PastPaperHero | Mortgages/security devices

Learning Outcomes

This article explains future advance mortgages within the broader topic of mortgages/security devices, including:

Defining a future advance mortgage and recognizing typical drafting language that signals one on the MBE.
Distinguishing clearly between obligatory and optional future advances and understanding why that distinction drives priority.
Determining priority between initial advances, later advances, and intervening liens or interests by constructing accurate timelines.
Applying recording act and notice principles—actual and constructive—to figure out when a later lienholder or earlier mortgagee wins.
Analyzing how future advances are allocated between senior and junior portions of the debt in foreclosure and deficiency scenarios.
Evaluating the treatment of construction loans, open-end lines of credit, and dragnet clauses as recurring future-advance fact patterns.
Comparing future advance mortgages with purchase-money mortgages and other senior or junior liens to predict the order of payment.
Spotting and avoiding common MBE traps, such as assuming all amounts under a recorded mortgage share the same priority date.
Practicing a repeatable, exam-oriented three-step method for classifying advances, identifying intervening interests, and assigning priority.

MBE Syllabus

For the MBE, you are required to understand the rules governing security interests in real property, including future advance mortgages, with a focus on the following syllabus points:

The nature of mortgages and their relationship to the secured note
Recognition and definition of future advance (or “open-end”) mortgages
Priority rules among multiple mortgages and other liens, including purchase-money mortgages
The effect of recording acts, actual notice, and constructive notice on mortgage priority
The distinction between obligatory and optional advances and its impact on priority
The treatment of future advances in foreclosure, including the effect on junior interests

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

A lender holds a properly recorded mortgage that states it secures “all present and future advances up to 300,000.”Thelenderinitiallyadvances300,000.” The lender initially advances 300,000.”Thelenderinitiallyadvances150,000. Later, another creditor records a judgment lien against the property. After that lien is recorded, the lender makes an additional 50,000advancethatitiscontractuallyrequiredtomake.Thelenderhasactualnoticeofthejudgmentlienwhenitmakesthesecondadvance.Whatisthepriorityofthe50,000 advance that it is contractually required to make. The lender has actual notice of the judgment lien when it makes the second advance. What is the priority of the 50,000advancethatitiscontractuallyrequiredtomake.Thelenderhasactualnoticeofthejudgmentlienwhenitmakesthesecondadvance.Whatisthepriorityofthe50,000 advance?
1. It is junior to the judgment lien because the lender had notice.
2. It is junior because all future advances made after intervening liens are junior.
3. It shares the same senior priority date as the original mortgage.
4. It has no security interest because it was made after the lien.
A recorded mortgage secures “all future advances that the lender may choose to make.” The lender makes an initial 80,000loan.Afterasubsequentmortgageisrecorded,thelendermakesanadditional80,000 loan. After a subsequent mortgage is recorded, the lender makes an additional 80,000loan.Afterasubsequentmortgageisrecorded,thelendermakesanadditional20,000 advance under the same mortgage. At the time of the second advance, the lender has neither actual knowledge of, nor has checked the records for, the second mortgage. In a notice jurisdiction, what is the likely result?
1. The 20,000advanceisseniorbecausethelenderlackedactualknowledge.b)The20,000 advance is senior because the lender lacked actual knowledge.
2. The 20,000advanceisunsecuredbecauseitwasoptional.d)The20,000 advance is unsecured because it was optional.
A bank holds a recorded future advance mortgage with a maximum amount of 400,000,securingaconstructionloan.Underthemortgage,thebankmustdisbursefundsuponcompletionofspecifiedstages.After400,000, securing a construction loan. Under the mortgage, the bank must disburse funds upon completion of specified stages. After 400,000,securingaconstructionloan.Underthemortgage,thebankmustdisbursefundsuponcompletionofspecifiedstages.After200,000 has been disbursed, a second lender records a junior mortgage. The bank learns of the junior mortgage and then disburses an additional 100,000requiredbytheconstructioncontract.Whatisthestatusofthisadditional100,000 required by the construction contract. What is the status of this additional 100,000requiredbytheconstructioncontract.Whatisthestatusofthisadditional100,000 in a later foreclosure by the bank?
1. It is junior because the bank had actual notice of the junior mortgage.
2. It is senior because the disbursement was obligatory under the original mortgage.
3. It is unsecured because the maximum amount was exceeded.
4. It is pari passu with the junior mortgage.
A bank holds a recorded mortgage securing an initial 100,000loan,plus“anyotherdebts,presentorfuture,thatthemortgagorowestothebank.”Later,themortgagortakesanunrelated100,000 loan, plus “any other debts, present or future, that the mortgagor owes to the bank.” Later, the mortgagor takes an unrelated 100,000loan,plus“anyotherdebts,presentorfuture,thatthemortgagorowestothebank.”Later,themortgagortakesanunrelated50,000 business loan from the bank, which the bank claims is secured by the same mortgage. Between the two loans, another lender recorded a second mortgage. In a foreclosure by the bank, how will the 50,000businessloanmostlikelybetreatedontheMBE?a)Itwillautomaticallysharethesamepriorityastheoriginal50,000 business loan most likely be treated on the MBE? a) It will automatically share the same priority as the original 50,000businessloanmostlikelybetreatedontheMBE?a)Itwillautomaticallysharethesamepriorityastheoriginal100,000 loan.
1. It will be treated as a future advance and may be junior if made with notice of the second mortgage.
2. It will be unsecured because dragnet clauses are always invalid.
3. It will be senior to the second mortgage because the bank was the first lender.

