A wraparound mortgage is a junior encumbrance that is ordinarily made when property will support additional financing, and the mortgagor does not want to prepay a favorable existing mortgage obligation but needs additional cash, or where the existing obligation precludes prepayment or contains an excessive prepayment penalty. In such an instrument, the wraparound beneficiary charges interest on the entire amount of the wraparound loan and agrees to make the principal and interest payments on the existing prior encumbrance as it collects principal and interest payments from the mortgagor.
Ohio Wraparound Mortgage
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US-01438BG
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FAQ
If the seller still has an existing mortgage, especially one that's still relatively high, the original lender must agree to this secondary loan. Most lenders require the loan to be paid in full once the home is sold and changes ownership. This would prevent the wraparound mortgage from even happening.
The chief danger of the wrap around mortgage is to the seller. Most mortgages have a "due on sale" clause. This means if the house is sold, the entire mortgage balance is due. If the seller cannot pay that amount or borrow it and pay it, the lender could foreclose on the home.
?If the seller doesn't pay the existing mortgage, the original lender can still foreclose on the house,? says Massieh. This means that even in cases where the buyer upholds their end of the arrangement, making payments on time, the deal could backfire.
Wraparound mortgages are not common, and this is mostly because the original lender has to sign off on this secondary form of financing. If the lender requires that the original loan is paid off before the seller is eligible to sell the home, then a secondary or junior mortgage may not be feasible.
A wraparound mortgage is a unique form of seller financing in which the seller keeps their mortgage and extends a loan to the buyer. The buyer pays the seller each month and the seller uses that money to pay their own mortgage. For this to be a (legal) option, the seller must have an assumable mortgage.
1 Depending on the wording in the loan documents, the title may immediately transfer to the new owner or it may remain with the seller until the satisfaction of the loan. Since the wraparound is a junior mortgage, any superior, or senior, claims will have priority.
After a wrap transaction, there are two separate and independent sets of payment obligations. The buyer becomes obligated to the seller on the new wrapped note, which is secured by a mortgage wrap deed of trust; and the seller remains obligated on the first-lien/wrapped note until it is paid and released.
