What is a Wraparound Mortgage?
Very few people have heard of a wraparound mortgage. It can be a helpful way for buyers that are having trouble qualifying for a home loan to buy a home as well as help sellers that are in distress.
What is a Wraparound Mortgage?
Also sometimes called a carry-back loan, a wraparound mortgage is a type of owner or seller financing. It gives a buyer financing that includes or “wraps-around” an existing mortgage that the seller of the home is currently paying. The buyer makes a payment to the seller. The seller uses this payment partly to pay the mortgage they have on the home and keeps the remainder as profit. Most wraparound mortgages have a higher interest rate than the current mortgage on the property in order for the seller to cover the payoff and receive a profit.
How do Wraparound Mortgages Work?
For a loan to become a wraparound loan the seller of the home has to be paying on an assumable mortgage. It is rare for a conventional loan to be assumable. FHA, USDA, and VA loans are all assumable loans.
Both buyer and seller must agree on the wraparound mortgage and the seller must obtain permission for the wraparound from their current lender. Once terms are legally set the seller needs to transfer the title to the buyer either right away or when the loan is repaid to their lender. When the title is transferred the buyer is legally the owner of the property.
A wraparound mortgage is in a junior or second lien position so this means that if the buyer is unable to keep the loan current making payments on time the lender would be repaid first from the proceeds of a foreclosure sale not the seller of the home.
Risks of Wraparound Mortgage
This type of mortgage can be risky for both the buying and selling parties. The buyer is making payments to the seller, not a lender so they are relying on the seller to be trustworthy and pay the mortgage on the home. If the seller defaults the home can be foreclosed on while the buyer is living in it even though they are making payments on time. It is wise to include that a portion of payments be made directly to the lender to help deter fraud.
A seller faces risk if the buyer fails to make payments because the seller is still liable to make mortgage payments. This means the seller needs to make those payments or default on the loan so it hurts your wallet or your credit rating. It could result in needing to take legal action to fix it.
A wraparound mortgage can provide opportunities for both a buyer and a seller where they didn’t have one before. However, there are big risks to all parties involved. Buyers can make this an option if they find a seller who is in danger of foreclosing on their home or having trouble selling. Once a property is found where a seller is willing to do a wraparound mortgage the mortgage lender for the home will need to agree. Before stepping into this type of mortgage it is a very good idea to consult a mortgage professional or a real estate attorney for in-depth advice.
For more information on your mortgage options in Omaha or Elkhorn and surrounding areas please contact our office.