Introduction

A future advance mortgage is a security device where a lender agrees that the same mortgage will secure not only an initial loan but also additional loans or disbursements made in the future. These future advances may be made at the time of the original transaction or on later dates, often under a line of credit or construction financing arrangement.

Key Term: Future Advance Mortgage
A mortgage arrangement in which one recorded mortgage secures a present loan and also secures additional sums that the lender may or must advance to the borrower in the future.

Future advance mortgages are heavily tested because they combine core mortgage concepts—priority, recording, and notice—with an additional layer: some debt is created later in time. The exam frequently asks whether a future advance has priority over a third party’s intervening interest (another mortgage, judgment lien, or other encumbrance) that arises between the initial loan and a later advance.

Future advances are common in two recurring fact patterns:

Construction loans: the lender agrees to disburse funds in stages as work progresses.
Lines of credit or “open-end” mortgages: the borrower can repeatedly draw down funds up to a stated maximum.

To analyze any MBE question involving future advances, you must:

Classify each advance as obligatory or optional.
Identify any intervening interest and its recording date.
Determine whether the lender had notice of that interest when making each advance.

Key Term: Intervening Interest
A lien or other property interest (such as a later mortgage or judgment lien) that attaches to the property after the original mortgage is recorded but before a particular future advance is made.

Types of Future Advances

Future advances fall into two categories, and the distinction controls priority:

Obligatory Advances: The lender is contractually required to make the additional disbursement if the borrower satisfies stated conditions.
Optional Advances: The lender may, but is not required to, make the additional disbursement.

Key Term: Obligatory Advance
A future disbursement that the lender is bound by the original mortgage agreement to make, usually once specified conditions (such as construction milestones) are met.

Key Term: Optional Advance
A future disbursement that the lender is permitted, but not required, to make; the lender retains discretion whether to advance the funds.

Common examples:

A construction loan in which the lender must release funds after each inspection is a classic obligatory advance situation.
A home equity line of credit (HELOC), or a business line of credit secured by real property, is usually made up of optional advances—the lender may decline to fund additional draws for various reasons.

Key Term: Line of Credit
A loan arrangement that allows a borrower to draw funds up to a stated maximum over time, with the mortgage securing both present and future draws.

Some mortgages also contain a dragnet clause, purporting to secure all debts the borrower owes to the lender, present and future.

Key Term: Dragnet Clause
A mortgage provision stating that the mortgage secures not only the described loan but also other present and future debts of the borrower to the same lender.

On the MBE, a dragnet clause is treated like a future advance provision: later debts that fall within the clause are analyzed as future advances for priority purposes.

Priority of Future Advances

The main exam issue is whether a particular future advance has priority over a third party’s intervening interest. The rules differ depending on:

Whether the advance is obligatory or optional, and
Whether the lender had notice of the intervening interest when making the advance.

Key Term: Senior Mortgage
A mortgage that has priority over another mortgage or lien, usually because it was recorded earlier or qualifies for special priority (e.g., a purchase-money mortgage).

Key Term: Junior Mortgage
A mortgage that is subordinate in priority to another mortgage or lien on the same property.

General Rule

If the mortgage is properly recorded, all advances made before an intervening interest is recorded are secured with the same priority as the original mortgage and are senior to that intervening interest.
For advances made after an intervening interest is recorded, priority depends on:
- Whether the advance was obligatory or optional, and
- Whether the lender had notice (actual or constructive) of the intervening interest.

Think in terms of time slices: for each advance, ask what interests existed and what the lender knew at the time of that advance.

