PastPaperHero | Mortgages/security devices

Learning Outcomes

This article explains purchase money mortgages within the broader topic of mortgages and security devices, including:

Identifying what constitutes a purchase money mortgage (PMM) and when a loan (or part of a loan) qualifies as purchase money
Explaining PMM priority rules against prior and subsequent interests, including judgment liens and other mortgages
Distinguishing vendor PMMs from third-party PMMs and stating their relative priority
Applying recording act principles to PMMs, including the effect of notice, race, and race-notice statutes
Analyzing how subordination agreements and mortgage modifications affect PMM priority
Applying PMM rules in foreclosure questions, including distribution of sale proceeds and potential deficiency judgments
Spotting common MBE traps involving unrecorded PMMs, mixed-purpose loans, and after-acquired property
Distinguishing PMMs from non–purchase money mortgages and understanding partial PMM status in a single loan
Recognizing how anti-deficiency rules, redemption rights, and due-on-sale clauses may interact with PMMs

MBE Syllabus

For the MBE, you are required to understand the law of mortgages and security devices as it relates to purchase money mortgages, with a focus on the following syllabus points:

Nature of a mortgage as a security device (note and mortgage) and the concept of foreclosure
Definition and characteristics of purchase money mortgages (PMMs)
Priority of PMMs over prior and subsequent interests, including judgment liens and non–purchase money mortgages
Special rules for competing vendor and third-party PMMs in the same transaction
Application of recording acts (notice, race, race-notice) to PMMs and bona fide purchasers
Effect of subordination agreements, modifications, future advances, and after-acquired property clauses on PMM priority
Consequences of foreclosure of a PMM for mortgagors and other lienholders, including deficiency judgments and redemption rights
Distinction between PMMs and refinancing, home-equity, and other non–purchase money mortgages
Interaction of PMMs with equitable doctrines such as replacement mortgages and equitable subrogation (to the limited extent tested)

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.

Which of the following has priority if both are properly recorded: a vendor PMM and a third-party PMM on the same property, arising out of the same purchase transaction (majority rule)?
1. Vendor PMM
2. Third-party PMM
3. Whichever was recorded first
4. Whichever was executed first
A buyer purchases land with a PMM from the seller and later grants a mortgage to a bank, which records first. The bank has notice of the seller’s PMM. Who has priority?
1. Seller’s PMM
2. Bank’s mortgage
3. Whichever has the higher amount
4. Whichever is recorded first
If a PMM is not recorded and a subsequent bona fide purchaser (BFP) without notice takes a mortgage on the property and records first in a notice or race-notice jurisdiction, who prevails?
1. PMM holder
2. BFP mortgagee
3. Both share title pro rata
4. The court will decide based on fairness
A buyer gives Bank a PMM for 300,000tobuyahouseand,inthesameclosing,givestheselleraPMMfor300,000 to buy a house and, in the same closing, gives the seller a PMM for 300,000tobuyahouseand,inthesameclosing,givestheselleraPMMfor50,000 for the rest of the price. There is no agreement about priority, and both mortgages are recorded. In most jurisdictions, what is the priority?
1. Bank’s PMM has priority over the seller’s PMM
2. Seller’s PMM has priority over the bank’s PMM
3. The two PMMs share pro rata
4. Whichever mortgage states a higher interest rate has priority
A buyer gives a PMM to Bank. Later, the buyer gives a second mortgage to Lender. Bank then modifies its loan, increasing the principal by $50,000 and raising the interest rate. Lender did not consent. As between Bank and Lender, what is the effect on priority?
1. Bank remains senior as to the entire modified loan
2. Lender becomes senior as to the entire Bank loan
3. Bank remains senior as to the original amount, but Lender is senior as to the increase
4. Lender remains junior as to all amounts because Bank was first in time

Introduction

A purchase money mortgage (PMM) is a special type of mortgage that secures the loan used to acquire title to real property. PMMs receive distinctive priority treatment compared to ordinary mortgages, and those priority rules are a frequent subject on the MBE, especially in foreclosure and recording-act questions.

To place PMMs in context, recall the basic mortgage structure.

Key Term: Mortgage
A mortgage is a real-property security device in which real estate is used as collateral to secure repayment of a debt.

Key Term: Note
The note is the borrower’s separate written promise to repay the loan; it is the personal obligation that the mortgage secures.

The borrower (mortgagor) signs a note promising to repay the debt and a mortgage instrument granting the lender (mortgagee) a security interest in the property. If the borrower defaults, the lender can force a foreclosure sale and use the sale proceeds to satisfy the outstanding debt.

