Wraparound mortgage
Encyclopedia
A wrap-around mortgage, more-commonly known as a "wrap", is a form of secondary financing for the purchase of real property. The seller extends to the buyer a junior mortgage
which wraps around and exists in addition to any superior mortgages already secured by the property. Under a wrap, a seller accepts a secured promissory note
from the buyer for the amount due on the underlying mortgage plus an amount up to the remaining purchase money balance.
The new purchaser makes monthly payments to the seller, who is then responsible for making the payments to the underlying mortgagee(s). Should the new purchaser default on those payments, the seller then has the right of foreclosure
to recapture the subject property.
Because wraps are a form of seller-financing, they have the effect of lowering the barriers to ownership of real property; they also can expedite the process of purchasing a home. An example:
Typically, the seller also charges a spread. For example, a seller may have a mortgage at 6% and sell the property at a rate of 8% on a wraparound mortgage. He then would be making a 2% spread on the payments each month (roughly, anyway. The difference in principal amounts and amortization schedule
s will affect the actual spread made).
As title is actually transferred from seller to buyer, wraparound mortgage transactions will violate the due-on-sale clause
of the underlying mortgage, if such a clause is present.
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
which wraps around and exists in addition to any superior mortgages already secured by the property. Under a wrap, a seller accepts a secured promissory note
Promissory note
A promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or...
from the buyer for the amount due on the underlying mortgage plus an amount up to the remaining purchase money balance.
The new purchaser makes monthly payments to the seller, who is then responsible for making the payments to the underlying mortgagee(s). Should the new purchaser default on those payments, the seller then has the right of foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
to recapture the subject property.
Because wraps are a form of seller-financing, they have the effect of lowering the barriers to ownership of real property; they also can expedite the process of purchasing a home. An example:
- The seller, who has the original mortgage sells his home with the existing first mortgage in place and a second mortgage which he "carries back" from the buyer. The mortgage he takes from the buyer is for the amount of the first mortgage plus a negotiated amount less than or up to the sales price, minus any down payment and closing costs. The monthly payments are made by the buyer to the seller, who then continues to pay the first mortgage with the proceeds. When the buyer either sells or refinances the property, all mortgages are paid off in full, with the seller entitled to the difference in the payoff of the wrap and any underlying loan payoffs.
Typically, the seller also charges a spread. For example, a seller may have a mortgage at 6% and sell the property at a rate of 8% on a wraparound mortgage. He then would be making a 2% spread on the payments each month (roughly, anyway. The difference in principal amounts and amortization schedule
Amortization schedule
An amortization schedule is a table detailing each periodic payment on an amortizing loan , as generated by an amortization calculator. Amortization refers to the process of paying off a debt over time through regular payments...
s will affect the actual spread made).
As title is actually transferred from seller to buyer, wraparound mortgage transactions will violate the due-on-sale clause
Due-on-sale clause
A due-on-sale clause is a clause in a loan or promissory note that stipulates that the full balance may be called due upon sale or transfer of ownership of the property used to secure the note...
of the underlying mortgage, if such a clause is present.