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: 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 cannot 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 under 42 Pa.C.S. § 8141 over other claims against the buyer, even judgment liens that pre-date the purchase, when given as part of the same transaction in which the buyer acquires title. Under the statute, a purchase money mortgage takes priority from the time it is delivered to the mortgagee so long as it is recorded within ten days of its date; otherwise priority runs only from the time it is left for record. Simultaneous recording with the deed is therefore strongly recommended. This is a significant advantage over other types of mortgages.

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 rules involve multiple overlapping statutes and exceptions (41 P.S. §§ 201 et seq., Act 6 of 1974, and others). The general limit is 6% for non-exempt transactions in a principal amount of $50,000 or less. Numerous exceptions exist for licensed lenders, business purpose loans, residential mortgages, and specific transaction types. For a principal amount of more than $50,000, there is generally no usury cap, and business loans of any amount are exempt. Structuring the note correctly is essential; consult an attorney before finalizing any seller-financed transaction.

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: A private PMM foreclosure follows the same statutory process as a bank foreclosure. The seller-lender can pursue foreclosure through a judicial action in mortgage foreclosure or by confession of judgment if the note contains a confession clause. One pre-foreclosure requirement is specific to HEMAP: the Act 91 notice generally does not apply to a noncorporate seller who takes back a purchase money mortgage, unless the seller elects in writing to be covered (35 P.S. § 1680.401c). That HEMAP carve-out does not exempt the seller from Act 6. A seller-lender foreclosing on a residential PMM (a property with two or fewer residential units and an original principal amount at or below the Act 6 base figure, currently approximately $217,873 and indexed annually) is a "residential mortgage lender" and must still serve the Act 6 Notice of Intention to Foreclose (41 P.S. § 403) at least thirty days before accelerating the loan or commencing the action, and must honor the debtor's right to cure (41 P.S. § 404). Act 6 is keyed to whether the loan is a residential mortgage, not to whether the lender is institutional, and it has no noncorporate-seller election or exemption. Only commercial or other non-residential loans, and loans above the base figure, fall outside Act 6's notice and cure requirements. A seller-lender who forecloses without the required Act 6 notice risks dismissal of the action.

Statutory content on this page was last verified against Pennsylvania statutes (20 Pa.C.S.; 72 P.S. Art. XXI): Jun. 2026. If you are reading this significantly after that date, confirm key provisions with current statute text or contact our office.