What Is a Purchase Money Mortgage

Key Term: Purchase Money Mortgage (PMM)
A mortgage given to secure a loan whose proceeds are used to acquire legal title to the mortgaged property, when the mortgage is given as part of the same transaction in which the borrower obtains title.

The critical feature is the use of the loan proceeds. A mortgage is a PMM only to the extent that the funds are actually used to pay all or part of the purchase price or to discharge a lien that is part of the purchase transaction (for example, paying off the seller’s existing mortgage as part of closing).

If the same loan also finances other purposes (for example, improvements or debt consolidation), only the portion used for the purchase price has purchase money status.

Key Term: Non–Purchase Money Mortgage
A mortgage that secures a debt that is not used to acquire title to the mortgaged property, such as a refinance of an existing loan, a home-equity loan, or a loan for renovations or personal expenses.

PMMs can be created in two heavily tested ways:

A seller finances part of the price and takes back a mortgage
A third-party lender (usually a bank) lends the buyer the purchase price and takes a mortgage at closing

Key Term: Vendor Purchase Money Mortgage
A PMM given by the buyer to the seller of the property, securing part or all of the purchase price.

Key Term: Third-Party Purchase Money Mortgage
A PMM given by the buyer to a lender who is not the seller, where the loan proceeds are used to pay the seller for the property.

For a mortgage to qualify as “purchase money,” timing matters. The PMM must be given contemporaneously with (or as a necessary part of) the conveyance of title: typically at the closing when the deed is delivered. A very short delay for administrative reasons (for example, the mortgage is signed a few hours later the same day) does not usually destroy PMM status if the loan is clearly part of the same purchase transaction.

By contrast, if the buyer pays the full price in cash and then, weeks later, borrows money secured by the property to “reimburse” themselves, that later mortgage is not a PMM. The property was already in the buyer’s estate before the loan.

Mixed-Purpose Loans and Partial PMM Status

On exam questions, a single loan may fund both the purchase price and other purposes (such as renovations or paying off unrelated debts). In that case:

The portion of the loan actually used to pay the seller (or to pay off a lien that must be cleared to convey title) is treated as a PMM
The remainder of the loan is treated as a non–purchase money mortgage, subject to ordinary priority rules

This partial PMM status is an important detail in priority and foreclosure questions.

MBE technique: When you see a loan described as “ $X for the purchase price and$ Y for renovations,” mentally split it into:

PMM portion: $X

Non-PMM portion: $Y

Treat them as separate amounts for priority analysis.

Title Devices Functioning Like PMMs

The MBE may also mention security devices that function like mortgages, such as deeds of trust or land installment contracts. Even if the instrument is not labeled a “mortgage,” if it secures payment of the purchase price, it is treated like a PMM for priority purposes.

Background: Why PMMs Get Special Treatment

On the MBE, PMMs often “jump the line” ahead of other claims. The rationale:

Without PMM financing, the buyer could not have acquired the property at all
The PMM lender’s funds are what brought the property into the borrower’s estate
It is therefore considered fair to prioritize the PMM over most other claims against the buyer

This policy is reflected in the PMM priority rule.

Key Term: PMM Priority Rule
A purchase money mortgage generally has priority over claims or interests against the buyer that existed before the buyer acquired title, even if those prior interests are recorded, subject to the recording acts and any subordination agreements.

Historically, courts described this as an “instantaneous-seisin” idea: the buyer’s seisin (title) exists only for a legal instant before the PMM attaches, so prior claims against the buyer cannot attach ahead of the PMM.

It is equally important to see the limit of this policy: the PMM takes priority over claims against the buyer, but it does not defeat prior encumbrances created by the seller on the land itself (for example, a mortgage the seller previously granted on the property). Those preexisting interests remain senior.

Types of Purchase Money Mortgages

A PMM can be structured in several ways:

Vendor PMM:
- The seller accepts part of the price over time and takes a mortgage on the property to secure that unpaid portion
- Common in installment or “seller-financed” transactions
Third-Party PMM:
- A bank or other lender wires the purchase funds to the closing
- The buyer signs a note to the lender and a mortgage on the property as security
- Most residential mortgages are third-party PMMs

Sometimes a transaction will involve both:

Buyer pays a cash down payment
Bank provides a third-party PMM for part of the price
Seller takes back a vendor PMM for the remainder

The relative priority of those two PMMs is a classic MBE issue handled below.

Priority Rules for Purchase Money Mortgages

The starting point in any mortgage priority problem is the default rule:

First in time, first in right – Earlier-recorded interests usually have priority over later ones.

PMMs are a major exception, but only in specific ways.

Key Term: Senior Interest
An interest that has higher priority than another interest in the same property and is paid first from foreclosure proceeds.

