If you are considering a wrap-around mortgage, it is very important to understand whether or not the seller’s bank will allow them to execute the wrap-around mortgage. The key legal term to know when asking a bank if they will allow a wrap-around mortgage is “assignment.”
For example, If I contract with you to sell you my car for $1,000 I can assign my right to collect $1,000 to my friend for who I owe $1,000.
I would give you my car, but my friend would be the one who takes your $1000. When you make a wrap-around mortgage you are doing the same thing. You are assigning the responsibility for paying an existing mortgage to a new party, the buyer.
Whether or not you are allowed to assign the mortgage the way wrap around mortgage requires depends on a specific term in the seller’s mortgage. That term is a lump sum payment requirement. If the seller’s mortgage has a lump sum requirement, the seller will be forced to pay off the bank when they sell the property. If that is the case then the seller cannot assign the loan.
It is unlikely that a bank with a lump sum payment in their mortgage agreement will agree to change the terms of the loan in order to allow the wrap-around mortgage. A bank will not agree to change the lump sum for a wrap-around mortgage because the wrap-around mortgage is assigning the responsibility for the loan to a third party who the bank may or may not approve of. Banks are not keen on taking on unknown risks and an assignment of a mortgage is not very palatable for a lender.