A homeowner purchased a property and financed the purchase with two loans. The first loan came from a bank and was secured by a mortgage executed contemporaneously with the purchase of the property. The second loan came from a private lender and was also secured by a mortgage executed at the same time. Each loan was used to pay part of the purchase price, and both lenders properly recorded their mortgages; the private lender recorded its mortgage a few hours before the bank recorded its mortgage. The homeowner later defaulted on both loans, and the property was foreclosed. Assuming the jurisdiction follows the majority rule for purchase-money mortgages, which mortgage has priority?
The private lender's mortgage has priority because private lenders are treated differently under purchase-money mortgage rules.
The private lender's mortgage has priority over the bank's mortgage because it was recorded first.
The bank's mortgage has priority over the private lender's mortgage because a purchase-money mortgage always takes precedence regardless of recording.
The mortgages have equal priority because both were executed and recorded contemporaneously with the purchase of the property.
Both mortgages qualify as purchase-money mortgages (PMMs) because they were taken at the time of the purchase to fund the price of the property. A PMM generally receives priority over earlier non-PMM liens, but when two PMMs are given to two third-party lenders, neither enjoys automatic super-priority over the other. Instead, priority between the two PMMs is governed by the recording act or simple chronology. Because the private lender recorded its mortgage first, its interest is senior, and the bank's mortgage is junior. The other answer choices incorrectly apply the general PMM priority rule without recognizing that both lenders hold equal-status PMMs or incorrectly claim a special rule for private lenders.
Ask Bash
Bash is our AI bot, trained to help you pass your exam. AI Generated Content may display inaccurate information, always double-check anything important.
What is a purchase money mortgage?
Open an interactive chat with Bash
How does mortgage priority generally work?
Open an interactive chat with Bash
What are the implications of mortgage foreclosure?