How Does the Math Work?
Seller's existing mortgage
$250,000 at 3%
Sale price
$500,000
Buyer down payment
$100,000
Seller creates wraparound financing
$400,000
The buyer pays the seller according to the $400,000 wrap. The seller continues making payments on the underlying $250,000 mortgage. The spread between the two obligations may create income for the seller.
Why Would Seller Do This?
Potential reasons: earn interest, expand the buyer pool, create income, or sell a property with low existing financing.
Why Would Buyer Do This?
Potential reasons: the buyer cannot obtain traditional financing, the negotiated terms are attractive, or the existing low-rate debt indirectly supports the economics.
Major Risk: Due-on-Sale
Transfer of ownership can trigger the existing lender's due-on-sale rights unless an exception applies.
“Seller is still making the payment”
does not mean
“Lender has no right to accelerate.”
Federal law generally permits enforcement of due-on-sale clauses outside specified exceptions.
Major Risk: Buyer Pays Seller, Seller Doesn't Pay Bank
Imagine the buyer faithfully pays $3,000 each month, but the seller stops paying the underlying mortgage. The underlying lender forecloses.
The buyer can face devastating consequences. That is why third-party servicing and controls are so important.
Major Risk: Underlying Loan Changes
If the underlying loan is an ARM, the payment can change. If escrow rises, the seller's required payment changes. The wraparound agreement needs to address these realities.
This Needs Attorneys
A wraparound should not be created from a downloadable template.
