What is a Wraparound Mortgage?

Received the following question today and thought it would be a good topic to discuss as this question does come up fairly often. What is a Wraparound Mortgage?

Question from client;

I have a house in El Paso, I did a wrap around loan for my sister and her stupid husband. They are going thru a divorce and have stopped paying the loan and taxes. Does this wrap around mortgage go into default since they broke the agreement? how do I get it reversed?

Short answer from Carlos Aguilar;

A wraparound loan is one in which the buyer can’t get a loan or qualify for a purchase loan so the seller carries the 1st TD; example say the seller, your previous client, wanted to sell their house for $250,000 and the existing loan was $200,000 so the seller carries a mortgage of $250,000 at a rate of say 6% so his principal and interest payment is; $1,498.88.  Now the seller has an existing loan of $200,000 at, let’s say at a rate of 4.5%, his principal and interest payment is $1,013.37.

Basically the seller, your client receives a payment of $1498.88 each month and then he uses this money to pay the mortgage, that is still in his name, and send the payment for the loan of $1,013.37 and keeps the difference.  It’s the way he gets his money over a long period of time.

The problem with all this is that it’s a very risky way to sell a house, the buyer has no equity and no incentive to make the payments on time because the loan is not in his name, it’s still in the name of the seller. If the seller, your client, doesn’t get his payment then he has to come out of pocket to keep his loan current.

It’s also risky because Texas is a Recourse State, which basically means that if you don’t pay your mortgage they can still sentence you to death by hanging or firing squad. JOKING, WE LOVE TEXAS!!!

This is the short explanation and because it’s a loan that is an agreement between buyer and seller, paperwork is prepared by a closing attorney, Texas is an attorney state, then it can have all kinds of variations and changes in terms, rates, etc.

It’s also a risky loan because in a state that has appreciation, such as California, chances are that if the buyer goes into default a few years down the road, the property has probably appreciated and is now worth more so the seller can take the property back and the property is an asset that he can resell.

Texas is a state that never has appreciation, the home that sold for $250,000 in 1977 is worth $251,000 in 2013, but hey you get the privilege of living in Texas and then in this case you get the privilege of living in El Paso, how can it get any better! Carlos is allowed to say this as he HAS lived in El Paso Texas in his other life and could not imagine leaving San Diego to go back to Texas.

Ok so this was supposed to be a short answer so my final comment is;  if you’re dealing with a situation such as this hopefully the wrap-around contract was prepared by an attorney who would have known to add language pertaining to default and the remedies to seller and buyer to cure the default.

A lot of real estate agents in Texas will prepare Wrap around mortgage agreements and that’s when it can get complicated, because Texas being an Attorney closing state, looks at these illegally created agreements as being potentially voidable so then we would  either hope that the ex brother in law will cooperate and get the hell out or the seller YOU, can declare the wraparound mortgage as being invalid and then he would have to move to file an Unlawful Detainer action which is nothing but an eviction process. At least this is a fast process in Texas, just get a court order and the local sheriff will come around and literally kick the occupant out on the street!!!

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