How do I structure this Wrap?

Question

Hi Guys,

I have my first deal about to be underway. But I need to know some things first.
	
	The house I want to purchase is worth about 200,000.
	There is a 165,000 FHA loan in place.
	I negotiated with the seller for 5,000 down and to wrap the payments with a contract for deed and a purchase contract.
	Is there a problem with doing wraps on existing FHA loans? My title attorney said VA or Conventional loans will work but not FHA. I dont understand.
	
	Thank You
	-Billy

Dion DePaoli · Answer

I am not aware of a restriction on the number of proper assumptions in a FHA or VA loan.  The assumption is at the discretion of the investor/mortgagee.  
	
	In the improper assumptions, the ones where lender approval is not sought out and obtained, you would create a problem with an A to B and B to C flow.
	
	Simply stated, A has absolute interest.  He can only give some interest to B. So then B has limited interest which he then could only give even further limited interest to C.  
	
	The idea is this is not agreed to as fractional ownership, each party believes they are getting "full" interest from the preceding party.  They are indeed not getting that.  Party A gave a mortgage, that instrument grants legal interest to the Mortgagee in the real property, that is an indivisible interest, which is legally superior to Party B.  The mortgagee's interest trumps B so what does B really give to C?  
	
	And there is one of the many problems with these types of structures. 
	
	Let's look at your example:
	
	Seller gives you Contract for Deed to purchase the home.  The Seller already has a mortgage which is superior to your interest established in the CFD.  
	
	In a CFD, you do not get all interests in the property, you only get a partial interest for use and enjoyment, which is just equitable interest.  Typically you do not get legal interest, so you don't have the legal right to sell the property to Party C.  (that idea likely breaches your CFD, which is a whole other discussion)
	
	This also falls under Equitable Title, which is use and enjoyment and Absolute Ownership which is Legal Title.  
	
	These wrap around things are popular but they are not tried and tested in the body of law and stand to fail pretty often.  They are risky structures for whoever is at the end of the food chain.  What recourse does Party C really have against Party A if Party A allows the Mortgagee to foreclose?  ("None")  Neither do you as Party B.  The Mortgagee has superior Legal Interest over all subordinate parties so Party B to Party Z.  For that matter, once the mortgage is given by the borrower to the Mortgagee, the borrower only retains an equitable interest per se.  That is, in the case of foreclosure, the Mortgagee seeks to terminate the Equitable Right of Redemption which the Borrower has.  Through the auction or by sale, the rights are bundled back together and conveyed to the next party.
	
	What recourse do you have as Party B over Party C?  How will you revoke or try and cause the court to revoke any equitable interest Party C has in the property upon failure to pay? ("None")  - the property is owned by Party A, you can't do anything with it, including foreclose. 
	
	IMHO, these things are brain damage for no reason.  They don't really do or accomplish what those who try and use them think they accomplish.  If I were you, I would simply try and find a real buyer to fill in the slot for Party C and be done with all of this.

William Swartz · Answer

Im sorry I forgot to mention im the middle party in the deal. Im flipping this to a cash buyer. I know FHAs are assumable from person A-B but i keep hearing you cant do A-B then B-C.

Dion DePaoli · Answer

Perhaps your attorney misspoke?  VA loans and FHA loans are assumable loans.  Conventional loans are not.  So technically you can properly wrap a VA or FHA loan.  
	
	When I say, 'properly', I mean you can still do a wrap around a conventional mortgage but the Mortgagee will not recognize the transfer of the obligation from Borrower A to Borrower B.   
	
	From the sound of the way you are structuring this with the Contract for Deed, the original borrower is sticking around and will manage their obligation with the current mortgagee.  You will pay the current owner and the current owner will pay his own mortgage bill.  That works and seems pretty straight forward.