Wrap-around mortgages are home purchase funding options in which lenders assume mortgage notes on sellers' existing loans. The wrap-around agreement is an addendum to the purchase agreement with many online templates available to create legally binding wrap-around agreements. Not all states allow wrap-around mortgages specifically because of legislative restrictions outlined in the S.A.F.E. Act.
Wrap-Around Agreement Elements
Wrap-around mortgages, also called wraps, provide sellers greater assurances when engaging in seller-financed agreements. The structure of the wrap must include the agreed purchase price, the down payment, and the accompanying bank-financed loan. The bank loan is obtained by the buyer and is used to pay the existing mortgage held by the seller.
Why Parties Want a Wrap-Around Agreement
At first glance, a wrap-around agreement seems risky for sellers. It is much easier to have a buyer finance and pay the complete purchase price at escrow's close. In traditional purchase agreements, sellers walk away cleanly from the property.
In a wrap, the seller remains tied to the property for the duration of the agreement. However, there are some benefits worth the risk to sellers.
Wraps are attractive to buyers who may not qualify for traditional lending options. Thus, sellers open the buying market to buyers who might not otherwise look at their home. Wraps additionally reduce annual income tax liabilities by extending income and profit over time. Some lenders also like wraps because they back an existing, maturing note usually with a lower interest rate.
Mortgage Law Compliance Issues
Check with local state mortgage laws to confirm wrap-around mortgages are allowed in your state. The S.A.F.E. Act set restrictions on loans nationwide. According to the S.A.F.E. Act, anyone writing a mortgage must have a mortgage license. A lender, including a seller-financier, violates the S.A.F.E. Act if he is not licensed through the Nationwide Mortgage Licensing System (NMLS).
The Dodd-Frank Act creates an exception, allowing individuals to set up one seller-financed transaction per year. This exception is not nationwide, so check with state regulations to see if Dodd-Frank provides an exception in your state.
Write the Wrap
Obtain the required forms either online, or through a real estate deed conveyor's office. Forms include the Wrap Around Financing Addendum, warranty deed, deed of trust, promissory note and disclosures. Review all details of the wrap including a reasonable, industry-accepted interest rate. Check with state and federal lending regulations for compliance.
Sign all forms in front of a notary. In the documents, include a Dodd-Frank compliance disclosure that acknowledges the seller has not sold another property with a wrap-around mortgage in the previous 12 months.
After the Sale
Generally, a wrap-around installment agreement is shorter than a traditional 30-year loan. At the end of the term, sellers usually won't extend the wrap. Sellers expect buyers to finalize all payments at the end of the wrap term. Thus, buyers need to either refinance with traditional mortgage products or make a balloon payment to fulfill the wrap-agreement.
Each year, the buyer will furnish the seller with a 1098 to report the income on his tax return.
- Wrap-around mortgages are not legal in some states and very few assumable loans are written any more, so this practice is seldom used.
- Do not write a wrap-around mortgage without telling your original lender what you are doing.
- One way for the seller to be protected when writing a wrap-around mortgage is to Include a clause that triggers a quit-claim deed to be passed from the new buyer to you if any payment is 60 days delinquent. File this document along with a signed quit-claim deed with the trust department of the bank that will handle all monthly payments. If the buyer makes monthly payments directly to your bank and those payments are 60 days late, then the quit-claim deed is automatically exercised and you re-take possession of the property.
Kimberlee Leonard had a successful career in financial services, insurance and tax preparation before becoming a full-time writer. She has worked with major institutions such as Wells Fargo, First Hawaiian Bank and State Farm.