In the complex world of real estate financing, various creative financing strategies exist to facilitate property transactions. Subject to, seller financing and wrap around mortgages just to name a few. 

One method gaining popularity is the wrap around mortgage. This unique financing arrangement offers both buyers and sellers flexibility in structuring deals. In this article, we’ll delve into the intricacies of wrap around mortgages, exploring what they are, how they work, and the advantages and risks associated with this innovative financing option.

First thing’s first, what is a Wrap Around Mortgage?

A wrap around mortgage, also known as an “all-inclusive trust deed” or “wraparound loan,” is a form of secondary financing where an existing mortgage is combined with a new mortgage. In simpler terms, it wraps around the original loan. This secondary mortgage “wraps around” the first, incorporating its balance into the new loan, creating a single monthly payment.

How Does a Wrap Around Mortgage Work?

Here’s a step-by-step breakdown of how a wrap around mortgage functions:

1. Existing Mortgage: The seller of the property or new owner that purchased the home subject to, has an existing mortgage on the home.

2. New Mortgage: The buyer acquires the property with a new mortgage, which “wraps around” the seller’s existing mortgage. This new mortgage is typically provided by the seller.

3. Single Payment: The buyer makes a single monthly payment to the seller, who in turn continues making payments on the original mortgage.

4. Interest Rate and Terms: The terms and interest rates of the new mortgage can be negotiated between the buyer and the seller, providing flexibility in structuring the deal. Many factors can influence this such as the buyer’s credit worthiness and value of the down payment.

Advantages of Wrap Around Mortgages:

1. Flexibility in Financing: Wrap around mortgages allows buyers and sellers to negotiate terms, interest rates, and repayment schedules more flexibly than traditional financing options.

2. Attractive to Buyers with Limited Credit: Buyers with less-than-perfect credit may find wrap around mortgages more accessible than obtaining a new mortgage from a traditional lender as well as financially more favorable.

3. Faster Closing Process: Wrap around mortgages can potentially expedite the closing process as they involve fewer formalities than conventional mortgages.

Risks and Considerations:

1. Due-on-Sale Clause: Most traditional mortgages contain a due-on-sale clause, which allows the lender to demand full repayment if the property is sold. The home can be deeded back to the seller to satisfy the lender’s requirements.

2. Default Risk: If the buyer fails to make payments on the wrap around mortgage, the seller is still responsible for the original mortgage. 

3. Lack of Lender Involvement: Since wrap around mortgages are typically private transactions between buyers and sellers, the involvement of traditional lenders is limited. This can mean fewer consumer protections and regulatory oversight as well as greater risk and responsibility for the seller.

Wrap around mortgages offer a unique financing alternative for both buyers and sellers in the real estate market. While providing flexibility and potential benefits, it is crucial for parties involved to be aware of the risks associated with this financing option. Before entering into a wrap around mortgage agreement, thorough research, legal consultation, and due diligence are imperative to ensure a smooth and successful transaction.