Key Term: Junior Interest
An interest that is subordinate to another interest in the same property and is paid later, if at all, from foreclosure proceeds.

PMM vs. Prior Interests Against the Buyer

As a general rule, a PMM has priority over interests that attached to the buyer before the buyer took title, such as:

Judgment liens against the buyer
Previously recorded general liens against the buyer
Earlier non–purchase money mortgages given by the buyer in other property that purport to extend to the new property through an after-acquired property clause (discussed below)

Because those interests were claims against the buyer, not against this specific property before the buyer acquired it, the PMM—which financed the acquisition—takes priority.

Example pattern:

Creditor obtains a judgment against Buyer in Year 1
In Year 2, Buyer purchases Blackacre using a PMM from Bank
Creditor records its judgment in the county land records after Buyer closes on Blackacre

Result: Bank’s PMM is senior on Blackacre. Even though Creditor’s judgment predates Buyer’s purchase, it cannot jump ahead of the PMM that enabled the purchase.

This is the scenario illustrated in Worked Example 1.3 below.

PMM vs. Prior Interests Created by the Seller

A different result occurs when the competing lien was created by the seller, not by the buyer.

If Seller had already mortgaged Blackacre to Bank1 before the sale, Bank1’s mortgage remains attached to the property when it is conveyed to Buyer.
Buyer’s PMM (whether given to Seller or to Bank2) will not leapfrog Bank1’s prior mortgage simply because it is a PMM.
Unless Bank1 agrees to subordinate or its mortgage is paid off at closing, Bank1 remains senior.

This distinction is important:

PMM > prior claims against buyer
But prior claims against seller’s title (like an earlier mortgage on the land) can stay ahead of the PMM.

MBE questions sometimes test whether you can distinguish “prior lien against the person” from “prior lien on the land.”

PMM vs. Subsequent Interests

A PMM is also generally senior to later mortgages or liens, because it came earlier in time. Thus, in most situations (ignoring recording acts for the moment):

PMM → senior
Later mortgages, mechanic’s liens, and judgment liens → junior

So if Buyer gives a PMM to Bank and later gives a second mortgage to Lender, Bank’s PMM is senior, Lender’s mortgage is junior. If Bank forecloses, Lender’s lien may be wiped out, depending on sale proceeds and notice.

However, as seen below, the recording acts can change this result if the PMM holder fails to record and a later mortgagee qualifies as a bona fide purchaser.

Vendor vs. Third-Party PMMs

If both a vendor and a third-party lender take PMMs on the same property as part of one purchase transaction, the majority rule is:

Vendor PMM has priority over the third-party PMM, unless:
- The parties agree otherwise (for example, by contractually subordinating the vendor PMM), or
- A recording act gives priority to the third-party lender because the vendor failed to record and the lender was a bona fide purchaser without notice

Rationale: The seller already owned the property and is extending credit for part of the price, so courts often favor the seller’s security interest over a third-party lender that also chose to finance the purchase.

Minority approaches:

Some jurisdictions apply a pure “first to record” approach between competing PMMs.
Others give equal priority and require pro rata sharing if the foreclosure proceeds are insufficient.

On the MBE, you should assume the majority rule—vendor PMM first—unless the facts clearly indicate a different state rule.

Effect of Partial PMM Status on Priority

When a mortgage is partly PMM and partly non-PMM:

The PMM portion gets PMM priority
The non-PMM portion is treated like a separate, later mortgage as to priority

For example, if Bank’s $300,000 mortgage consists of:

$250,000 used to pay the seller (purchase price) → PMM portion
$50,000 used for renovations → non-PMM portion

Bank’s mortgage will be senior to junior lienors for the first $250,000 to the extent PMM rules protect it, but the remaining$ 50,000 may rank lower, especially if junior creditors relied on the original loan amount when lending.

Effect of Recording Acts on PMM Priority

Although PMMs enjoy special priority, they are not exempt from recording statutes. They must still be recorded to protect against subsequent bona fide purchasers.

Key Term: Recording Act
A statute that determines the priority of interests in real property based on recording and notice.

Key Term: Bona Fide Purchaser (BFP)
A person who acquires an interest in property for value and without notice (actual, record, or inquiry) of a prior unrecorded interest, and who satisfies the requirements of the applicable recording statute.

Mortgagees (lenders) are treated as purchasers for value under recording acts, so they can qualify as BFPs.

Most MBE questions assume one of three recording systems:

Key Term: Notice Statute
A recording statute under which a subsequent BFP without notice of a prior unrecorded interest prevails, even if the BFP records later.

Key Term: Race-Notice Statute
A recording statute under which a subsequent BFP must both (1) take without notice of the prior unrecorded interest and (2) record first to prevail.

