When a buyer cannot qualify for a traditional mortgage loan it can make it rough for buyer and sellers alike! Closing the transaction using a wrap-around loan may be a great financing option for both parties.
What is a wrap-around loan?
A Wrap is a type of seller financing wherein the seller’s existing loan is wrapped by a secondary loan from a buyer to a seller. The payment from the buyer is then used to pay the sellers existing loan.
How does a wrap-around loan work?
In a typical real estate transaction, the buyer purchases the home with a loan provided by a conventional lender. The seller uses the proceeds of the sale to pay off their existing mortgage on the home.
With a wrap loan the seller keeps their existing mortgage on the home, offers seller financing to the buyer and wraps the buyer’s loan into the existing mortgage. In this situation, the seller takes on the role of the lender.
The terms of the loan between buyer and seller should mirror or be higher than the sellers existing loan. The buyer then makes the payment to the seller and the seller uses those funds to make the monthly payment on their existing loan.
Usually, a contract collection company is retained to ensure that both payments are made timely.
Example of a wrap-around loan
Tia is selling her home for $200,000 and has an existing loan balance of $100,000 at a 3% fixed interest rate. She decides to finance a loan for John to purchase her home. Tia and John agree to a $40,000.00 down payment and a $160,000 wrap-around loan in favor of Tia at a 5% fixed interest rate. John pays Tia monthly on his loan and Tia then uses that money to make the payment on her existing loan. Tia can use the profit from John’s payment to continue to pay down her existing loan or keep the difference herself.
Normally the wrap-around mortgage will include a balloon payment due within 12-36 months.
Benefits of a wrap-around loan
Wrap-around loans can help sellers who are having a difficult time selling their home, it broadens the pool of buyers by making it easier for them to qualify. For buyers it helps them to purchase a home that otherwise might be unattainable at today’s rates.
