Wraparound Mortgages: A Shortened Guide
When a buyer can’t qualify for a traditional mortgage, a wraparound mortgage might be an alternative. This financing option helps both parties close the deal but comes with risks.
What Is A Wraparound Mortgage?
A wraparound mortgage allows the seller to keep their existing mortgage while the buyer’s mortgage “wraps” around it. The buyer pays the seller monthly, and the seller continues paying their original mortgage, often profiting from the interest rate difference.
How It Works
Seller Financing: The seller offers a loan to the buyer, wrapping the new loan around the existing mortgage.
Payment Flow: The buyer pays the seller, who uses a portion to pay their mortgage.
Assumable Mortgage: The original mortgage must be assumable, or the lender must approve the arrangement.
Example
Adam sells a home for $160,000 with a $40,000 mortgage at 4%. Linda, the buyer, gets a $150,000 wraparound mortgage at 6%, paying Sam monthly. Adam profits from the 2% interest difference.
Pros and Cons
Benefits for Buyers:
Easier qualification.
Potentially lower closing costs.
Benefits for Sellers:
Profit from higher interest rates.
Access to a larger pool of buyers.
Risks for Buyers:
Higher interest rates.
Risk of foreclosure if the seller defaults.
Risks for Sellers:
Need for lender approval.
Responsibility to collect payments from the buyer.
Risk of foreclosure if the buyer defaults.
Alternatives to Wraparound Financing
FHA Loans: Lower credit score and down payment requirements.
VA Loans: No down payment for qualified veterans.
USDA Loans: No down payment for rural areas.
Bottom Line
Wraparound mortgages can help buyers who can't get traditional loans and sellers looking for more buyers. However, they carry significant risks. Consulting a real estate attorney is advisable.
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