(Pure race statutes exist but are rarely tested with PMMs; in such jurisdictions, the first to record wins, regardless of notice.)

Core principle for PMMs under recording acts:

If a PMM holder fails to record, a later BFP mortgagee who takes without notice and meets the statute’s requirements can gain priority, even though the earlier unrecorded mortgage is a PMM.

This is true in both notice and race-notice jurisdictions:

In a notice jurisdiction, the later mortgagee must take without notice; timing of recording does not matter between them.
In a race-notice jurisdiction, the later mortgagee must both lack notice and win the race to record.

Exam trap: Do not assume PMM priority is absolute. Always check:

Whether the PMM was recorded

Whether the competing claimant is a BFP for value

What type of recording act applies

Types of Notice

To assess BFP status, recall the three kinds of notice:

Actual notice: The mortgagee actually knows of the prior unrecorded PMM.
Record notice: The prior PMM was properly recorded in the chain of title before the later mortgagee took its interest.
Inquiry notice: The circumstances would lead a reasonable person to investigate further, and such investigation would reveal the prior PMM.

If a later mortgagee has any of these types of notice of the prior PMM, the mortgagee cannot be a BFP and usually cannot defeat the PMM under a recording act.

Subordination and Modification

Even when a PMM is senior by default, its holder can contractually alter that priority.

Key Term: Subordination Agreement
An agreement by which a mortgagee voluntarily accepts a lower priority position than it would otherwise have under default rules.

A PMM holder (vendor or third-party lender) can execute a subordination agreement in favor of another mortgagee. On the MBE, if the facts mention a written agreement “subordinating” a PMM, treat the PMM as junior according to the agreement. Courts enforce these agreements as written.

Key Term: Modification of Mortgage
A later agreement between mortgagor and mortgagee that changes the terms of an existing mortgage, such as increasing principal or interest or extending maturity.

If a senior PMM is later modified:

The original mortgage remains senior to junior interests.
But the modification (to the extent it is materially more burdensome to the mortgagor—such as an increase in principal, extension of maturity, or higher interest rate) is treated as junior to already-existing junior interests.

This rule protects junior lienholders from having their position unexpectedly worsened by later changes between the mortgagor and senior mortgagee.

A related doctrine applies when a senior mortgage is released and simultaneously replaced with a new mortgage (a common refinancing pattern):

The replacement mortgage generally retains the same priority as the original mortgage,
Except to the extent the new terms are materially more burdensome to junior lenders (for example, a substantial increase in principal), in which case that increased portion is treated as junior.

This “replacement” doctrine can apply to PMMs that are refinanced, although the refinanced loan itself is usually no longer considered a PMM; instead, it takes on the priority of the original PMM up to the old balance.

Future-Advances Mortgages and After-Acquired Property

PMM priority also interacts with two other mortgage devices the MBE likes to test.

Key Term: Future-Advances Mortgage
A mortgage that secures not only an initial loan but also future advances made by the lender under a line of credit.

Under a future-advances mortgage:

The mortgage may secure both obligatory advances (lender is contractually required to lend) and optional advances (lender chooses to lend later).
As to priority:
- Obligatory advances usually relate back to the time the mortgage was originally recorded.
- Optional advances after the lender has actual notice of an intervening lien may lose priority to that intervening lien in some jurisdictions.

A future-advances mortgage that finances the original purchase may be a PMM for that initial advance only; later draws to remodel the kitchen or consolidate debt are treated as non–purchase money and may be junior to intervening liens.

Key Term: After-Acquired Property Clause
A mortgage provision stating that the mortgage will also encumber property the mortgagor acquires in the future.

Such a clause allows a mortgagee to reach newly acquired property without executing a new mortgage each time.

On the MBE:

A mortgage lien created by an after-acquired property clause is subordinate to a PMM on property that is later acquired.
The PMM that actually financed the purchase will prevail over the earlier lender who merely relied on after-acquired language.

This fits the policy that the lender who made the purchase possible should come first on that property.

PMMs and Foreclosure

Key Term: Foreclosure
The process by which a mortgagee forces a public sale of the mortgaged property after the mortgagor’s default, in order to satisfy the secured debt from the sale proceeds.

Foreclosure can be judicial (court-supervised) or nonjudicial (power-of-sale). The MBE usually assumes judicial foreclosure unless otherwise stated.

In a foreclosure involving a PMM, the usual foreclosure priority rules apply, subject to the PMM’s special priority status:

Senior interests (including a PMM) are paid first from the sale proceeds, in order of priority.
Junior interests are paid only if money remains after paying all senior liens.
Any remaining surplus goes to the mortgagor.
If the sale proceeds are insufficient to pay the foreclosing mortgagee in full, the mortgagee may seek a deficiency judgment against the mortgagor (subject to state limitations).

