PURCHASE MONEY LIENS

Purchase money liens have a special legal status. Civil Code Section 2898 (a) provides that, “A mortgage or deed of trust given for the price of real property, at the time of its conveyance, has priority over all liens created against the purchaser, subject to the operation of the recording laws.”

The preference given to purchase money liens applies to both: (a) a lien given by the buyer to the seller, to secure the unpaid portion of the purchase price; and (b) a lien given by the buyer to a third party (such as a bank) to secure a loan which was made for the purpose of buying the property. Bargioni v. Hill (1963) 59 Cal. 2d 121. Note, however, that if a loan is made, without any specific purpose, or if the borrower is allowed to use the loan for other purposes, it is not a purchase money loan, even if the loan proceeds are used to buy the property. Van Loben Sels v. Bunnell (1898) 120 Cal. 680.

The preference given to purchase money liens is usually relevant when there are involuntary liens against the property, such as mechanic’s liens or judgment liens. As a rule, priority among consensually created liens, such as deeds of trust, is governed, not by the purchase money preference, but by the ordinary rules of recordation and priority. Miller & Starr, 5 California Real Estate { 11:1103 (3rd Ed.).

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