How Wraparound Mortgage Works? – By Example

In my previous blog, I talked about the topic on “Important Owner Financing Strategies A Home Seller Needs To Understand” Some readers asked me about the definition and the example of wraparound mortgage through emails.

I think wraparound mortgage is an important topic. Using this strategy, you can reach some buyers with good income but bad credit score. It helps you in current slow market and gives more tools to sell your home fast.

Here they are:

Definition of wraparound mortgage:

A wraparound mortgage is an all-inclusive mortgage loan encompassing underlying financing. It is a variation of a seller junior mortgage wherein the seller remains obligated to pay the underlying first mortgage and second mortgage. Seller continues to make payments on the existing mortgage loans and buyer makes payments to seller on a new mortgage loan that is subordinated to, and wraps around, the existing mortgage.

Example of wraparound mortgage:

You have a house worth $200,000 with a first mortgage of $150,000 on the house with an interest rate of 6% in 30 years term and a second mortgage of $30,000. You total existing monthly payment, say, is $1100/month.

You sell the house for $200,000 with a 10% down payment ($20,000) and take a mortgage or note of $25,000, a land contract or all-inclusive trust deed for $180,000.

You continue to pay the payments of existing first mortgage and the second mortgage to your current lenders. Your home buyer pays you each month on the mortgage or the note of $180,000 at the interest rate both agreed, say, 8% APR in 30 years term.

Here is the number:
  
Note to you: $180,000   8% 30yr     $1320.78/month

Your existing monthly payments       $ 1100/month

Your month cash flow:                      $220.78/month

The $180,000 note wrap around the first mortgage of $150,000 and the second one of $30,000. The total debt is $180,000. You have no equity in the note. You collect $1320.78/month and pay $1100/month to your current lenders. The difference of $220.78/month is yours to keep. You got also $20,000 down payment upfront.

When your buyer pays you off and you pay off your lenders to clear the title.

Is this wraparound mortgage a good deal, you bet. Can you get a better deal if you sell you home on traditional way? I don’t know. It is up to you.

Warnings for using wraparound mortgage:

Your risk is the buyer’s default on payments. But, your homebuyer also forfeits the down payment of $20,000. The key is to get enough down payment and make sure the home buyer has enough income to be able to make monthly payments to you.

Also, make sure to use your real estate attorney to setup the contract and the note. Never try to do this job by yourself!

Buyer's Benefit of Using wraparound mortgage? – No need to go through a bank to get a loan; saving on the costs of borrowing money. It is good for those buyers have good income but bad credit scores.
For more home selling tips on my home selling blog on owner financing, click following links:

http://besthomesellingtips.com/2007/08/17/important-owner-financing-strategies-a-home-seller-needs-to-understand/

http://besthomesellingtips.com/2007/07/29/how-to-protect-you-from-buyer-default-when-selling-your-home-with-owner-financing/

http://besthomesellingtips.com/2007/07/29/top-10-mistakes-made-when-selling-your-home-with-owner-financing/

http://besthomesellingtips.com/2007/07/16/how-to-sucessfully-sell-your-home-by-owner-financing-part-1/

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