What is a wraparound mortgage? Wraparound mortgage is usually associated with what you call creative financing wherein an owner finances the property. When they finance the property they have an existing mortgage and they agree to accept a larger mortgage from the buyer. The buyer pays a larger mortgage to the seller. The seller then, in turn, continues to make their payment out of the first mortgage. An example of this would be: let’s say a seller owes $50,000.00 on this property and he sells his property to a buyer for $100,000.00. The buyer only has $20,000.00 to put down, but the seller agrees to hold an $80,000.00 mortgage and that would be a wraparound mortgage since they would be making the payments or collecting the payments on $80,000.00. They in turn would be responsible – the seller would be responsible for paying the underlying first mortgage in that they would not satisfy their first mortgage.
There are problems that can be associated with this in that the buyer may be concerned that the seller may take his payments and not pay his first mortgage, so we have to use care in assuring the buyer that the seller pays their payments so that they don’t get foreclosed upon. Also, almost with all institutional mortgages there’s what they call “due on sale clause” meaning that whenever the property is sold or transferred then the loan can become due with payable. With as many defaults of mortgages these days, there’s usually not too many lenders that are hauling along due with payable, but it does get complicated when dealing with the insurance and how the loan – the taxes – come out in the new buyer’s name.
The wraparound mortgage is a little complicated. It’s a way of doing creative financing. There certainly needs to be some guidance from a good real estate lawyer if you’re going to consider either taking back any wraparound mortgage, or if you’re a buyer and you want to give the seller a mortgage and they’re not going to pay off their underlying first mortgage.
So if you have any questions about a wraparound mortgage, give me a call at (727) 847-2288.