Purchase-money mortgage

Key Takeaways

• A purchase-money mortgage is seller financing: the seller carries part or all of the price instead of the buyer borrowing the whole amount from a bank.
• The buyer signs a promissory note for the carried amount and secures it with a lien on the property being bought, so the seller becomes the lender at the moment the seller stops being the owner.
• In Washington the security instrument is normally a deed of trust, and RCW 61.24.100 blocks a deficiency judgment against the borrower after a trustee's sale on that deed of trust.
• A real estate contract is not the same instrument: RCW 61.30.010 defines it as a written agreement for the sale of real property in which the seller keeps legal title as security for payment of the price.

What It Means

A purchase-money mortgage is financing the seller provides to the buyer as part of the sale itself. Instead of the buyer arriving with a bank loan for the full price, the seller agrees to be paid over time for some or all of it. The buyer signs a Promissory Note for the carried amount and gives the seller a lien on the property being purchased, so the seller leaves closing holding paper rather than all cash.

Two features make the arrangement distinctive. First, the loan and the sale are the same event, so the debt exists only because the property changed hands. Second, the lender and the seller are the same person, which changes the negotiation completely. Interest rate, term, down payment, and whether the payments amortize or end in a balloon are deal terms across a table, not the output of an underwriting department.

Sellers use it to move a property a lender will not touch or to reach a buyer a bank turned down. Buyers use it when bank financing is unavailable, too slow, or more expensive than what the seller is willing to accept.

How It Works in Washington

Washington is a deed of trust state, so a purchase-money loan carried by a seller is normally documented as a promissory note secured by a Deed Of Trust rather than by a traditional mortgage. Chapter 61.24 RCW governs those instruments. RCW 61.24.020 provides that no person, corporation, or association may be both trustee and beneficiary under the same deed of trust, with an exception for an agency of the United States government, so a seller who carries the paper is the beneficiary and must name a separate qualified trustee.

The consequence a licensee has to understand is what happens on default. RCW 61.24.100 provides that, except as that section permits for deeds of trust securing commercial loans, a deficiency judgment shall not be obtained on the obligations secured by a deed of trust against any borrower, grantor, or guarantor after a trustee's sale under that deed of trust. A seller who carries a note on a residence and then completes a nonjudicial Foreclosure gets the property back and nothing more, even if the auction brings far less than the balance owed. That exposure is why carryback sellers negotiate hard on the size of the down payment.

Seller financing can also be structured as a real estate contract instead. RCW 61.30.010 defines that as a written agreement for the sale of real property in which legal title is retained by the seller as security for payment of the purchase price, and chapter 61.30 RCW sets out the forfeiture process the seller follows when the buyer defaults.

Example

Ray and Lucinda Ferris own a 12-acre parcel with an older farmhouse outside Ellensburg, free and clear, and list it at $520,000. The only serious buyer, Tomas Beltran, cannot get conventional financing because the well and the outbuildings will not appraise cleanly. The Ferrises agree to carry the financing. Tomas pays $104,000 down, which is 20 percent, and signs a promissory note for $416,000 at 7 percent interest, amortized over 30 years with a balloon payment of the remaining balance at the end of year five. Principal and interest run about $2,768 a month. The note is secured by a deed of trust recorded against the parcel at closing, with a local title company named as trustee because the Ferrises cannot serve as their own. The Ferrises collect monthly payments instead of a lump sum, and Tomas refinances with a bank in year four once the outbuildings are rebuilt.

Common Mistakes and Exam Traps

• Some sources use purchase-money mortgage loosely for any loan used to acquire property. Washington pre-license courses use the narrow meaning, which is financing the seller carries for the buyer, so answer with seller financing.
• A purchase-money deed of trust is not a real estate contract. With a deed of trust the buyer takes legal title at closing and the seller holds a lien; with a real estate contract the seller keeps legal title as security until the price is paid.
• Carrying a note is not the same as the buyer assuming the seller's existing loan. An assumption transfers a debt that already exists, while a carryback creates a brand new debt at closing.
• After a Washington trustee's sale the lender generally cannot chase the borrower for the shortfall, so an answer choice that has the carryback seller winning a deficiency judgment after a nonjudicial foreclosure is wrong under RCW 61.24.100.