Wraparound mortgage

Wraparound mortgage is a money term you need to understand. Here’s what it means.

What is a wraparound mortgage?

A wraparound mortgage is a type of financing where a borrower receives a second mortgage to guarantee the payments on a first mortgage.

The borrower’s original first mortgage and the new second mortgage are combined into one loan, and the borrower makes the payments on the new loan while the lender who holds the second mortgage makes the payments on the original first mortgage.

In the mortgage and real estate industry, wraparound mortgages are known as a form or creative financing.

Deeper definition

Although a wraparound mortgage has some of the same traits as a traditional second mortgage, such as the wraparound mortgage taking second lien position on the title, there are some notable differences.

The wraparound lender must agree to make all payments on the first mortgage, including principal and interest as long as the borrower remains current on the wraparound mortgage.

Also, wraparound mortgages overstate the principal balance owed on the original mortgages by adding any funds advanced to the borrower from the wraparound mortgage, plus any unpaid principal on the original mortgage.

Many wraparound mortgages involve seller-financing transactions. The home seller acts as the lender for the wraparound mortgage and guarantees to make the payments on the original mortgage.

However, only assumable loans can carry wraparound mortgages, which require permission from the lender of the original mortgage. Only loans from the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA)are assumable, without the approval of the lender.

Most mortgages also carry a “due on sale” clause, which requires full repayment of the first mortgage upon the sale or transfer of the property securing the mortgage.

Wraparound mortgage example

Seller A wants to sell his or her home to buyer B. Seller A has an existing mortgage of $70,000, and buyer B is willing to pay $100,000 with $10,000 down.

However, buyer B doesn’t qualify for a traditional mortgage. Seller A agrees to carry the remaining $90,000 for buyer B at an agreed upon interest rate. The, seller A will take payments from buyer B on the wraparound mortgage and continue to make payments on the original mortgage of $70,000.

Need to learn more about assumable mortgages? Find out today.

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