A wraparound mortgage is a type of seller financing that allows the original owner to retain his home loan while receiving payments from the buyer. Each month, the buyer makes a mortgage payment to the seller. In turn, the seller pays the bank and keeps the additional funds for himself. In essence, the seller “wraps” his mortgage with a new loan made to the buyer.
For example: A seller owes $100,000 on a home and pays 5% interest to his bank. He sells the home for $150,000 with a 7% interest rate. Each month the buyer sends a mortgage payment to the seller. The seller then pays his bank the amount owed and keeps the excess interest (2%) and principle ($50,000 over the life of the loan).
How a Wraparound Mortgage Works
Since wraparound mortgage terms are set by the individuals involved (the buyer and the seller), the process can vary. Generally, the financing terms are included in the purchase contract. At closing, the property title is transferred from the seller to the buyer. The buyer is given a promissory note for the total amount of the loan.
Each month, the buyer sends his mortgage payment to the seller and the seller sends his mortgage payment to his lender. Often, this transfer of funds is done through a trust account, making it transparent that each party is fulfilling his obligations. If the buyer fails to make his payments, the seller can force foreclosure proceedings.
The Due-on-Sale Clause
Almost all loans made since the 70s have a “due-on-sale” clause that makes wraparound mortgage borrowing risky. Basically, these clauses say that if a homeowner sells interest in the property (i.e. transfers the property title to someone else), the lender may choose to call the loan due. In this case, the seller would have to pay the total amount owed to his lender within just thirty days.
There are a couple ways to get around a “due-on-sale” clause. Buyers can enter into wraparound mortgage agreements with homeowners that have older mortgages, without this language. They may try contacting the original lender to see if approval can be granted. Or, they can look for loans that specifically allow wraparound mortgages. Namely, government-sponsored FHA and VA mortgage programs allow homeowners to enter into these types of agreements.
Where to Find a Wraparound Mortgage
Finding a wraparound mortgage can be a challenge. Many sellers are not comfortable providing this type of financing and a majority are unable to because of “due-on-sale” clauses. When looking for such an agreement, consider using a real estate agent or mortgage broker that specializes in creative financing. Keep an eye out for terms such as “wraparound mortgage,” “assumable mortgage,” and “owner carry,” as you scan property ads.
Wraparound Mortgage Alternatives
A wraparound mortgage can be a good deal. But, it’s not your only choice. Before making a decision, be sure to consider other seller financing solutions such as private loans, simultaneous closings, and carry back mortgages.