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Understanding Wrap Around Loans
As a loan officer, you will get clients who are looking into buying a home, be it their first or second, and find that financing isn’t available to them. Therefore, it’s up to you to help them find viable alternatives. For a potential home buyer, a wrap around loan offers a way to get into a home when traditional financing is unavailable.
What is a Wrap Around Loan?
A wrap around loan is a second loan which a homeowner makes to a prospective buyer to help them purchase the home. The home buyer then pays a monthly mortgage payment to the home seller who continues paying on their original mortgage. In other words, wrap around financing is a loan coming from the seller of the home, rather than from a mortgage lender or company.
Due-on-Sale Clause Prevent Wrap Around Loans
Typically, only assumable loans are “wrappable.” Assumable loans are those on which existing borrowers can transfer their obligations to qualified house purchasers. Most fixed rate mortgages have a due-on-sale clause, which requires the mortgage to be repaid in full if the home is ever sold. The due-on-sale clause is put in place to prevent wrap around loans, banning a buyer from assuming the seller’s mortgage without the lender’s permission.
What are the Risks for Sellers?
Wrap around loans do come with their share of risks for the home seller. In some situations, instead of the mortgage payment going from the buyer to the seller, the payment goes to a third party for transmission to the original lender. This situation is a very risky arrangement for whoever is liable for the loan. If the buyer doesn’t pay the mortgage, the seller may not find out until they receive a notification from the mortgage lender.
What are the Risks for Buyers?
Not all risk in a wrap around transaction is towards the seller. The home buyer also can face default risk as well. If the seller does not make payments to the original mortgage lender, the lender can choose to foreclose on the home. Foreclosure can happen even if a buyer consistently makes monthly payments to the seller. The buyer also cannot go to the lender without the seller since the mortgage is in the seller’s name.