How to Get a Wrap-Around Mortgage
What it is
| At a Glance | |
|---|---|
| Loan Type: | Mortgage |
| Lender: | Bank |
| Secured: | Yes |
A wrap-around mortgage is a loan in which the lender assumes responsibility for an existing mortgage. This occurs when a borrower has a mortgage on one home with a first lender, sells the home to a third party, and then pays the down payment on a second home and borrows a higher amount on a second mortgage to a second lender. The second mortgage actually wraps around the first mortgage because the new lender makes the payments on the first mortgage. Lenders can use this scenario to leverage a lower interest rate on the existing mortgage into a higher yield. Usually the lender is also the seller of the property.
A wrap-around mortgage is one type of seller financing. Another method is called a second mortgage, in which the borrower goes through the same institution for both mortgages. The difference is that with a second mortgage the first mortgage is repaid, whereas with the wrap-around mortgage the first mortgage isn't. Wrap-around mortgages are used to circumvent restrictions on assuming loans. Home sellers who do this violate the original contract with the lender. In many states, escrow companies are required by law to inform a lender whose loan is being wrapped.
Who it's for
A wrap-around mortgage is attractive to sellers who will acquire a high-yielding investment. This investment comes at a high risk with the seller having less equity and being responsible for the original loan. The seller's credit usually deteriorates as a result.
What you need to do to apply
In order to obtain a wrap-around mortgage, interested applicants will need to contact a local lending institution and inquire about the different options and rates available. Personal and financial history, including a credit report, will need to be made available to the lending institution. A property appraisal may also be required.