Key Term: Deficiency Judgment
A personal judgment against the mortgagor for any unpaid balance of the debt remaining after a foreclosure sale.

Some jurisdictions restrict or prohibit deficiency judgments on certain PMMs (especially residential PMMs), but unless the question expressly describes an anti-deficiency statute, assume a deficiency is available.

Effect of Foreclosure on Other Interests

A foreclosure sale has different effects depending on whether an interest is senior or junior to the foreclosing mortgage:

Senior interests:
- Survive the foreclosure.
- The buyer at the foreclosure sale takes the property subject to those senior liens.
- The senior mortgagee can later foreclose if the debt remains unpaid.
Junior interests:
- Are generally destroyed by a properly conducted foreclosure of a senior mortgage, provided the junior lienholders were joined in the action and given notice.
- Junior lienholders receive payment (if any) from surplus proceeds after senior liens are satisfied.
- If they are not paid in full, they can sue the mortgagor personally for the remaining debt but can no longer look to the property.

Because PMMs are often the earliest mortgages, they frequently occupy the most senior position among private lienholders. However, certain liens—especially property tax liens—may have statutory superpriority over all mortgages, including PMMs.

PMM Foreclosure Scenarios

When the PMM itself is being foreclosed:

It is paid ahead of junior liens consistent with its priority.
Its foreclosure wipes out properly noticed junior liens.

When a junior mortgage is foreclosed:

Any senior PMM is unaffected and remains on the property.
The buyer at the junior foreclosure sale takes the property subject to the PMM and must either:
- Pay the PMM or risk later foreclosure by the PMM holder, or
- Accept the risk of loss if the original mortgagor does not pay the PMM.

The exam sometimes tests whether you realize that a junior foreclosure cannot eliminate a senior PMM.

Redemption Rights and PMMs

Borrowers subject to PMMs have the same redemption rights as other mortgagors.

Key Term: Equity of Redemption
The mortgagor’s right, before the foreclosure sale, to redeem the property by paying the amount due on the mortgage plus accrued interest and allowable costs.

Key Term: Statutory Right of Redemption
A right created by statute (in some states) allowing the mortgagor to redeem the property for a set period after the foreclosure sale by paying the foreclosure sale price or the full debt, as the statute specifies.

Key points:

The equity of redemption exists in every jurisdiction and applies to PMMs and non-PMMs alike.
The mortgagor must tender the full amount due (including any validly accelerated amount if there is an acceleration clause) plus allowed costs.
Clauses that attempt to “clog” or waive the equity of redemption in advance are generally invalid.
Statutory redemption is purely statutory. It is available only if the jurisdiction provides it and on the terms provided.

The Themis question in the source material illustrates equity of redemption: even after foreclosure is initiated, but before the sale, a defaulting borrower can redeem by paying the full outstanding balance and accrued interest. The bank must accept such a valid tender; it cannot insist on completing the sale instead.

Due-on-Sale Clauses and PMMs

Key Term: Due-on-Sale Clause
A provision in a mortgage note giving the lender the option to demand immediate payment of the full outstanding balance if the borrower transfers the property without the lender’s consent.

Due-on-sale clauses commonly appear in notes secured by PMMs. If the mortgagor sells the property “subject to” the mortgage without the lender’s consent:

The mortgagor remains personally liable on the note unless the lender releases them in a novation.
The buyer takes the property subject to the mortgage but, absent an assumption agreement, does not become personally liable to the lender.

The Themis example shows that a lender cannot sue the buyer for the full balance merely because of a due-on-sale clause in the note unless the buyer has expressly assumed the loan. The clause permits acceleration as against the mortgagor, but it does not automatically create personal liability for the buyer.

Due-on-sale clauses are enforceable in most jurisdictions and are not treated as unreasonable restraints on alienation.

Worked Example 1.1

A seller conveys land to a buyer for $300,000. The buyer pays$ 100,000 in cash, gives the seller a PMM for $50,000, and borrows$ 150,000 from Bank, giving Bank a third-party PMM. All documents are signed at the same closing. Both the seller and Bank promptly record their mortgages. The buyer later defaults on both loans. There is no subordination agreement.

Who has priority?

Answer:
Under the majority rule, the vendor PMM (seller’s mortgage) has priority over the third-party PMM, even though both are recorded and arose in the same transaction. Bank’s PMM is junior to the seller’s PMM. In foreclosure, sale proceeds would first satisfy the seller’s PMM, then Bank’s PMM, then any remaining junior liens.

