- December 11, 2008
- All Washington Issuing Offices
- Purchase Money Deeds of Trust and Pre-Existing Liens
In many states, case law or statutes provide that a purchase money deed of trust (a deed of trust securing loan funds used to purchase real property) has priority over existing judgment liens against the incoming buyer. In these states, if a purchaser has a judgment lien against him and he obtains a loan funding his purchase of a home, the deed of trust securing that loan has priority over the judgment lien.
While this is the law in many states, there is no case law or statute in Washington State that clearly adopts this theory. Therefore, you must search the names of incoming buyers. Furthermore, except as noted below, you must take exception for any liens against the incoming buyers and assume those liens have priority over the purchase money deed of trust.
Exception 1: IRS Tax Liens
In Revenue Ruling 68-57 the IRS declared that its liens will be subordinate to purchase money deeds of trust. Therefore, you may show an IRS tax lien in Schedule B-II of the loan policy as a subordinate matter so long as ALL of the loan funds are being applied to the purchase price or closing costs.
Exception 2: Underwriter Approval
You may treat a non-IRS lien against the incoming buyer as subordinate to the purchase money deed of trust if you obtain STG underwriter approval (in writing) to do so.
In the event you rely on the purchase money theory in situations other than the two exceptions noted above, your agency will be charged with the entire claim loss. We acknowledge that some agents may rely on the theory for small liens that don't fall within the two exceptions because the amount of the liens fall within the agent's deductible under their agency agreement with STG.
Finally, the purchase money deed of trust theory does not alter the fact that the lien against the incoming buyer attaches to the property. Therefore, you should always show the incoming buyer's liens as an exception on the owner's policy.
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