Take a wraparound mortgage, for example. It may sound like a fairly esoteric term, but it’s actually quite common. With the increased popularity of seller/owner financed loans, you may find yourself coming across the term. But just what is a wraparound mortgage? How does it benefit you? How easy is it to obtain? And more specifically, what are some of its disadvantages?
If you’re a homeowner in Utah who is considering selling your home through owner financing, here’s what you should know about wraparound mortgages.
What Is A Wraparound Mortgage?
There’s several definitions of a wraparound mortgage. In seller financing, it refers to a junior mortgage used to secure the sale of a property. During a wraparound mortgage, a seller takes the place of a conventional lender by financing a second mortgage on a property and selling it to buyers who typically have less than perfect credit. A buyer pays a monthly mortgage installment, just like they would through a bank. Only it’s paid directly to the seller, plus interest. Typically, it consists of any balance due on the original mortgage plus additional fees and is secured through a promissory note which legally binds the buyer to the agreed monthly amount. Unlike a second mortgage, it “wraps around” the original agreement at an increased cost. Once the initial mortgage is paid off, the deed and title to the property is transferred to the buyer.
Why is this beneficial for homeowners? Well, they can nominally increase monthly interest rates for one. Sellers who may have multiple properties (or even find themselves in circumstances where a single property simply isn’t worth the upkeep) are guaranteed a monthly cash stream plus an additional profit—anywhere from two percent upwards. Most frequently, sellers can increase interest rates based on a buyer’s credit risk. The lower the rating, the higher the interest could hypothetically be.
Is A Wraparound Mortgage Legal?
Yes. But that doesn’t stop the fact that many homeowners may find difficulty finding many lenders who will agree to one. In fact, scrutiny about credit risk is even greater for buyers looking at a wraparound mortgage than if they were looking at a standard one. If a buyer has difficulty securing a traditional mortgage, then they’ll face even more difficulty if a bank finds out they’ve secured one through a second party.
With a wraparound mortgage, lenders are looking at both your ability to repay as well as that of any prospective buyer. You may have a history of responsible payments. But does a buyer? What does their work history look like? What about their prospects for paying off their loan as well as the increased interest? What assets do they currently hold which can justify a mortgage? Remember that a wraparound mortgage is as much your responsibility as a buyer’s. And should they default, you’re still responsible for payments on your initial mortgage—in some cases, with additional penalties.
The Bottom Line
Like any other form of owner financing, wraparound mortgages carry both risks and advantages. If you’re lucky enough to find a reliable buyer, it can be an investment that gains a considerable profit; particularly if you’re considering retiring in the next few years. After all, with some of the recent changes to social security benefit payments, even your IRA alone might not be sufficient enough of a cushion over the next few years.
But the risks you take are the same as those facing any consumer lending institution: reliability and trust. Let’s just hope you make the right call.
We Buy Houses Using a Wraparound Mortgage
We purchase homes quite often using a Wraparound Mortgage from the seller. We can usually pay more for a property if the seller of a home allows us to keep their mortgage in place. We create a mortgage for the amount we have to pay the homeowner above the balance of their mortgage plus their current mortgage. We can usually pay more because we only need to secure financing for a much smaller amount of the purchase price, and the interest rate on the homeowner’s 1st mortgage is less than we can borrow money for.
We typically ask the home owner to leave their mortgage in place for 3 to 5 years until we get permanent financing or sell the property.