Obligatory Advances

For obligatory advances, the borrower has a contractual right to receive the funds once conditions are met, and the lender cannot refuse without breaching the agreement.

Majority rule (and MBE rule): If the original mortgage is recorded before the intervening interest, then all obligatory advances made under that mortgage have the original priority, even if:
- They are made after the intervening interest is recorded, and
- The lender has actual knowledge of the intervening interest.

The rationale is that the lender’s priority is fixed when it commits to lend; it cannot protect itself later because it must advance the funds.

In practice:

A properly recorded construction mortgage securing an obligatory construction loan will have priority for all required advances over later mortgages or judgment liens, up to the maximum stated in the mortgage.

Optional Advances

For optional advances, the lender may decline to make additional disbursements and can protect itself by refusing to lend once new risks arise.

Rule: Optional advances made before any intervening interest arises share the original mortgage’s priority.
Optional advances made after an intervening interest is recorded have priority only if the lender had no notice (actual or constructive) of that intervening interest at the time of the advance.
If the lender has notice, the optional advance is subordinate (junior) to the intervening interest.

Key Term: Notice (for Future Advances)
Knowledge, actual or constructive, that an intervening lien or encumbrance exists on the property at the time a future advance is made.

Key Term: Actual Notice
Direct knowledge of an intervening lien or interest, such as being told of the lien or seeing the recorded instrument.

Key Term: Constructive Notice
Notice imputed by law because the intervening interest was properly recorded in the public records, even if the lender did not actually check the records.

On the MBE, a properly recorded intervening lien generally gives the world—including the original mortgagee—constructive notice. Thus, if an optional advance is made after a junior lien is recorded, it is usually junior to that lien, even if the lender did not in fact examine the records.

Recording and Notice

A properly recorded future advance mortgage gives constructive notice that:

The lender already has a mortgage on the property; and
The mortgage may secure additional future advances up to a stated maximum.

This affects later lenders and purchasers, who take subject to the mortgage to the extent of its priority.

However, recording works both ways:

A later recorded lien gives constructive notice to the prior mortgagee.
For optional advances, this constructive notice matters: if a junior lien is recorded before an optional advance is made, that advance will generally be junior to the recorded lien.

This leads to the core rule:

Obligatory advances: Priority relates back to the date the original mortgage was recorded, regardless of notice.
Optional advances: Priority depends on whether the mortgagee had notice (actual or constructive) of the intervening interest when the advance was made.

Foreclosure and Future Advances

When a mortgage that secures future advances is foreclosed, you must separate the debt into portions:

Advances that are senior to the junior interests being foreclosed against.
Advances that are junior to those interests.

Key Term: Purchase-Money Mortgage
A mortgage given to a seller or lender to secure funds used to acquire title to the property; it generally has priority over prior non-purchase-money interests.

Key foreclosure consequences:

The foreclosing mortgagee can recover from the foreclosure sale proceeds only those advances that are senior to the interests being cut off.
Optional advances made after the mortgagee had notice of a junior lien (and therefore are junior to that lien) cannot be paid ahead of that junior lienholder from the sale proceeds.
If the sale proceeds are insufficient to cover the entire secured debt, a deficiency judgment may be available against the mortgagor personally. The presence of junior or senior status affects who gets paid from the sale; it does not eliminate the borrower’s personal obligation unless otherwise specified by law.

Key Term: Deficiency Judgment
A personal judgment against the mortgagor for the unpaid balance of the debt after foreclosure sale proceeds are applied to the secured obligation.

If a junior mortgagee forecloses, a senior future advance mortgage remains on the property to the extent of any senior advances; the buyer at the foreclosure sale takes the property subject to that senior mortgage.

Worked Example 1.1

A bank lends $100,000 to a borrower secured by a recorded mortgage that allows for future advances up to$ 200,000. The mortgage states that the bank may, but is not required to, make additional advances. The borrower later borrows another $50,000 from the bank. After the first loan but before the second, a judgment creditor records a lien against the property. The bank has no knowledge of the lien when it makes the second advance, and the jurisdiction treats recording as constructive notice.

Answer:
The first advance ( $100,000) clearly has priority over the judgment lien because it was made before the lien was recorded. The second advance ($ 50,000) is optional. Because the jurisdiction charges the bank with constructive notice of recorded liens, the lien was on record when the second advance was made. Therefore, the $50,000 advance is junior to the judgment lien, even though the bank lacked actual knowledge.

Worked Example 1.2

Same facts as above, except the judgment creditor records the lien after the second $50,000 advance is made.

