What Is A Wraparound Mortgage?

In real estate, do you know what is a wraparound mortgage? Is it a type of loan? New buyers like us may struggle to understand this term. We all know that there are several risks involved while purchasing any property. So, it’s necessary to know the financing option thoroughly before buying or selling the house. Today, I will explain everything you need to know about what is a wraparound mortgage meaning and how it works. Even wrap around mortgage risks and benefits for sellers and buyers are discussed. If you are interested to know more about what is a wraparound mortgage, then keep on reading.

What Is A Wraparound Mortgage?

A wrap-around mortgage is a type of loan where the buyer’s new mortgage wraps around the seller’s original home loan. It consists of the balance of the original loan along with the amount to cover the new purchase price. Here, the seller of the property will receive a secured promissory note.

Wraparound mortgages are also called a wrap loan, overriding mortgage, agreement for sale, a carry-back, or all-inclusive mortgage. Continue to read to learn more about how does a wraparound mortgage contract works.

How Does A Wraparound Mortgage Work?

We know that in home loans, the buyer gets a loan from a bank or any mortgage lender to pay for the property. Now, let’s understand the working of a wraparound mortgage. I have broken down the whole procedure into points, have a look at them.

  • In the wraparound mortgage, the seller holds their existing mortgage and offers seller financing to the buyer.
  • A new wraparound mortgage is created stating the balance of the original loan plus the additional funds required for the purchase.
  • Both the buyer and the seller sign a promissory note that includes the terms of mortgages.
  • Then the buyer gives monthly payments to the seller, who uses that money to pay their original loan and keeps the remaining.
  • The wrap-around mortgage becomes a second mortgage or junior lien. Due to this, the original lender can sneeze the house if the seller fails to pay the existing mortgage.

Note: The interest rates charged on wraparound mortgages are very high.

You can keep on reading to study the pros and cons of a wraparound mortgage.

Wrap-around Mortgage Pros And Cons

A wrap-around mortgage can be beneficial for both the buyer and the seller. But there are certain risks that both parties must keep in mind before proceeding with the deal. Let us have a look at the wrap-around mortgage pros and cons.

Pros Cons
  • For the buyer, it is easier to get approved for a wrap-around mortgage than a traditional loan.
  • The original lender can foreclose the mortgage even if the buyer is making payments on time.
  • It offers more flexible loan terms.
  • The seller must continue to make their mortgage payments even if the buyer stops making the payments.
  • Sellers can make more profit by charging higher interest rates.
  • It is not suitable for all the sellers or lenders.

Wraparound Mortgage Versus Second Mortgage

In our previous section, we have studied what is a wraparound mortgage. While reading, you must have come across the term the second mortgage. Is it similar to the wraparound mortgage? Well, let’s compare them to find the correct answer.

Wraparound Mortgage Second Mortgage
  • In a wraparound mortgage, the secondary loan consists of the original loan amount plus an additional amount.
  • In the second mortgage, the secondary loan includes only the addition of the original mortgage loan.
  • It’s used as a form of seller financing.
  • It’s used by homeowners to access their home equity.
  • This mortgage is not suitable for all lending institutions.
  • This mortgage is offered by lenders in the form of a home equity loan or home equity line of credit.

Wraparound Mortgage Example

Do you know when to use a wrap-around mortgage? If not, then let’s understand with the help of an example of the wraparound mortgage.

Diana is selling her house for $160,000 with an existing mortgage balance of $40,000 at a 4% interest rate. She decides to finance a loan for her friend Max to purchase her home. Both Diana and Max agree to pay a $10,000 down payment and $150,000 wrap-around mortgage at a 6% interest rate. Max pays Diana his monthly payment for the second mortgage.

Now, here Diana uses this payment to pay off her original mortgage. She keeps the difference between the two payments (2% interest rate) with herself and makes a profit. But if Diana fails to make her monthly payments, Max can foreclose and reclaim the property.

Alternatives To Wrap-around Mortgage

Sometimes we face difficulties in qualifying for loans or finding buyers. In the market, you’ll find the following alternatives of mortgage loans that might be helpful for you.

  • FHA Loans

It is the best option for those who have lower credit scores or are unable to pay the down payment amount.

  • VA Loans

VA loan is a type of loan where you don’t have to pay the down payment. It has lower  interest rates and doesn’t need any private mortgage insurance.

  • USDA Loans

Compared to the other loans, USDA loan makes purchasing a home in a rural area more affordable. It comes with the lowest interest rates and low-cost PMI.

FAQ

How Does A Wraparound Mortgage Work?

A wraparound mortgage works in the following way.

  • In the wraparound mortgage, the seller holds their existing mortgage and offers seller financing to the buyer.
  • A new wraparound mortgage is created stating the balance of the original loan plus the additional funds required for the purchase.
  • Both the buyer and the seller sign a promissory note that includes the terms of mortgages.
  • Then the buyer gives monthly payments to the seller, who uses that money to pay their original loan and keeps the remaining.
  • The wrap-around mortgage becomes a second mortgage or junior lien. Due to this, the original lender can sneeze the house if the seller fails to pay the existing mortgage.

Is A Wrap Around Mortgage Legal?

Yes, a wraparound mortgage is legal.

What Is A Wraparound?

A wraparound is a curving or extending around at the edges.

What Is An Example Of A Wraparound Mortgage?

An example of a wraparound mortgage is as follows.

Diana is selling her house for $160,000 with an existing mortgage balance of $40,000 at a 4% interest rate. She decides to finance a loan for her friend Max to purchase her home. Both Diana and Max agree to pay a $10,000 down payment and $150,000 wrap-around mortgage at a 6% interest rate. Max pays Diana his monthly payment for the second mortgage. Now, here Diana uses this payment to pay off her original mortgage. She keeps the difference between the two payments (2% interest rate) with herself and makes a profit. But if Diana fails to make her monthly payments, Max can foreclose and reclaim the property.

Conclusion

In my above article, I have explained what is a wraparound mortgage in detail. A wrap loan is a type of loan where the buyer’s new mortgage wraps around the seller’s original home loan. This mortgage is provided by the seller instead of a bank or mortgage lender. It consists of the balance of the original loan along with the amount to cover the new purchase price. Here, the seller of the property will receive a secured promissory note. In simple words, it is beneficial for both the buyer and the seller. Be wise, and share this information on what is a wraparound mortgage with other sellers.