What is a wraparound mortgage?
When a buyer is unable to obtain traditional financing for enough money to cover the price of buying a home , a wraparound mortgage is one of the creative financing options that can make the purchase possible. The wraparound mortgage allows the buyer to purchase the home by leveraging the existing mortgage from the seller.
A wraparound mortgage is a type of loan for purchase in which the seller of the property has an existing mortgage on the property and the buyer assumes the mortgage and just need to get a new mortgage for the difference between the purchase price and the mortgage existing. The seller benefits because you can sell the house. Benefits because the buyer can purchase the home without having to obtain a mortgage for the full amount. For the lender, the transaction brings more revenue.
So overall , the seller of a wraparound mortgage transaction is the mortgage lender. In this situation, the lender can increase your performance as you are charging for the first and second mortgage. Although the rate of interest on the first mortgage is already established, the second mortgage that wraps the first usually has a rate higher interest.
This means that the lender is increasing its performance. For example, Mr. Smith sold the house to Mr. Ford for $ 150,000 and has a balance of the existing mortgage of $ 90,000. Mr. Ford Mr. Smith gives an initial payment of $ 5,000 and establishes a wraparound mortgage for the remaining $ 55,000. The rate of interest on the first mortgage is six percent and the new second mortgage is eight percent. When establishing the wraparound mortgage, the lender only has to pay the buyer $ 55,000 for which he will earn eight percent, also earn the difference between the two interest rates of wraparound mortgage of $ 55,000.
To be able to make a mortgage transaction envelope, the first mortgage must be assumed by the buyer. An assumable loan is a mortgage where the existing borrower, who is the seller, you can transfer your debt obligation that is the mortgage to the buyer. Although assumable loans were more common in the past, so usually only see clause acceptable option offered with loans from the Federal Housing Administration (FHA in English), and the Department of Veterans Affairs (VA for its acronym in English). If no acceptable clause with the first mortgage, the seller must obtain permission from the lender to make a wraparound mortgage. If an acceptable clause, then the paperwork is submitted to the lender in order to transfer the debt obligation of the first mortgage from the seller to the buyer.
The home buyer has the option to finance the second mortgage with your existing lender. This is probably the easiest way to get a second mortgage because the lender also carries the first mortgage. Since second mortgages are riskier for the lender because they are second in line to cash in case of default by the borrower, may be more difficult to obtain.
The other option for obtaining a second mortgage is that the buyer should ask a different lender who takes the first mortgage. There are two ways that a borrower can take with the new lender. One would be the second mortgage lender pays the first mortgage lender and then you get a mortgage for the full amount. The other way is that the second mortgage lender takes the second mortgage and the first is kept as is.