Answer:
Both the $100,000 initial advance and the$ 50,000 optional advance were made before the intervening lien was recorded. Because the bank’s mortgage was recorded first, and all advances were made before any intervening interest arose, the entire $150,000 has priority over the judgment lien.

Worked Example 1.3

A mortgage secures a construction loan. The lender is contractually obligated to disburse funds as the project reaches certain milestones. After the mortgage is recorded but before all funds are disbursed, a second mortgage is recorded. The lender has actual notice of the second mortgage before making later disbursements.

Answer:
All advances under the construction loan are obligatory. The lender’s obligation to disburse was fixed when the original recorded mortgage was executed. Therefore, even advances made after the second mortgage is recorded, and with actual notice of that mortgage, retain the original mortgage’s priority. All construction advances are senior to the second mortgage.

Worked Example 1.4

A bank makes a $150,000 loan to a homeowner, secured by a recorded mortgage that states it “secures this note and any future optional advances up to$ 250,000.” Two years later, another lender records a second mortgage for $50,000. After checking the public records, the bank learns of the second mortgage but nonetheless makes an additional optional advance of$ 40,000 under the original mortgage.

Answer:
The original $150,000 advance is senior because it was made before the second mortgage. The later$ 40,000 advance is optional and was made after the second mortgage was recorded and with actual knowledge of that mortgage. Under the majority rule, this optional advance is junior to the second mortgage. In a foreclosure by the bank, the second mortgagee would be paid from sale proceeds before the $40,000 optional advance.

Worked Example 1.5

Bank A holds a recorded future advance mortgage with a maximum of $400,000. It initially advances$ 200,000 as an obligatory construction loan. Later, Bank B records a second mortgage for $100,000. After Bank B’s mortgage is recorded, Bank A (i) disburses an obligatory$ 100,000 progress payment, and (ii) makes an additional optional $50,000 loan under the same mortgage for the borrower’s personal expenses, with actual knowledge of Bank B’s mortgage.

Answer:
Bank A’s obligatory $300,000 ($ 200,000 + $100,000) has priority over Bank B’s mortgage because obligatory advances relate back to the date of the original recorded mortgage. The optional$ 50,000 advance is junior to Bank B’s mortgage because it was made after Bank B’s mortgage was recorded and with notice. At foreclosure by Bank A, sale proceeds would be applied first to senior liens in order of priority: (1) Bank A’s $300,000 obligatory advances, then (2) Bank B’s$ 100,000, and only then, if proceeds remain, to Bank A’s junior $50,000 optional advance.

Exam Warning

On the MBE, do not assume that all future advances share the same priority. Always:

Identify the type of advance (obligatory vs optional).

Determine the timing of the advance relative to any intervening lien.

Ask whether the lender had notice (actual or constructive) of that intervening lien when the advance was made.

Also be alert for dragnet clauses. If the mortgage purports to secure “all other debts” to the same lender, later loans may be treated as future advances whose priority depends on whether they were obligatory or optional and whether the lender had notice of intervening interests.

Revision Tip

When analyzing a future advance mortgage question:

First, identify every advance and classify it as obligatory or optional.

Second, create a timeline: record dates for each mortgage and lien and the date of each advance.

Third, for each optional advance, ask whether the original mortgagee had actual or constructive notice of any intervening lien at that time.

Systematically applying this three-step approach will help avoid missing a priority shift hidden in the facts.

Key Point Checklist

This article has covered the following key knowledge points:

A future advance mortgage secures present and future loans under a single mortgage instrument, often up to a stated maximum amount.
Obligatory advances under a recorded mortgage have priority over intervening interests, regardless of notice, because the lender is contractually bound to make them.
Optional advances under a recorded mortgage have priority over intervening interests only if made without notice (actual or constructive) of those interests.
A recorded intervening lien generally gives constructive notice; a mortgagee making an optional advance after such recording is usually subordinate as to that advance.
In foreclosure, only those advances that are senior to a junior lien are paid ahead of that lien from the foreclosure proceeds; junior advances may still be owed personally by the mortgagor but are not paid before senior liens.
Dragnet clauses can cause later, unrelated debts to be treated as future advances; on the MBE, their priority is analyzed using the same obligatory/optional and notice framework.

Key Terms and Concepts

Future Advance Mortgage
Obligatory Advance
Optional Advance
Intervening Interest
Line of Credit
Dragnet Clause
Senior Mortgage
Junior Mortgage
Purchase-Money Mortgage
Notice (for Future Advances)
Actual Notice
Constructive Notice
Deficiency Judgment

Mortgages/security devices - Future advance mortgages