Worked Example 1.2

A buyer purchases property from a seller for $200,000, giving the seller a PMM for$ 150,000 and paying $50,000 in cash. The seller does not record. Later, the buyer obtains a$ 100,000 loan from Bank, granting Bank a mortgage on the property. Bank has no knowledge of the seller’s PMM and promptly records. The jurisdiction has a race-notice statute. The buyer defaults on both mortgages.

Who has priority?

Answer:
Because the seller failed to record, Bank qualifies as a subsequent bona fide purchaser for value without notice and recorded first. In a race-notice jurisdiction, Bank’s mortgage has priority over the seller’s unrecorded PMM. The fact that the seller’s mortgage is a PMM does not defeat the recording act where the later mortgagee is a BFP who wins the race to record.

Worked Example 1.3

Buyer has an outstanding judgment entered against her by Creditor A. One year later, Buyer purchases a house for $400,000, paying$ 80,000 cash and borrowing $320,000 from Bank, which takes a PMM and records. Creditor A then records its judgment lien in the county where the house is located. Buyer later defaults on the mortgage. Bank forecloses, and the property is sold.

Between Bank’s PMM and Creditor A’s judgment lien, who has priority in the foreclosure proceeds?

Answer:
Bank’s mortgage is a purchase money mortgage that financed the acquisition of the house. Even though Creditor A’s judgment existed before Buyer acquired title, the PMM has priority as to the property because it enabled the purchase. Bank’s PMM is senior, so Bank is paid first from the foreclosure proceeds; Creditor A’s judgment lien is junior and is paid only if funds remain after Bank is satisfied.

Worked Example 1.4

Buyer gives Bank a PMM for $250,000 to purchase a home. Later, Buyer takes a$ 50,000 home equity loan from Lender, secured by a second mortgage. Both mortgages are properly recorded, Bank first. Two years later, Bank agrees to modify its loan, increasing the principal to $280,000 and raising the interest rate. Lender does not consent. Buyer then defaults on both loans. Bank forecloses.

What is the priority among Bank and Lender?

Answer:
Bank’s original PMM for $250,000 remains senior to Lender’s second mortgage. However, the **increased$ 30,000 principal (and any additional burden from the higher rate)** is treated as junior to Lender’s previously recorded mortgage because it is a material modification that makes the senior mortgage more burdensome to the mortgagor and, indirectly, to the junior lienor. Thus:

Bank is senior as to the original $250,000;

Lender is senior to Bank as to the additional $30,000 created by the modification.

Worked Example 1.5

Seller owns Blackacre free of liens. Buyer agrees to purchase Blackacre for $300,000. Buyer borrows$ 300,000 from Bank, giving Bank a mortgage; Bank wires the funds to the closing, where Seller conveys title to Buyer. The same day, but after closing, Buyer grants a second mortgage on Blackacre to Lender to secure a preexisting $50,000 personal loan. Bank and Lender record on the same day; Lender’s recording hits the records a few minutes earlier. The jurisdiction follows a pure notice statute. Buyer defaults on both mortgages. Who has priority?

Answer:
Bank’s mortgage is a third-party PMM because it funded the purchase price. Lender’s mortgage secures a preexisting debt and is not purchase money. Under the PMM priority rule, Bank’s PMM is senior to Lender’s non–purchase money mortgage, even though Lender recorded slightly earlier. In a notice jurisdiction, what matters for priority between these two is notice, not who recorded first—and Lender had notice that Buyer acquired title using Bank’s funds, because Bank’s mortgage is part of the purchase transaction. The PMM takes priority.

Worked Example 1.6

Buyer obtains a $300,000 loan from Bank at closing. Of this amount,$ 240,000 is wired to Seller as part of the purchase price, and $60,000 is placed in Buyer’s account to renovate the kitchen. Buyer signs a single mortgage to Bank for$ 300,000. Later, Buyer gives a $50,000 second mortgage to Lender for debt consolidation. All mortgages are properly recorded, Bank first. Buyer defaults on all obligations, and Bank forecloses. The sale brings$ 320,000.

How are the proceeds distributed between Bank and Lender?

Answer:
Only the ** $240,000** portion of Bank’s loan used to pay the seller is **purchase money**. The remaining$ 60,000 used for renovations is non–purchase money. As to Lender:

Bank’s PMM portion ($240,000) is senior and must be paid first.

Bank’s non-PMM portion ( $60,000) is treated as a separate non-PMM mortgage that is senior only if there is no rule penalizing the later increase; here, there was no intervening lien when Bank made the full loan, so Bank’s entire$ 300,000 interest is senior in time to Lender.
In most exam scenarios like this, Bank will be treated as senior for the full $300,000. Thus from$ 320,000:

Bank receives $300,000 in full;

Lender, as junior, receives the remaining $20,000 and has a deficiency claim of$ 30,000 against Buyer personally.

