Learning Outcomes
After reading this article, you will be able to identify what constitutes a purchase money mortgage (PMM), explain the priority rules between PMMs and other interests, distinguish between vendor and third-party PMMs, and apply these principles to MBE-style questions. You will also understand how recording acts affect PMM priority and recognize common pitfalls tested on the MBE.
MBE Syllabus
For MBE, you are required to understand the rules governing purchase money mortgages and their priority compared to other security interests. This article covers:
- Definition and characteristics of purchase money mortgages (PMMs)
- Priority of PMMs over prior and subsequent interests
- Distinction between vendor PMMs and third-party lender PMMs
- Effect of recording acts on PMM priority
- Subordination agreements and modifications affecting PMM priority
- Application of PMM rules to foreclosure scenarios
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.
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Which of the following has priority if both are properly recorded: a vendor PMM and a third-party PMM on the same property?
- (A) Vendor PMM
- (B) Third-party PMM
- (C) Whichever was recorded first
- (D) Whichever was executed first
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A buyer purchases land with a PMM from the seller and later grants a mortgage to a bank, which records first. Who has priority?
- (A) Seller’s PMM
- (B) Bank’s mortgage
- (C) Whichever has the higher amount
- (D) Whichever is recorded first
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If a PMM is not recorded and a subsequent bona fide purchaser (BFP) without notice records first, who prevails?
- (A) PMM holder
- (B) BFP
- (C) Both share title
- (D) The court will decide based on fairness
Introduction
A purchase money mortgage (PMM) is a special type of security device that arises when a buyer finances the purchase of real property by giving a mortgage to either the seller or a third-party lender. PMMs are frequently tested on the MBE because they have unique priority rules that differ from ordinary mortgages. Understanding these rules is essential for answering MBE questions involving foreclosure, priority disputes, and recording issues.
Key Term: Purchase Money Mortgage (PMM) A mortgage given to secure a loan used to acquire title to the property, either to the seller (vendor PMM) or a third-party lender at the time of purchase.
Types of Purchase Money Mortgages
A PMM can be created in two main ways:
- Vendor PMM: The seller finances part or all of the purchase price and takes back a mortgage from the buyer.
- Third-Party PMM: A bank or other lender provides funds for the buyer to purchase the property and receives a mortgage at the time of purchase.
Key Term: Vendor Purchase Money Mortgage A mortgage given by the buyer to the seller as part of the purchase price for the property.
Key Term: Third-Party Purchase Money Mortgage A mortgage given by the buyer to a lender (not the seller) to finance the purchase of the property.
Priority Rules for Purchase Money Mortgages
PMMs enjoy a special priority over most other interests in the property that arise before the buyer acquires title. This means a PMM will generally take precedence over earlier judgments, liens, or mortgages against the buyer, even if those interests are recorded first.
Key Term: PMM Priority Rule A purchase money mortgage has priority over any prior claims or interests against the buyer, regardless of recording, unless a subsequent mortgagee qualifies as a bona fide purchaser and records first.
Vendor vs. Third-Party PMMs
If both a vendor and a third-party lender take PMMs as part of the same transaction, the majority rule is that the vendor’s PMM has priority over the third-party PMM, unless there is an agreement to the contrary or a recording act changes the result.
Effect of Recording Acts
Although PMMs have special priority, they are still subject to recording statutes. If a PMM holder fails to record and a subsequent bona fide purchaser (BFP) without notice records first, the BFP will prevail under a notice or race-notice statute.
Subordination and Modification
A PMM holder can agree to subordinate their interest to another mortgage by contract. Additionally, if a senior PMM is modified to increase the debt or make it more burdensome, the modification may lose priority to junior interests for the increased amount.
Worked Example 1.1
A seller conveys land to a buyer, who pays part of the price in cash and gives the seller a PMM for the balance. The buyer also obtains a loan from Bank, secured by a mortgage on the property, to cover the rest of the price. Both the seller and Bank record their mortgages. The buyer later defaults. Who has priority?
Answer: The seller’s PMM has priority over the Bank’s PMM, even if both are recorded, unless the parties agreed otherwise or a recording act gives priority to Bank due to lack of notice and earlier recording.
Worked Example 1.2
A buyer purchases property from a seller, giving the seller a PMM. The seller does not record. Later, the buyer grants a mortgage to Bank, which records before the seller. The buyer defaults on both mortgages. Who prevails?
Answer: If Bank is a bona fide purchaser for value without notice of the seller’s unrecorded PMM, and Bank records first, Bank’s mortgage will have priority under a notice or race-notice statute.
Exam Warning
PMM priority is not absolute. If the PMM holder fails to record and a subsequent BFP records first without notice, the BFP will take priority under the recording act. Always check for facts indicating a BFP and proper recording.
Revision Tip
Remember: Vendor PMMs usually have priority over third-party PMMs, but both can lose priority to a subsequent BFP who records first. Always analyze the facts for notice and recording.
Key Point Checklist
This article has covered the following key knowledge points:
- A purchase money mortgage (PMM) is a mortgage given to finance the purchase of property, either to the seller or a third-party lender.
- PMMs have priority over prior interests against the buyer, even if those interests are recorded first.
- Vendor PMMs generally have priority over third-party PMMs if both arise from the same transaction.
- PMMs are still subject to recording acts; a subsequent bona fide purchaser who records first can defeat an unrecorded PMM.
- PMM holders can agree to subordinate their priority, and modifications may affect priority for the increased amount.
- On the MBE, always check for facts about notice, recording, and subordination agreements.
Key Terms and Concepts
- Purchase Money Mortgage (PMM)
- Vendor Purchase Money Mortgage
- Third-Party Purchase Money Mortgage
- PMM Priority Rule
