A Wrap-Around Mortgage Is a Form of a Seller-Financed Mortgage
To understand a wrap-around mortgage, you first need to understand a seller-financed real estate transaction. In a seller-financed transaction, the seller of the property acts as the mortgage holder for the buyer.
The purpose of that arrangement is to remove the banking institution from the purchase. Removing the bank from a real estate transaction increases the risk to the buyer and seller, but provides some benefits to the buyer and seller as well.
In a wrap-around variation of seller financing, the seller can execute a seller-financed transaction with the buyer even though the seller still has a mortgage of their own on the property. The payment structure of the deal is the buyer paying the seller their mortgage and then the seller paying the bank for the original mortgage.
The buyer’s mortgage to the seller is the wrap-around mortgage. A seller may be convinced to allow the buyer to make a wrap-around mortgage by negotiating to charge a higher interest rate on the wrap-around mortgage than the interest on their initial mortgage. That way the seller makes more money on the arrangement than they would have by selling the property in a traditional sale.
To enter into a wrap-around mortgage, the seller must first make sure their loan is “assumable.” That means that the seller can make someone else responsible for the loan. If the loan is assumable, the seller can execute the wrap-around loan with the buyer.
This format of real estate transactions carries a higher risk than a traditional sale. More than one person is responsible for paying a mortgage on the property and if either person makes a mistake someone will be in a position to foreclose. The buyer carries the most risk because they need to trust the seller to continue making the payments on the original mortgage.
Contact a Wrap-Around Mortgage Lawyer Colorado Residents Trust
To schedule an appointment with a Colorado Wrap-Around Mortgage Attorney, reach out to our firm, Baker Law Group (a Denver Wrap-Around Mortgage Law Firm).