Purchase Money Mortgages & Seller Financing

A purchase money mortgage (PMM) is a mortgage given by the buyer to the seller as part of the purchase price — essentially, the seller becomes the lender. This is increasingly common in tight credit markets, commercial transactions, and situations where conventional financing is unavailable or impractical.

How It Works

Instead of (or in addition to) obtaining a bank mortgage, the buyer gives the seller a promissory note secured by a mortgage on the property being purchased. The seller receives the note as part of the purchase price and the buyer makes payments directly to the seller over an agreed term.

Common PMM Scenarios

• Buyer can't qualify for conventional financing: Self-employed buyers, buyers with credit issues, or investors purchasing non-conforming properties
• Commercial real estate: Seller financing is routine in commercial transactions, especially for smaller properties or when the seller wants to spread capital gains recognition over time (installment sale under IRC § 453)
• Family transactions: Parents selling to children, often at below-market rates with favorable terms
• Business sales: When a business and its real estate are sold together, the seller often carries a note on the real estate portion
• Land contracts / agreements for deed: A variation where the buyer makes payments but the seller retains title until the note is paid in full. These require careful drafting under PA law.

Critical Legal Considerations

Lien Priority: In Pennsylvania, a purchase money mortgage has automatic first-lien priority over other claims against the buyer — even judgment liens that pre-date the purchase — as long as it is recorded simultaneously with (or before) the deed. This is a significant advantage over other types of mortgages (42 Pa.C.S. § 8141).

Documentation: A PMM transaction requires a properly drafted promissory note (payment terms, interest rate, default provisions, acceleration clause) and a mortgage document recorded with the Recorder of Deeds. Bucks County recording fees: mortgage $82.75 base + additional page/name charges.

Usury: Pennsylvania's usury limit is 6% for amounts under $50,000 unless the mortgage is for the purchase of a residence (residential mortgage exception). For larger amounts, there is no usury cap. Structuring the note correctly is essential.

Due-on-Sale Clause: If the seller has an existing mortgage on the property, the buyer's purchase may trigger a due-on-sale clause in the seller's mortgage. A seller who carries back financing without paying off their own mortgage is creating a "wrap-around" — a structure that requires careful analysis and disclosure.

Default & Foreclosure: Unlike a bank foreclosure, a private PMM foreclosure follows the same statutory process but without loss mitigation requirements applicable to institutional lenders. The seller-lender can pursue foreclosure under Act 91 or by confession of judgment if the note contains a confession clause.