A Colorado wrap-around mortgage is a mortgage agreement where a seller agrees to finance the mortgage to a buyer, but the seller also keeps their initial mortgage and keeps making the monthly payments on that mortgage. The buyer makes their mortgage payments to the seller and the seller makes payments to the bank. The property is subject to both mortgages until they are paid off.
The benefits of a wrap-around mortgage are
- They are seller-financed so the buyer may be able to secure the loan without meeting stringent financing qualifications;
- The transaction may close more smoothly with private parties than with a bank involved, and
- The seller can make a profit on the sale of the property and the mortgage arrangement.
As a seller-financed loan, the seller can choose to accept a buyer with lower lending qualifications than a traditional bank. Lower lending qualifications include lower credit scores, lower income, or perhaps a worse debt-to-income ratio.
A seller may choose to take on a buyer who doesn’t meet the qualifications for a lending institution but still has the proper income to afford the property.
Transactions with lending institutions are often complicated by the institution’s processes and procedures around closing. A seller-financed loan removes the large lending institution from the equation which may speed up closing because there is less bureaucracy involved in the process.
Most importantly, the wrap-around mortgage allows a seller to profit twice from the sale of the property. The first point where the seller profits are the traditional profit a seller makes when they sell a property. Property values generally increase over time so a seller who has held a property for a long time is likely to profit from the sale of their property.
The second point a seller in a wrap-around mortgage makes a profit is on the loan. In a traditional sale, the seller is not involved in the new mortgage on the property. In a wrap-around mortgage, the seller also acts as a lender to the buyer which allows them to profit a second time from the interest the buyer will pay over the course of the loan.