If you are trying to sell your home, yet you can’t find buyers with bank approval or you are a buyer and can’t get financing, you have one more option. It’s called the wrap around mortgage. As the name suggests, the mortgage wraps around the current mortgage that the seller holds. It’s not common practice, but it can come in handy if a seller can’t sell his or her home or a buyer cannot get qualified.
How the Wrap Around Mortgage Works
The wrap around mortgage is a seller-financed mortgage. The seller lends the buyer the money to buy the home. It’s at a rate that’s higher than the seller currently pays on his mortgage. Unlike in the traditional home sale, the seller does not receive a lump sum of money to pay off his mortgage. Instead, it stays in place. The buyer should put a down payment on the home, though, giving you some reassurance that the buyer will continue to make the payments.
The buyer pays the seller monthly payments at the agreed upon interest rate and amortization. The seller uses this money to pay his mortgage payment. There should also be money left over for the seller to put in his pocket. The buyer has possession of the home the entire time and the seller holds the deed to the home.
How the Buyer Benefits
Buyers benefit from the wrap around mortgage in several ways:
- It’s a way to get financed – If you cannot secure financing for a home, this is an alternative. The seller will qualify you based on his or her own requirements. The requirements are usually much less stringent than a bank would require.
- It’s a way to take advantage of low interest rates – If the seller has an exceptional interest rate on his loan, you may want to capitalize on that. While the seller will inflate the rate, usually by 1%, it could still be lower than today’s rates. In essence, you piggyback on the seller’s good rate by taking a wrap around mortgage.
How the Buyer is at Risk
There is one major risk buyers take with this type of loan. The seller is still responsible for making the loan payments. The buyer has to be able to trust that the seller will do this. If instead, the seller pockets the money and lets the mortgage go into default, the buyer is at risk of losing the home. The bank will foreclose on the home no matter who is living there or what the situation is. Because you took financing from the seller, you have nothing to fall back on and you could be left without a home.
How the Seller is at Risk
Just like the buyer has to trust the seller, the same is true for the seller trusting the buyer. If the seller goes out and secures another mortgage for the home he now lives in, he is responsible for two mortgage payments. If the buyer of the original home defaults, it could put the seller in financial distress. Of course, doing your own research and making sure the buyer is a good fit is an important step in the entire process. But, there’s no surefire way to make sure you are not at risk for default.
The entire process is about trust on both sides. The seller could default on the mortgage and leave the buyer without a home. The buyer could also default on his payments and leave the seller at risk of default. The wrap around mortgage, when done right, can be a great way for both parties to get what they need. It’s important that both sides of the equation make sure the other is trustworthy in order to ensure the process goes smoothly.