A wrap mortgage, also known as a wraparound mortgage or simply a "wrap," is a type of secondary financing option for real estate transactions. It is a method of seller financing where a buyer takes over the seller's existing mortgage while also receiving additional financing from the seller. In essence, the buyer's new mortgage "wraps around" the existing mortgage, combining the two loans into a single agreement.
Here's how it typically works:
- Existing Mortgage: The seller has an existing mortgage on the property.
- New Mortgage: The buyer purchases the property and agrees to make mortgage payments to the seller, who acts as the lender for the new mortgage.
- Combined Payments: The buyer makes a single mortgage payment to the seller, who then uses part of that payment to cover the original mortgage (if any) and keeps the remaining amount as their profit.
- Collateral: The property serves as collateral for both the existing mortgage and the new mortgage.
Key points about wrap mortgages:
- Risk for the Buyer: While wrap mortgages can provide an opportunity for buyers to obtain financing when they might not qualify for a traditional loan, they also come with risks. If the seller fails to pay the original mortgage, it could result in foreclosure, potentially affecting the buyer as well.
- Due-on-Sale Clause: Before considering a wrap mortgage, buyers should check if the seller's existing mortgage has a due-on-sale clause. This clause allows the lender to demand full repayment of the mortgage if the property is sold. If the due-on-sale clause is triggered, the buyer would need to pay off the original mortgage immediately.
- Clear Terms and Legal Assistance: Wrap mortgages can be complex, and both parties should seek legal advice to ensure that the agreement is properly structured and the terms are clear and fair to both parties.
It's essential to understand that wrap mortgages may not be legal in some jurisdictions or may have specific regulations surrounding them. As with any real estate transaction, it's crucial for both parties to thoroughly understand the terms and potential risks before entering into a wrap mortgage agreement.
