What is a Wraparound Mortgage?
A wraparound mortgage is a type of mortgage that allows the seller to keep their existing mortgage on the property and offer seller financing to the buyer. The buyer then makes monthly payments to the seller, who uses that money to pay their own mortgage lender — and often pockets a bit of a profit on the difference between the two payments.
It’s far from a conventional loan, but can be an opportunity for both homebuyers struggling to obtain a mortgage and sellers in distress.
How Does a Wraparound Mortgage Work?
In a typical wraparound mortgage transaction, the seller has an existing mortgage on the property. The buyer agrees to purchase the home for a certain price, and the seller agrees to finance a portion of the sale price. The buyer and seller then sign a wraparound mortgage agreement, which outlines the terms of the loan, including the interest rate, monthly payments, and repayment schedule.
The buyer then makes monthly payments to the seller, who uses that money to pay their own mortgage lender and keep the home in good repair. The seller is still ultimately responsible for paying off the existing mortgage, but they can now also collect additional income from the buyer’s monthly payments.
Benefits of Wraparound Mortgages for Sellers
There are a number of potential benefits to wraparound mortgages for sellers, including:
- Ability to sell a home with an existing mortgage: Wraparound mortgages can allow sellers to sell their homes even if they have an existing mortgage that they cannot afford to pay off. This can be especially helpful for sellers who are facing foreclosure.
- Increased flexibility: Wraparound mortgages can give sellers more flexibility in the sale of their homes. For example, sellers may be able to offer lower down payments or longer repayment terms to buyers. This can make their homes more attractive to buyers, which can lead to a faster sale.
- Additional income: Wraparound mortgages can generate additional income for sellers. The seller’s monthly payments from the buyer will typically be higher than the seller’s monthly mortgage payments. This difference can be kept by the seller as profit.
Drawbacks of Wraparound Mortgages for Sellers
There are also a few potential drawbacks to wraparound mortgages for sellers, including:
- Complexity: Wraparound mortgages can be more complex than traditional mortgages. This is because the seller is still responsible for paying off the existing mortgage, even though they are no longer living in the home. Sellers should carefully review the wraparound mortgage agreement before signing it to make sure they understand all of the terms and conditions.
- Risk of default: If the buyer defaults on their loan, the seller is still responsible for paying off the existing mortgage. This can put the seller at financial risk.
- Tax implications: Wraparound mortgages can have complex tax implications for sellers. Sellers should consult with a tax advisor to understand the tax implications of a wraparound mortgage before entering into one.
How to Use a Wraparound Mortgage to Sell Your Property
If you are a seller considering using a wraparound mortgage to sell your property, there are a few things you should keep in mind:
- Find a qualified buyer: It is important to find a buyer who is qualified for a wraparound mortgage. This means that the buyer must have a good credit score and be able to afford the monthly payments.
- Work with a qualified real estate professional: A qualified real estate professional can help you understand the wraparound mortgage process and find a qualified buyer for your property.
- Get everything in writing: Once you have found a buyer and reached an agreement on the terms of the wraparound mortgage, be sure to get everything in writing. This will help to protect you in case there are any disputes down the road.
Wraparound mortgages can be a complex financing option, but they can also be a good way for sellers to sell their homes quickly and easily, even if they have an existing mortgage. If you are considering using a wraparound mortgage to sell your property, be sure to weigh the pros and cons carefully and work with a qualified real estate professional to ensure that you are getting the best possible deal.