What are the pit falls of a wrap around mortgage

A wrap around mortgage is when a seller creates a mortgage that wraps the bank mortgage. Basically, you would pay the seller; the seller in turn would pay the mortgage. You can pay your mortgage to an escrow then the escrow divvies out the payments but however there are two mortgages.

What you are talking about is more commonly known as a subject to purchase. What you are doing is purchasing the home subject to the existing mortgage with an intention to pay the existing mortgage.

The downfalls to this idea are that the banks may find out that the seller has transferred ownership to the property. This transfer of ownership will breach contract with the homeowner and bank. The bank then has the right to accelerate the loan or in other words call the loan due. This just means you would have to get another mortgage if the loan is called due.

Many people have called this illegal. However, from my research so far I have not found anything that defines this as illegal but instead a breach of contract.

The most common way to keep the bank from finding out that a transfer has occurred is to use a real estate trust.

Here are the basics of how it will work:
- The seller will set up a real estate trust with you as the trustee and themselves as the beneficiary.
- The deed (ownership) is transferred to the name of the trust as well as all bills and insurance.
- After a short time the seller transfers the beneficial rights to you.
- You cannot be the trustee and beneficiary both so you select a new trustee.
- You now own the property through the trust.

Why this is done is because most banks find out that a transfer has happened because of insurance. Insurance companies must note to all beneficiaries on insurance if there was any change in policy.

If you want insurance on the property you need to change to policy to your name. If the bank sees that the policy is in your name they can call the loan due. However, if the policy changes to a trust name they normally cannot call the loan due. I say normally because there may be times such as reasonable understanding that a property has been transferred combined with a lawsuit through the courts that may force the trust opened to find who owns the property.

Giving you all of this you may want to talk to a competent lawyer that understands this and can talk to you about what would be best.

Wraps are not as common as they used to be. But if the seller is going to do that then why dont you just take over their loan??

Do they have equity that needs to be wrapped?? That is where the wrap comes in ie I have a loan for 150K and I sell it to you for 200K with owner financing. Rather than 50K second, I just wrap the 1st for 200K.

It is absolutely NOT illegal. There is NO due on sale jail. But yes, if there is a due on sale clause in their mortgage (and there probably is unless the mortgage is very old or adjustable), then the wrap will violate it. All that means is that the lender CAN (but doesnt have to) call the mortgage. Very rarely does this happen. And with all the problems in the mortgage industry right now, I cant imagine a lender doing this.

if your going to do a WRAPAROUND MORTGAGE, make sure you have a 3rd party involved, like a title company or escrow co. to give the payments to. That way you will be sure the payments are getting to the lender and not the sellers pockets.YOUR HERO,SULLY.

Thanks a lot guys. I had a basic understanding of it but your answers took all that I knew and sewed it together. I will study up some more on it and figure out if or how I can incorporate it into my current buying strategies.

Excellent point.. and absolutely critical.

Just to repeat and emphasize.

You make your payment for say, 1009 to the title company. The title company writes a check for 900 to the seller's mortgage company, sends 91 to the seller and keeps 18 (or whatever) for their trouble. Setting up the account and the monthly fee is commonly split 50/50 between buyer and seller.

Otherwise, you might make your payments on time every month and STILL lose the property if the seller gets in financial trouble.

What are the advantages to me other then not having to find financing immediately if at all. Or I guess a better question is what would the seller gain from it?

The seller keeps the interest gained from the loan and possibly avoids as big of a tax liability depending on the situation and timing. Some people would rather have the cashflow every month rather that one lump sum.

Thanks CBR thats good to know. I am keeping very good notes on this one.

In this market, the most important thing... is that the seller actually sells their property. Seller financing is making a big comeback. I expect that to continue.

I thought I would repost since there sems to be questions regarding the "subjct 2" on the board as of late. Maybe this will help some of them.

Well this sure would've been good to know before I posted the subject to post. I did an advanced search and didn't find anything, it's no wonder, it was under a different topic... LOL! I'd gotten a few inquiries on the subject to which was why I posted it. I didn't know it was also considered a wrap around mortgage or similar to it... Thanks.

Glad we are all here together, imagine if we had to look other places for the same info...we might through in the towel and run...lol....good posting you did also. I know I have not commented much as of late but know that I support you on here and am glad to see the knowledge you share with others.

regarding the subject to aka wraparound. I have a couple of those working right now. So I can tell you - they are great if you do them right

I'm so glad to be a part of this wonderful family, the information, support and friends I've gotten out of it is priceless!! I know you're dealing with alot, so I don't expect you to comment all the time. I understand and I keep you in my prayers daily. But you never cease to amaze me with your wisdom and eagerness to help us all regardless. You truly are an amazing woman!
God bless,

When doing a wrap around mortgage how is the transfer tax figured since there is still an outstanding lien on the property