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The Wrap Around Mortgage

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A wrap around mortgage is a type of owner financing. Also known as an all-inclusive mortgage or a trust deed, and commonly called a wrap (and sometimes written as wraparound mortgage), it allows property to be purchased without having to qualifying for a loan or paying closing costs. In a wrap around, the seller extends to the buyer a”junior” or secondary mortgage that exists in addition to the first mortgage. In this type of arrangement, the buyer is paying off the seller’s first mortgage as well as paying an additional amount up to the value of the property; interest on the note is included in the contract.

This kind of transaction can be beneficial if the buyer has poor credit or cannot raise the capital necessary to secure a conventional mortgage. However, it can be a complicated process and may not be for everyone.

Check the laws

Wrap around mortgages are not permitted in every state. In addition, the lender on the primary mortgage may prohibit the seller from extending a wrap. If one is discovered and the lending institution does not allow it, the lender may be entitled to demand payment in full of the mortgage.

Other issues

The laws and mortgage contract are not the only problems. Here are some things to bear in mind.

  • The seller must be willing to accept monthly payments rather than a lump sum pay out.
  • The mortgage and title remain in the seller’s name. As protection, the buyer must be sure to get receipts for every payment made as proof should the seller default on the loan. Without receipts, the judge on the People’s Court will laugh you right out the doors.
  • Record keeping is complicated. The seller must track how much of each payment goes to the principal and how much goes to interest. Every year, the seller must provide the buyer with an IRS form documenting how much money in interest was paid.
  • The buyer must pay the property taxes and insurance on the property. However, these costs are usually included in the monthly amount.

Be careful

Even though it is not a simple process, it can be a good situation; especially if the borrower is lacking in credit, cash for a down payment or if the seller is having trouble selling the property. If you decide on pursuing a wrap around, seek legal advice to be sure you can obtain one and that you are doing everything correctly.

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