It’s a type of seller financing offered by homeowners who still have a mortgage on their home. Although this isn’t common in today’s market, it could make a comeback when interest rates rise in the future.
People often confuse this type of purchase with a Land Contract/Contract for Deed or Bond for Deed. The major difference is with a wraparound mortgage the seller is no longer listed as an owner of the property; however, they do remain on the original mortgage. Seller sets the terms of the new loan so that the buyer is making a monthly payment that is higher than the payment due on the existing mortgage. Therefore, the buyer is making a payment which is used to pay the mortgage, thus the “Wraparound.” The difference between their payment and sellers’ mortgage payment is seller’s profit. To avoid risk of the seller not paying the mortgage and the homebuyer having the home foreclosed is to use a reputable loan servicing company to work on behalf of both party’s interest. Southern Loan Servicing’s staff, software, affiliated companies, and long history allow you to trust that we can structure, administer, and close out your owner-financed transaction efficiently and accurately.
The seller has also taken on all of the risk of a traditional lender in a wrap around mortgage. If the borrower doesn’t pay, the seller bears all the costs associated with enforcing the loan or foreclosing.
Additionally, if the borrower doesn’t pay, the seller is then at risk of being unable to pay his mortgage and could face foreclosure. This can occur even though the borrower is causing the problem by not paying. The wrap around is a second mortgage and as such is in a second position for enforcement. If the seller cannot pay the first mortgage, even when it is the home buyers fault, the original mortgage lender has the first claim and can foreclose on the original home owner.
Risks of a wrap around mortgage are not limited to the seller. The buyer faces default risk as well. As an example, if a buyer consistently makes monthly payments, but the seller is not then paying the first mortgage, the original mortgage lender can foreclose on the home. *Using a loan servicer can prevent this*
Learn about the pros and cons of this type of seller financing here.