Introduction

When buying or refinancing real estate, you might hear about a wrap around loan. It’s a unique financing option that can help buyers and sellers work together smoothly. If you’re curious about how this loan works and whether it suits your needs, you’re in the right place.

In this article, we’ll break down what a wrap around loan is, how it functions, its advantages, and the risks involved. By the end, you’ll have a clear understanding to decide if this financing method fits your real estate goals.

What Is a Wrap Around Loan?

A wrap around loan is a type of secondary financing where a new loan “wraps around” an existing mortgage. Instead of paying off the original loan, the buyer makes payments to the seller, who continues paying the original lender.

This means the seller acts as the lender, combining the old mortgage balance with the new loan amount. The buyer benefits by potentially getting better terms or avoiding strict bank requirements.

How Does It Work?

Here’s a simple example to understand the process:

• The seller has an existing mortgage of $150,000.

• The buyer wants to purchase the property for $200,000.

• The seller offers a wrap around loan for $200,000 at an agreed interest rate.

• The buyer pays the seller monthly payments based on the $200,000 loan.

• The seller uses part of these payments to keep paying the original $150,000 mortgage.

This arrangement allows the buyer to avoid applying for a new mortgage from a bank and may offer more flexible terms.

Benefits of a Wrap Around Loan

Wrap around loans offer several advantages for both buyers and sellers. Here are some key benefits:

• Easier Qualification:

  Buyers who struggle to get traditional financing might find it easier to qualify for a wrap around loan.

• Flexible Terms:

  Sellers and buyers can negotiate interest rates, payment schedules, and loan duration.

• Faster Closing:

  Since there’s no bank involved, the transaction can close more quickly.

• Seller Income:

  Sellers can earn interest on the wrap around loan, potentially increasing their return.

• Lower Closing Costs:

  Without bank fees, closing costs may be reduced.

Risks and Considerations

While wrap around loans can be beneficial, they also carry risks. It’s important to understand these before proceeding:

• Due-on-Sale Clause:

  Many mortgages have a clause allowing lenders to demand full repayment if the property is sold. This could trigger the original loan’s payoff.

• Seller Default Risk:

  If the seller fails to pay the original mortgage, the buyer’s interest in the property is at risk.

• Legal Complexity:

  Proper contracts and legal advice are essential to protect both parties.

• Higher Interest Rates:

  The wrap around loan’s interest rate might be higher than traditional loans.

Who Should Consider a Wrap Around Loan?

Wrap around loans are ideal in certain situations:

• Buyers with poor credit or difficulty qualifying for bank loans.

• Sellers looking to sell quickly and earn interest income.

• Properties with existing low-interest mortgages that sellers want to keep.

• Investors seeking creative financing options.

However, both parties should consult real estate attorneys and financial advisors before entering such agreements.

Steps to Arrange a Wrap Around Loan

If you decide to pursue a wrap around loan, here are the typical steps involved:

• Discuss Terms:

  Buyer and seller agree on loan amount, interest rate, and payment schedule.

• Review Existing Mortgage:

  Check for due-on-sale clauses and lender permissions.

• Draft Agreement:

  Prepare a detailed contract outlining responsibilities and protections.

• Close the Deal:

  Sign documents and transfer property ownership.

• Manage Payments:

  Buyer pays seller, who continues paying the original mortgage.

Conclusion

A wrap around loan can be a powerful tool for real estate financing, offering flexibility and faster closings. It allows buyers to purchase property without traditional bank loans and lets sellers earn interest income.

However, it comes with risks like lender clauses and reliance on the seller’s payments. Always get professional advice and carefully review all terms before proceeding. With the right approach, a wrap around loan can be a win-win for both buyers and sellers.

FAQs

What is the main advantage of a wrap around loan?

The main advantage is that it allows buyers to finance a property without getting a new bank loan, often with more flexible terms and faster closing.

Can the original lender call the loan due in a wrap around loan?

Yes, if the original mortgage has a due-on-sale clause, the lender can demand full repayment when the property ownership changes.

Who is responsible for paying the original mortgage in a wrap around loan?

The seller remains responsible for paying the original mortgage using the payments received from the buyer.

Is a wrap around loan safer for buyers or sellers?

It carries risks for both, but sellers face risks if buyers default, and buyers risk if sellers fail to pay the original mortgage.

Do wrap around loans require legal contracts?

Yes, detailed legal agreements are essential to protect both parties and clarify terms in a wrap around loan.