If the facts had included an intervening junior lien taken before the renovation portion was advanced, the non-PMM portion could have lost priority as to that junior lien.

Worked Example 1.7

Seller owns Greenacre subject to a recorded $200,000 mortgage in favor of Bank1. Seller agrees to sell Greenacre to Buyer for$ 300,000. Buyer borrows $250,000 from Bank2 to fund the purchase and gives Bank2 a mortgage; Buyer pays the remaining$ 50,000 in cash. The sale contract provides that Seller will use the sale proceeds to pay off Bank1’s mortgage at closing. At closing, Seller uses $200,000 from Buyer’s funds to pay off Bank1, which then releases its mortgage. Bank2 records its mortgage promptly. No other liens exist.

Is Bank2’s mortgage a PMM, and does it have first priority on Greenacre?

Answer:
Yes. Bank2’s funds are used to pay the seller (directly or indirectly) to enable delivery of clear title to Buyer. The portion used to pay off Bank1’s prior mortgage is effectively part of the purchase price. Bank2’s mortgage is a third-party PMM for the entire $250,000. Because Bank1’s lien was discharged at closing, Bank2’s PMM becomes the senior mortgage on Greenacre. On these facts, no other private liens compete, so Bank2 has first priority.

On a more complex exam fact pattern, if Bank1’s mortgage were not fully paid or properly released, Bank1 could retain priority for any unpaid portion, because its lien attached to the land before Buyer’s PMM.

Worked Example 1.8

Borrower grants a mortgage to Lender in 2018, covering “all real property presently owned or hereafter acquired by Borrower in this county.” The mortgage is properly recorded. In 2020, Borrower purchases Whiteacre using a $400,000 PMM from Bank, which is recorded immediately. Lender’s mortgage with the after-acquired property clause is also of record. Borrower defaults on both loans.

Between Bank’s PMM and Lender’s after-acquired interest, who has priority in Whiteacre?

Answer:
Bank’s mortgage is a purchase money mortgage on Whiteacre—it financed the acquisition of that specific property. Lender’s interest in Whiteacre arises only through the after-acquired property clause in its earlier mortgage. Under the general rule, an interest created by an after-acquired property clause is subordinate to a PMM on that property. Therefore, Bank’s PMM has priority over Lender’s after-acquired interest in Whiteacre.

Worked Example 1.9

Buyer gives Bank a PMM for $350,000 to purchase a home. Later, Buyer gives a second mortgage to Lender for$ 50,000. Both mortgages are recorded, Bank first. Buyer defaults only on Lender’s mortgage. Lender forecloses its second mortgage, giving proper notice to Buyer and Bank. The sale brings $360,000.

What happens to Bank’s PMM and the foreclosure sale proceeds?

Answer:
Bank’s PMM is senior to Lender’s mortgage and is not being foreclosed. Foreclosure by a junior lienor does not affect senior liens. The buyer at Lender’s foreclosure sale takes the property subject to Bank’s PMM, which remains on the property. The sale proceeds are distributed as follows:

Costs of sale are paid first;

Lender, as the foreclosing junior mortgagee, is paid next from the proceeds;

Any remaining surplus goes to Buyer (the mortgagor).
Bank’s PMM is not paid from Lender’s foreclosure proceeds and can still be foreclosed later if Buyer (or the new owner, if the debt is not paid) defaults on the PMM. The buyer at the junior foreclosure sale must take into account the risk of Bank’s future foreclosure.

Worked Example 1.10

Owner gives Vendor a PMM for $200,000 to purchase Blackacre. Vendor forgets to record. Later, Owner sells Blackacre to Buyer for$ 250,000. Buyer searches the records, finds no mortgages, pays value, and records her deed. Buyer has no actual or inquiry notice of Vendor’s PMM. The jurisdiction has a notice recording statute. When Owner stops paying Vendor, Vendor seeks to foreclose on Blackacre.

Can Vendor enforce the unrecorded PMM against Buyer’s interest in Blackacre?

Answer:
No. Buyer is a bona fide purchaser: she paid value, lacked notice of Vendor’s PMM, and took in a notice jurisdiction. Even though Vendor’s mortgage is a PMM, it was unrecorded when Buyer purchased. Under the notice recording act, Buyer’s interest prevails over the prior unrecorded PMM. Vendor can still sue Owner personally on the note, but cannot foreclose on Blackacre against Buyer.

