The exact date and time that a loan records in the county recorder's office is the only thing that determines whether a mortgage is a first mortgage or a second mortgage. If the first mortgage is paid in full prior to the second mortgage, the second mortgage becomes the new first mortgage. If two loans originate at the same time, one lender must agree, in writing, to allow the other lender to record his loan first.
Purchase Money First Mortgages
If a loan is used to purchase a property and it is the primary source of funds for the purchase, it will become a purchase money first mortgage. Several states have laws regarding purchase money loans. Typically, if you lose your home to foreclosure and you still have the original purchase money loan in place, the courts will not allow the lender to obtain a deficiency judgment. This means that if the property sells for less than the loan amount the lender cannot collect the balance from you.
Purchase Money Second Mortgages
Purchase money second mortgages are also loans issued to purchase a property. They are typically considerably smaller than a first mortgage and their purpose is to allow you to purchase a property when you do not have sufficient funds for the required down payment. Purchase money seconds are usually exempt from deficiency judgments, as well.
Purchase Money Second Mortgage Sources
Sellers offer this type of financing when adequate loans are not available. State and local government agencies also have programs that issue purchase money second mortgages for low-income families. They require that you remain in your home as your primary residence for a number of years. When that condition is satisfied, the agencies often forgive any remaining debt.
If your income level is at or below the poverty level, you should talk to your city and county government agencies to see if they have purchase money programs available in the area you wish to live. If you have sufficient income, but you have been unable to accumulate enough of a down payment, you should discuss this with the seller to see if he will agree to provide a purchase money second mortgage.
- USLegal.com: Purchase Money Mortgage Law & Legal Definition
- U.S. Mortgage Insurers. "Low Down Payment Facts." Accessed Sept. 3, 2020.
- Consumer Financial Protection Bureau. "What Is a Second Mortgage Loan or "Junior-Lien"?" Accessed Sept. 3, 2020.
- IRS. "Publication 936 (2019), Home Mortgage Interest Deduction." Accessed Sept. 3, 2020.
Phil Altshuler has written award-winning ad copy and sales-training literature since 1965. He is an expert in conventional and sub-prime loans, bankruptcy, mortgage loan modifications and credit. Altshuler was a licensed mortgage broker in California and Arizona, as well as a licensed electrical contractor. He has a Bachelor of Science in electronic engineering from California Polytechnic State University.