Wrap Around Mortgages

Wrap-Around Mortgage

For veteran real estate professionals the terms wrap-around mortgage, lease purchase and contract for deed are well known alternative finance options. Financing alternatives such as these became common place twenty and thirty years ago during the last down real estate markets when many people were trying to scramble to sell their real property or face foreclosure.

What is a Wrap-Around Mortgage?

A wrap-around mortgage, also known as a “wrap”, is a form of alternative home financing for the purchase of real property. This type of transaction usually takes place between an investor or seller and a buyer. The wrap-around mortgage literally “wraps” around and exists in addition to any mortgages already secured by the property.

In a wrap-around mortgage transaction, the seller accepts a promissory note from the buyer for the total amount of the purchase price less any down payment paid by the buyer. The new purchaser then makes monthly mortgage payments to the holder of the note, typically the seller, who in turn is responsible for making payments to the primary mortgage(s) on the property.

Usually this is a short term note with a 3-5 year balloon payment due. The premise behind this type of transaction is to allow the buyer time to obtain standard mortgage financing. Since the buyer will be trying to obtain a mortgage refinance loan more instead of a purchase money loan qualification requirements are not as stringent. Once the buyer is able to refinance the property all existing mortgages are paid in full.

Alternate Home Financing Benefits for the Seller
In a sluggish housing market, mortgage companies are often more strict with their credit guidelines making it harder for borrowers with even good credit to obtain financing. During this type of market homes take longer to sell and some sellers find themselves paying two mortgages. A seller held wrap-around mortgage may be the perfect solution, providing a quick sale and financial relief for the sellers.

In addition to a fast sale, sellers also benefit financially in other ways. Homes with a alternative finance options often sell closer to the asking price, with almost all the closing costs paid by the buyer. Sellers often charge a higher interest rate than their existing mortgage to the buyers. This additional interest is called a spread and is interest income for the note holder.

The interest income from these types of transactions are often higher than the interest income provided from a standard savings account or certificate of deposit. Since the investment is secured by real property it is considered less risky than other investments, making these types of transactions the perfect investment in uncertain times.