Exam Warning

PMM priority is strong but not absolute. A PMM can lose priority if:

The PMM holder fails to record and a later mortgagee or grantee qualifies as a BFP and satisfies the recording act.
The PMM holder signs a subordination agreement in favor of another lienholder.
A later modification materially increases the senior PMM and prejudices existing junior lienors (the increased amount loses senior status).
A statutory lien (such as a property tax lien) is given superpriority by state law.

On MBE questions, always:

Identify whether any mortgage is a PMM and to what extent (entire loan or partial).
Determine whether competing claimants are:
- Prior creditors of the buyer,
- Preexisting encumbrancers of the seller’s title,
- Junior lienors, or
- Later BFPs under a recording statute.
Apply the applicable recording act carefully, including notice analysis.
Watch for mixed-purpose loans, after-acquired property clauses, and loan modifications that may alter priority.

Revision Tip

Vendor PMMs generally have priority over third-party PMMs in the same transaction, and both PMMs usually have priority over other creditors. But no PMM can defeat a subsequent BFP who satisfies the recording act. When in doubt, analyze:

Is the competing claimant a BFP for value?
Did the PMM holder record, and if so, when?
Is there a specific agreement (subordination, modification, or replacement mortgage) changing the default priority?
Is the competing interest based only on an after-acquired property clause?

Approaching PMM questions systematically in this order will help you avoid most common traps.

Key Point Checklist

This article has covered the following key knowledge points:

A mortgage is a security device that uses real property as collateral for a debt; the note is the personal promise to repay.
A purchase money mortgage (PMM) is a mortgage securing a loan used to acquire title to the same property, given as part of the purchase transaction.
PMM status applies only to the portion of the loan actually used to pay the purchase price (or to pay off a lien that is part of the purchase transaction); other portions are non–purchase money.
PMMs include vendor PMMs (to the seller) and third-party PMMs (to a lender); both qualify if their funds are tied to the acquisition.
Non–purchase money mortgages include refinances, home-equity loans, and other loans secured by the property but not used to acquire title.
As a default rule, PMMs have priority over prior claims against the buyer and over non–purchase money mortgages, even if those other interests are recorded first, subject to recording acts.
A PMM does not automatically defeat prior encumbrances on the land created by the seller; earlier mortgages by the seller can remain senior unless paid off or subordinated.
When both a vendor PMM and a third-party PMM arise in the same transaction, the majority rule gives the vendor PMM priority unless the parties agree otherwise or a recording act changes the result.
PMMs are still subject to recording acts: an unrecorded PMM can be defeated by a subsequent bona fide purchaser (including a mortgagee) who takes without notice and satisfies a notice or race-notice statute.
After-acquired property clauses do not defeat a PMM; interests created by such clauses in later-acquired property are subordinate to PMMs on that property.
Future-advances mortgages may secure both purchase money and non–purchase money advances; only the purchase money portion enjoys PMM priority, and later optional advances made with notice of intervening liens may be junior.
Subordination agreements allow a PMM holder to voluntarily accept junior status; courts enforce these agreements according to their terms.
A senior PMM that is later modified remains senior as to the original amount but may become junior to preexisting junior liens for any materially more burdensome modification (e.g., increased principal or interest).
Replacement mortgages that refinance a PMM generally take the original PMM’s priority up to the prior balance, except as to materially more burdensome changes, which may be junior.
In foreclosure, a senior PMM is paid before junior liens from the sale proceeds; senior liens survive foreclosure of junior mortgages, while junior liens are wiped out by foreclosure of senior mortgages if properly notified.
Deficiency judgments are available when foreclosure proceeds do not fully satisfy the PMM debt, unless a statute limits them (especially for residential PMMs).
Mortgagors under PMMs retain the equity of redemption before the foreclosure sale and may have a statutory right of redemption after the sale, depending on state law; attempts to waive the equity of redemption in advance are invalid.
Due-on-sale clauses in PMM notes allow the lender to accelerate upon transfer without consent but do not create personal liability for a buyer who merely takes “subject to” the mortgage.
On the MBE, always identify the PMM first, then evaluate recording, notice, mixed-purpose loan issues, and any subordination or modification before determining priority.

Key Terms and Concepts

Mortgage
Note
Purchase Money Mortgage (PMM)
Non–Purchase Money Mortgage
Vendor Purchase Money Mortgage
Third-Party Purchase Money Mortgage
PMM Priority Rule
Senior Interest
Junior Interest
Recording Act
Bona Fide Purchaser (BFP)
Notice Statute
Race-Notice Statute
Subordination Agreement
Modification of Mortgage
Future-Advances Mortgage
After-Acquired Property Clause
Foreclosure
Deficiency Judgment
Equity of Redemption
Statutory Right of Redemption
Due-on-Sale Clause

Mortgages/security devices - Purchase money mortgages