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Southern Loan Servicing, Inc. - 2023

What is a wraparound mortgage? 🤔

A wrap-around mortgage, also known as an “all-inclusive mortgage” or a “wrap loan,” is a type of financing arrangement used in real estate transactions. It is a secondary financing option that allows a home seller to offer their property to a buyer while still keeping the existing mortgage in place.

Here’s how a wrap-around mortgage works:

  1. Existing Mortgage: The seller has an existing mortgage on the property they wish to sell.
  2. New Mortgage: The buyer purchases the property from the seller and makes monthly mortgage payments to Southern Loan Servicing.
  3. Wrap-around Loan: Southern Loan then uses a portion of the buyer’s payments to cover the existing mortgage, and any remainder is sent to the seller as their profit.
  4. Two Payments: Essentially, the buyer makes two payments each month – one to the seller (who in turn pays the existing lender) and one to cover the additional amount for the seller’s profit.
  5. Collateral: The property itself serves as collateral for both the existing mortgage and the new wrap-around mortgage.

Wrap-around mortgages can be attractive to both buyers and sellers:

Advantages for Sellers:

  • Increased Selling Options: Sellers can attract more buyers by offering financing options, especially in situations where traditional bank financing might be challenging to obtain.
  • Steady Income: Sellers can receive a steady stream of income from the interest spread between the existing mortgage and the new mortgage.

Advantages for Buyers:

  • Easier Financing: Buyers who might not qualify for traditional bank loans can benefit from the flexibility of wrap-around mortgages.
  • Lower Closing Costs: Wrap-around mortgages might have lower closing costs compared to obtaining a new mortgage from a bank.

However, there are risks associated with wrap-around mortgages, and both parties should exercise caution and seek legal advice before entering into such an arrangement:

  • Due-on-Sale Clause: The original mortgage might have a “due-on-sale” clause, allowing the lender to demand full repayment of the loan if the property is sold, potentially complicating the wrap-around arrangement.
  • Default Risk: If the buyer defaults on the wrap-around mortgage payments, the seller is still responsible for the existing mortgage payments. This could lead to foreclosure by the original lender.
  • Ownership Transfer: The buyer doesn’t gain ownership of the property immediately, as the original mortgage remains in the seller’s name until it’s fully paid off or the property is sold again.

It’s important for both parties to clearly understand the terms of the wrap-around mortgage and to consult with legal and financial professionals to ensure a smooth and legally sound transaction.

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