Wraparound Mortgage

Wrapping Your Head Around Wraparound Mortgages

A wraparound mortgage, sometimes called an “all-inclusive mortgage” or “wrap mortgage,” is a unique type of financing option. Essentially, it wraps together two loans into one – the underlying mortgage that’s already on a property, and a new loan provided by the wraparound lender to cover the remaining amount needed by the buyer. It can get a bit confusing, so let’s break it down step-by-step.

How Wraparounds Work

When a home seller still has an existing mortgage, a wraparound allows them to sell the home without having to pay off that underlying loan first. Here’s a quick example:

• Jane owns a home worth $300,000
• She owes $180,000 still on her mortgage
• Bob wants to buy Jane’s home for $300,000
• To make that work, Bob gets a wraparound mortgage for $300,000 from LendingCo
• That wraparound loan “wraps” Jane’s underlying $180k mortgage plus an additional $120k mortgage from LendingCo
• So Bob now has one wraparound loan at $300k, even though there are actually two loans in play still

Make sense so far? The wraparound lender provides enough money to pay off Jane in full, plus gives the additional funds that Bob needs to close. Bob then makes one payment to LendingCo each month, and LendingCo is responsible for making the payments to Jane’s underlying loan.

The Benefits

Wraparounds can be win-win for both buyers and sellers. Here are some of the biggest benefits:

• Allows sellers to dispose of a property without paying off their current mortgage first
• Seller continues collecting monthly payments based on their underlying loan
• Buyer avoids costs/hassles of securing their own standalone financing
• Creative financing solution for deals that might not work with traditional loans
• Usually easier to qualify for compared to other mortgages
• Lower down payments are often possible as well

In short – wraparounds open up more possibilities. Sellers can sell faster without needing enough cash on hand to pay off their old loan. And buyers may find it easier to purchase a home this route versus going through the rigorous loan approval process to secure their own traditional mortgage.

Risks to Understand

Of course, wraparound loans aren’t necessarily a slam dunk across the board. There are some pitfalls to be aware of, including:

• Requires the seller to take on the role of being a “lender”
• Risk for the seller if buyer defaults on the wraparound payments
• Tricky to stay compliant with state lending/finance laws
• Harder to transfer or sell the property until the wraparound is paid off
• Lack of formal lending guidelines can increase fraud risks

As you can see – wraparounds may provide more flexibility in certain home sale situations, but they also come with increased liability and uncertainty in some cases too. Doing thorough due diligence is a must!

Is a Wraparound Right for You?

Wraparound mortgages can be game-changers…or major disasters. So how do you know if pursuing one makes sense or not?

The most important factor is understanding your state’s laws about seller financing. Not all states allow wraparounds, so definitely look into the specific regulations and eligibility criteria based on where the home is located. For example, in California, wraparounds need to be handled very carefully to comply with applicable laws.

It’s also essential for both buyers and sellers to evaluate their risk tolerance. As the seller, you take on liability if the buyer ever stops making payments. And as the buyer, you have to feel comfortable relying on the seller’s continued cooperation and involvement.

Speaking of the seller – their financial strength and creditworthiness definitely matter too. The better their financial footing, the lower the risk that their old mortgage payments or the wraparound itself ever fall into default.

Lastly, working with an experienced attorney or advisor can help navigate the intricacies of wraparound loans in your specific area or situation. As with any complex financing instrument – having professional guidance is a prudent move.

Wrapping Up Wraparounds

Wraparound mortgages aren’t necessarily common, but they can be handy tools in the right circumstances. Hopefully this breakdown gave you a solid understanding of what wraparounds are, how they work, plus their unique pros, cons and risks across the board.

The keys are making sure they align with your state laws, ensuring both parties comprehend the liability issues, only working with reputable and solvent sellers, and enlisting professional legal/financial help early on. Do those things, and a wraparound mortgage may just be an exciting win-win for you as both a buyer and a seller!