Legal Definitions - wraparound mortgage

A wraparound mortgage is a form of seller financing where the seller extends a new mortgage to the buyer that includes, or "wraps around," an existing mortgage on the property. In this arrangement, the buyer makes payments directly to the seller, and the seller, in turn, remains responsible for making payments on the original, underlying mortgage to their lender. This type of financing is often used when the existing mortgage has favorable terms (like a low interest rate) or when a buyer might have difficulty qualifying for a new traditional loan.

Here are some examples to illustrate how a wraparound mortgage works:

• Example 1: Leveraging a Low Interest Rate

  Sarah owns a house with an existing mortgage of $150,000 at a fixed interest rate of 3%, which she took out several years ago. She wants to sell the house for $300,000. Current market interest rates for new mortgages are around 6%. A potential buyer, David, is interested but finds the current high interest rates challenging. Sarah offers David a wraparound mortgage for $300,000 at a 5% interest rate. David makes monthly payments to Sarah based on the $300,000 loan at 5%. Sarah then uses a portion of David's payments to continue paying her original $150,000 mortgage at 3%, keeping the difference as profit. This arrangement benefits David by offering a lower interest rate than a new conventional loan, and it benefits Sarah by making her property more attractive to buyers while earning a spread on the interest rate.

• Example 2: Facilitating a Sale for a Buyer with Credit Challenges

  Mark wants to buy a commercial building from Jane for $500,000. Jane has an existing mortgage on the property for $200,000. Mark has some recent credit issues that make it difficult for him to secure a traditional bank loan quickly. To facilitate the sale, Jane agrees to provide Mark with a wraparound mortgage for the full $500,000. Mark makes monthly payments to Jane, and Jane continues to make her payments on the original $200,000 mortgage to her bank. This allows Mark to acquire the property without immediate bank financing, and Jane secures a buyer for her property, which might have otherwise been delayed or fallen through.

• Example 3: Quick Transaction for an Investment Property

  An investor, Emily, wants to purchase a rental property from Robert for $400,000. Robert has an existing mortgage of $180,000 on the property. Both parties want to complete the transaction quickly without the delays often associated with traditional bank financing. Robert agrees to offer Emily a wraparound mortgage for $400,000. Emily makes her monthly mortgage payments to Robert. Robert then takes a portion of those payments to cover his original $180,000 mortgage payment to his lender. This method allows Emily to acquire the investment property more rapidly and with less paperwork than a conventional loan, while Robert ensures a steady income stream and a successful sale.