For example, the original owner may fail to make payments on the original mortgage, potentially leading to foreclosure and causing the buyer to lose his interest in the property – despite making his payments on the wraparound mortgage. This creates two potential sources of default and foreclosure. First is the inherent risk associated with having two mortgages on the property. Use of a wraparound mortgage comes with its share of disadvantages and risks, as well. Finally, they allow the buyer and seller to negotiate the transaction on their own terms, since there is no new outside lender involved.Second, it allows a buyer who may not qualify for a traditional mortgage to obtain financing for the purchase.The seller does not need to go through the process of applying for and receiving a loan from an outside institution prior to closing. First, this transaction is typically quicker to close than a traditional real estate sale.Advantages Of Wraparound MortgagesĪ wraparound mortgage provides various benefits to both the buyer and the seller. Therefore, B’s debt has “wrapped around” S’s original mortgage. Every month B pays S on his promissory note and S pays his bank on his original mortgage. S’s original mortgage is still outstanding on the property as well as B’s new mortgage. B now owns the home subject to his promissory note to S. Instead of applying for a loan from a bank, B simply pays S a down payment and gives S a promissory note for the remainder of the purchase price. In contrast, a typical transaction looks like the following: S wishes to sell his home and B wishes to buy. Of course, it is subject to the new mortgage he obtained from the bank. S’s mortgage is completely paid off, and B owns the home. Then B’s bank pays off S’s outstanding mortgage, paying S the remainder. Once approved for their loan, B pays S a down payment. Buyer (“B”) wishes to buy S’s home and applies for a loan from a bank or similar lending institution. A simplified example of a traditional real estate sale looks something like the following: Seller (“S”) wishes to sell their home, which has an outstanding mortgage. Wraparound Mortgage BasicsĪ wraparound mortgage is best explained using an example. When you are considering selling or buying real estate in Austin, Round Rock, Cedar Park, or Pflugerville using a wraparound mortgage, you should consult an Austin real estate lawyer to help guide you through how best to structure the transaction, prepare the proper documents you need, and make sure that the transaction is handled efficiently. This article will provide a basic overview of wraparound financing and the advantages and disadvantages of its use. These mortgages are a legal form of seller financing in Texas and are often favored in situations where a buyer may not be able to obtain a favorable form of traditional financing from a bank or other lending institution. It provides property sellers and buyers with an alternative to the traditional property sale. A wraparound mortgage (also called a mortgage wrap) is a special form of seller financing.
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