What is A Wrap-Around Mortgage?
A wrap-around mortgage is a type of secondary financing that is widely used for the purchase of real estate. A wrap-around mortgage is when a homeowner who has a pre-existing mortgage on their property extends a junior mortgage to a buyer that is then “wrapped around” the seller’s pre-existing mortgage. The buyer is not assuming responsibility for the homeowner’s pre-existing mortgage on the property; rather the homeowner sells their property directly to the buyer who then makes monthly payments to the homeowner. Although the practice has its own inherent risks, it is in many ways beneficial to both buyers and sellers, as we shall see later on.
How a Wrap-Around Mortgage Works
In a conventional real estate sale, the buyer would obtain a mortgage from a bank, pay the seller cash for the property and then make monthly mortgage payments to the bank. On getting paid, the seller then pays off his remaining mortgage balance, while keeping the remainder as profit. This is not the case in a wrap-around transaction. In a wrap-around, the seller’s existing mortgage will remain in place and a second mortgage that is secured by a promissory note is created for the buyer.
The buyer’s mortgage is wrapped around the seller’s mortgage and usually carries a higher interest rate and principal balance. Upon closing, the buyer then takes possession of the house, making monthly payments to the seller who then uses the proceeds to pay his existing mortgage while keeping the difference as profit. In this case, the seller plays the role of the lender. Should the buyer default on those payments, the seller then has the right to foreclose on the property in attempts to regain ownership.
Advantages of a Wrap-Around Mortgage for Sellers
For sellers whom are unable to sell their house due to tax consequences, little to no equity or just hard-to-sell properties, wrap-around mortgages have a variety of benefits. Tired landlords and homeowners whom have properties that require too many repairs are able to free themselves from the burdens of homeownership by selling on a wrap-around mortgage.
Additionally, the seller also has an opportunity to earn additional income from the buyer’s monthly payments. Wrap-around mortgages usually carry higher interest rates than the original mortgage. As sellers pay their own mortgage on the property, they are able to pocket the remainder as their profit from the transaction.
- Wrap-around mortgages free sellers from the financial burdens of their home.
- Sellers are more likely to sell their property faster in difficult markets.
- Wrap-around mortgages guarantee the seller additional income due to a higher a higher interest rate.
- Homeowner’s are able to sell their property at a higher price.
- Sellers are able to eliminate realtors’ commissions and fees.
Common Myths and Misconceptions
Despite the advantages and benefits to both parties, wrap-around mortgages, much like other owner-financing plans are often the subject of several myths and misconceptions. While some of these assertions may be partially right, some are also outright false. Regardless, it is advisable that both parties (sellers and buyers) seek professional advice in regards to the terms and modalities involved in order to avoid unnecessary headaches.
A Wrap-Around Mortgage Is Illegal –False!
While many people have the assumption that a wrap-around transaction is illegal, nothing could be further from the truth. The process is legal across the United States, however it is recommended to consult with your attorney to know the particulars of the legal structure that is required in your state. You will soon discover that many homeowners are selling their properties using this method.
The Lender Will Call My Loan Due
It’s true that most mortgages usually carry a due-on-sale clause. This can make sellers nervous when considering a wrap around deal. However, it is highly unlikely and very rare that the bank will exercise its right of the due-on-sale clause. Majority of wrap-around transactions are used on conventional bank loans without the lender ever exercising their right to call the loan due. Most banks receive government funding, and the money they receive is dependent on the their ability to lend money responsibly. In other words, if the bank calls a loan due on a performing note and has to foreclose on the property because the property is unable to sell within a specific time, the banks are then hurting their lending reputation; decreasing their chances of receiving larger government loans in the future. As long as the lender keeps receiving their monthly payments, they are happy and the risk is greatly reduced.
The Wrap-Around Mortgage Risk For Sellers
Wrap-around mortgages are based on trust from both sides. The seller expects the buyer to send their monthly payments on-time, while the buyer expects the seller to use his payments to “pay down” the balance of the existing mortgage. Usually an escrow company is used as the preferred entity that facilitates payment transactions to the specific parties during the life of the wrap-around mortgage.
Is There An Easier Way To Sell Your Property? YES!
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If your finding it hard to sell your property in a highly competitive market or you just can’t afford to wait endlessly for that perfect buyer, give us a call at 888-914-7325 or fill out our form to discover how we can help.