A wraparound mortgage
, also known as an all-inclusive mortgage or overriding mortgage, is a type of financing arrangement that allows a buyer to assume the seller's existing mortgage while also obtaining additional financing from the seller. This type of mortgage is commonly used in real estate
transactions where the buyer does not qualify for traditional financing or wants to avoid the costs and complexities associated with obtaining a new mortgage.
The key difference between a wraparound mortgage and a traditional mortgage lies in the structure and terms of the loan
. In a traditional mortgage, the buyer borrows a specific amount of money
from a lender to purchase a property, and the lender places a lien on the property as collateral
. The buyer then makes regular payments to the lender, typically over a fixed term, until the loan is fully repaid.
In contrast, a wraparound mortgage involves the buyer assuming the seller's existing mortgage, which remains in place. The buyer makes payments to the seller, who in turn continues to make payments on the original mortgage. The seller essentially "wraps" their existing mortgage around the new mortgage, hence the term "wraparound."
The key features and benefits of a wraparound mortgage include:
1. Financing flexibility: Wraparound mortgages provide an alternative financing option for buyers who may not qualify for traditional mortgages due to credit issues or other reasons. It allows them to leverage the seller's existing mortgage and obtain additional financing without going through the rigorous qualification process of a new loan.
2. Avoidance of lender requirements: Since the buyer assumes the seller's existing mortgage, they can bypass certain lender requirements such as down payments, credit checks, and income verification. This can be particularly advantageous for buyers who have difficulty meeting these requirements.
3. Simplified closing process: Wraparound mortgages can streamline the closing process by eliminating the need for a new loan application, underwriting
, and associated fees. This can save time and money for both parties involved in the transaction.
4. Potential for favorable terms: The terms of a wraparound mortgage are negotiable between the buyer and the seller, allowing for more flexibility in interest
rates, repayment schedules, and other loan terms. This can potentially result in more favorable terms compared to traditional mortgages.
However, it is important to note that wraparound mortgages also carry certain risks and considerations. For the buyer, there is a risk
of default if the seller fails to make payments on the original mortgage. Additionally, the buyer assumes responsibility for any potential liens or encumbrances on the property. For the seller, there is a risk of default by the buyer, which could lead to foreclosure
In summary, a wraparound mortgage is an alternative financing arrangement that allows a buyer to assume the seller's existing mortgage while obtaining additional financing. It differs from a traditional mortgage in terms of structure, qualification requirements, and closing process. While it offers flexibility and potential benefits, both buyers and sellers should carefully consider the risks and implications before entering into a wraparound mortgage agreement.