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What is a wraparound mortgage?

On Behalf of | Feb 16, 2022 | Real Estate |

When a buyer would like to purchase a home but needs assistance with financing, one option may be to use a wraparound mortgage. A wraparound mortgage is a type of secondary financing that is used to “wrap” a new mortgage loan around the seller’s original loan. In this scenario, the buyer would then make their monthly payments to the seller instead of a mortgage company.

This can be a helpful way to set up a mortgage for a for-sale-by-owner property or a rent-to-own home. The seller provides the mortgage to the buyer rather than having them take out a loan through a typical mortgage provider.

The home will belong to the buyer, but they are required to make on-time payments to the seller. The seller takes all payments received to pay off the original mortgage loan.

Wraparound mortgages are a creative way to buy a home

With a wraparound mortgage, a seller offers financing to the buyer of their choice. The seller may be in a position where they can get this additional funding easily, but the buyer may not have had many financing options. With this method, the seller has full control over who can purchase the property, even if they have bad credit or a bankruptcy recently in their history.

What’s the problem with a wraparound mortgage?

The biggest issue with a wraparound mortgage is that the seller is on the hook for all payments to the original mortgage lender. If the buyer decides to stop paying or cannot make payments in full, then the original seller still needs to make those payments even though they may not have an income coming in.

Though that is a risk, some will take it because there is a possibility of earning higher interest on the loan given to the buyer. Sellers have the potential to make money off the increased interest as well as the difference between the loan principal and the mortgage payment.

If you would like to consider a wraparound mortgage to sell your home, it’s worth discussing the legal implications first. It may not be the right option for everyone, but in some cases, it may be the right fit.

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