priority position, ahead of the seller carry-back mortgage. Both of the loans are considered purchase money mortgages and are entitled to the priority of such mortgages. However, the relative priorities between the two purchase money mortgages may not be quite as defined. Law in some states gives special priority to a “vender’s” purchase money mortgage (the seller carry-back) over a purchase money mortgage made by a third-party lender. Care must be taken to insured the correct and/or priority between the purchase money mortgages according to the laws of your jurisdiction. The order in which the mortgages are recorded must be documented by instructions from the lenders and the mortgage securing the junior priority loan should include a provision that it is junior and subject to the other purchase money mortgage.