If the seller still owes money on the home you want to buy, a wraparound mortgage is a way to finance the purchase without the hassle of going through a lender. In a wraparound mortgage, you pay the seller the monthly payment on his or her existing mortgage, plus an additional payment to cover the balance of your purchase price for the home.
Difficulty: Moderately challenging
Things You'll Need
- Credit Reports
- Plain Stationery
- Online Mortgage/finance Services
Write an offer on a property. Include the amount of down payment you'll be making and subtract that from the purchase price. That will be the amount of the wraparound mortgage you're seeking.
Agree with the seller upon an interest rate you're willing to pay on the wraparound mortgage. Typically the interest rate will be close to that of a rate from a regular lender, but it may be a bit higher to compensate the seller for his or her financial assistance. The seller may request a copy of your credit report.
Get a copy of the note on the seller's existing loan. It's best if the existing first mortgage is a fixed-rate one, but you can still wrap an adjustable-rate first mortgage.
Open an escrow with a title company or hire a real estate attorney to handle the transaction.
Arrange a closing date.
Establish the exact balance owed on the first mortgage as of the closing date. The attorney or escrow officer will calculate this information.
Tips & Warnings
- The seller has to be willing to take your monthly payments for a number of years instead of a lump sum from the sale of the property in order for a wraparound to work.
- A wraparound mortgage is ideal for people who have less-than-perfect credit.
- If the existing first mortgage is an adjustable-rate one and the first mortgage payment has increased, the wraparound payment should change to compensate for the increase in payment. If there has been a decrease in the first mortgage payment, it's easier to leave the overall payment the same and put the additional money toward the balance.
- Each year you should request a copy of the ending (year-to-date) statement on the first mortgage so you know exactly how much has been paid off.
- The seller may want to see proof that the insurance and taxes are being paid. Be prepared to show this documentation.
- Wraparound mortgages are not legal in all states, and some lenders forbid their loans from being wrapped.
- Check with the seller's mortgage lender and read the existing loan documents to make sure doing a wraparound will not trigger a due-on-sale clause, which requires the loan to be paid off if the home is sold.
- If you wrap a mortgage and fail to notify the lender, the lender can call the loan due and an arrangement must be made between the buyer and the seller to pay off the entire balance of the first mortgage.
- The record keeping for a wraparound mortgage is complex. The seller must keep track of payments and how much of each payment goes to pay interest and principal on the first and wraparound. Each tax year, the seller must provide you with a form from the Internal Revenue Service reporting the amount of interest paid on a seller-financed mortgage.
- When you make your payments to the seller, request that he or she provide a copy of the payment (receipt) made on the first mortgage. Buyers can get into trouble when they make their payment to the seller but the seller fails to make the payment to the original lender, causing the buyer to lose the house in foreclosure even if the buyer has made payments all along.