Explain to me a Mortgage Wrap!

[Kacey W]

I have a commercial property that I have a buyer for. One of our only options would be a mortgage wrap. I have never done a wrap and am not real familiar with it. Can someone give me an explanation of a wrap, what to look out for as the seller, and why I should/shouldn't do a wrap as the seller?

I am starting from scratch here. Is there a Wrap For Dummies book???

I have some concerns with:

1) The current lender calling the note due if/when they find out.

2) What do i do if the buyer defaults?

3) How do we handle insurance with the buyer?

4) Anything else I am overlooking.

Please give me some insight on this idea!

Thanks in advance.

[Jon Holdman]

When you do a wrap you create a new mortgage that "wraps" the existing one. The loan between you and the original lender stays in place. There is a new loan with you as the lender and the buyer as the borrower. Those payments come to you and then you use them to make the payments on the existing loan.

You probably want to get an attorney to create all the documents.

1) Yes, this could happen. You are transferring title, which violates the DOS clause. Seems rare for this to happen, though.

2) You foreclose and take the house back. Hopefully the buyer would just give it back painlessly, but foreclosure is your final options.

3) There are some other threads on this topic. This is one of the more controversial aspects of this type of deal. Look for "subject to", which is effectively what you're doing.

The buyer may want some assurances that you're making your payments. If you don't the original lender will foreclose on you and take the house. You may want to use a service to handle the payments.

This loan will remain on your credit report and may affect your ability to get other loans.

Many commercial loans are assumable. The lender may have to approve the buyer and there may be some fees. But if this is possible, this is a much cleaner option.