A wrap-around mortgage is a form of seller financing that benefits the seller financially and helps buyers who can’t qualify for a traditional mortgage.
There are risks associated with this kind of creative financing, and alternatives to consider.
What Is a Wrap-Around Mortgage?
Traditionally, a buyer weighs the different mortgage types and obtains a mortgage loan to pay the seller for the home. The seller’s existing mortgage gets paid off, with any extra money going to the seller.
With a wrap-around mortgage, a form of owner financing, the original mortgage is kept intact, and the funds a buyer needs to purchase the home are “wrapped around” the current balance.
How Does a Wrap-Around Mortgage Work?
First, the seller must have an assumable mortgage and lender permission to wrap the mortgage. The seller and buyer agree on a price and down payment.
The buyer signs a promissory note, vowing to make agreed-upon payments to the seller. The seller might transfer the home title to the buyer at that time or when the loan is repaid.
The seller continues to make regular mortgage payments to their lender, keeping any monetary overage.
To make this feasible and worthwhile to the seller, the buyer typically pays a higher interest rate than what’s being charged on the original loan (on which the seller is still making payments).
Let’s say you want to sell your home for $200,000, and you still owe $75,000 on your mortgage at 5%. You find a buyer who is willing to pay your price but who can’t get a conventional mortgage approved.
Your buyer can give you $20,000 for a down payment. The two of you will then sign a promissory note for $180,000, at, say, 7%. You’ll make a profit on the spread between the two interest rates and the difference between the sale price and original mortgage balance.
If you’re crunching numbers, a mortgage payment calculator can help.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
What Are the Advantages of a Wrap-Around Mortgage?
Here are ways that a wrap-around mortgage can benefit the buyer as well as the seller.
Benefits for the buyer:
• A carry-back loan allows you to buy a house that you might not otherwise qualify for, perhaps because of low credit scores.
• As long as a seller is willing to sell to you under this arrangement, your financing is essentially approved without your needing to do anything else.
• You’ll pay no closing costs on the loan.
• If you are self-employed, you likely won’t need to provide statements from past income as you would with a traditional mortgage lender. The seller may only be interested in your ability to pay now.
Benefits for the seller:
• You don’t need to wait for a buyer to be approved for financing.
• You can charge a higher interest rate than what you’re paying, allowing you the opportunity to create steady cash flow and make a profit.
• In a buyer’s market, where the supply of homes for sale is greater than demand, your willingness to offer a wrap-around mortgage can make you stand out.
Are There Risks With Wrap-Around Mortgages?
Yes. Wrap-around mortgages come with risks for both buyers and sellers.
Risks for the buyer:
• You’ll likely want to pay an attorney to review the agreement. If you don’t, then you’re assuming more of the risks as described in the next two bullet points.
• You are putting your trust in the seller. If they don’t keep up the mortgage payments on the original loan, the home could go into foreclosure. (You could ask to make payments directly to the lender, which the seller may or may not agree to.)
• If the seller has not told their lender about the arrangement, this could lead to problems. If the original mortgage has a due-on-sale clause, the financial institution could demand payment in full from the seller.
Risks for the seller:
• The buyer may not make payments on time — or could stop making them altogether. If this happens, you still owe mortgage payments to your lender.
• Any lag in making your payments can have a significant negative impact on your credit scores, making it more challenging to get good interest rates on loans.
• Suing the buyer for past-due funds can get expensive, and if the buyer doesn’t have the money to pay you, this may not provide you with any real mortgage relief.
If you’re shopping for a mortgage, it can make sense to explore alternatives. A home loan help center is a good place to start.
Alternatives to Wrap-Around Mortgages
Alternatives can include the following:
• FHA loans
• VA loans
• USDA loans
Here’s an overview of each.
FHA Loans
With loans insured by the Federal Housing Administration, FHA-approved lenders can offer low down payments while easing up on credit scores required to qualify.
VA Loans
The U.S. Department of Veterans Affairs offers low-interest-rate VA loans directly to qualifying borrowers (based on service history and duty status) and backs loans made by participating lenders.
USDA Loans
The U.S. Department of Agriculture guarantees USDA loans for qualifying rural Americans who have low to moderate levels of income. The USDA also offers funding to improve homes to safe and sanitary standards.
The Takeaway
A wrap-around mortgage could sound enticing, but buyer beware. Taking time to repair damaged credit or looking into other types of loans might make more sense. If you do enter into this transaction, you’ll probably want to involve a lawyer to make sure your interests are protected.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
Is a wrap-around mortgage a good idea?
This type of mortgage has benefits and risks for both the buyer and the seller.
What is an example of a wrap-around mortgage?
Let’s say a buyer can’t get traditional financing but agrees to purchase a $250,000 house from the seller, with some down payment. The seller still owes $50,000. The buyer agrees to make payments to the seller on the purchase price, and the seller uses a portion of that money to make the usual mortgage payments. The seller profits from charging a higher interest rate than that of the original mortgage.
Who is responsible for a wrap-around loan?
The buyer will be responsible for making payments to the seller according to the agreement signed by the two parties. The seller will be responsible for continuing to make payments on the original mortgage until it is paid off. So both parties have responsibilities to fulfill.
Can wrap-around loans help a buyer purchase a home?
Yes. The key benefit for buyers is that seller financing helps them purchase a home that they otherwise may not have been able to own.
Photo credit: iStock/Tatiana Buzmakova
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¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
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