Wraparound Mortgages

[Dan Auito]

Also known as the All Inclusive Trust Deed, this is a good article on a good tool used by many to create alternative methods of finance vehicles.

http://www.firsttuesdayonline.com/Journal/2004%20Archive/Working%20the%20AITD.htm

[neodemes]

Let's kick this thread back to the top of the heap and see if we can get some takers for Ray's questions. :SM023:

And, then I have a couple, too.

Can someone kindly explain the process by which the control of the property - the Deed - is conveyed to the buyer. I know the Title doesn't get passed over until the wrap is paid off, but how and when is ownership conveyed?

Also, I would like to make extra principle payments every month to the underlying mortgage, which will cut the term in half (6 years, as opposed to 12 and just to clarify, this is a purchase for residence, not turnover or rental), but I'm unclear how to go about structuring this.

Thanks in advance for the help that I know is forthcoming.

:SM128:

[neodemes]

Hey Raymond, glad you still got your ears on - thanks for the update. Hopefully someone will pick up on the chatter and infuse some additional knowledge.

My questions may fall into the 'too stupid to bother with' category, but, just so they don't get buried, here the are again:

Can someone kindly explain the process by which the control of the property - the Deed - is conveyed to the buyer. I know the Title doesn't get passed over until the wrap is paid off, but how and when is ownership conveyed?

Also, I would like to make extra principle payments every month to the underlying mortgage, which will cut the term in half (6 years, as opposed to 12 and just to clarify, this is a purchase for residence, not turnover or rental), but I'm unclear how to go about structuring this.


:SM113:

[neodemes]

Raymond,

Thanks. Just let me clarify my position.

I am the Buyer. This will be my residence. My original plan was to Sub2 and get the deed via trust (there is a long post already on that aspect).

Long story short, they first agreed, verbally, and then decided not to go that route after getting spooked by a lawyer.

:oops:

So, now I'm proposing a wrap, no money down (that part is OK with them), and of course want to set myself up in the best possible position.

Any and all thoughts welcome. Time is of the essence, btw.

[neodemes]

...but I can't remember it. :11doh:

Thanks for thinking, Raymond. Something just clicked...I can stipulate that 'principle only' overpayments can be made to the wraparound, to be solely applied to the underlying mortgage...in theory, and have the whole thing administered by a loan servicer (hopefully at the expense of the seller, seeing as I made some extreme life-altering decisions based on their initial acceptance of the sub2). Any idea what kind of fees these loan servicers charge?

btw - we miss you at http://www.rei-resource.com/rei-forum. Don't you think its time to 'phone home'? We have a lot of new sections if you haven't visited recently, including a new State network. At least pop in and say 'Howdy' in the CA section!

:SM123:

[cmorsunski]

Here are some good sites I've found on wraparound mortgages. I'm sure there are many more out there, but these are helpful to get started:

http://www.propex.com/C_g_wrap.htm

http://homes.wsj.com/columnists_com/buildingvalue/20040914-buildingvalue.html

http://www.creonline.com/articles/art-266.html

For those who hate to surf the net, here is some info that I've copied from propex.com:


How Does A Wraparound Work?

1. Establish a sale price and write the offer. To determine the amount of the wraparound mortgage, deduct your down payment from the purchase price. (The seller must be willing to accept your monthly payments over a period of years instead of a lump sum for a wraparound to work).

2. Agree upon an interest rate. Typically, the interest rate will be near that charged by conventional lenders - a "market" rate so to speak, but it may be slightly higher to compensate the seller for his/her financial assistance. The seller will likely require a copy the buyer's credit report.

3. Obtain a copy of the note on the seller's existing loan. Read the existing loan documents to ensure that doing a wraparound will not trigger a "due-on-sale" clause which requires the loan to be paid off when the home is sold. Further, if you wrap a mortgage and fail to notify the lender, the lender may "call" the entire loan amount due. Payments on the wraparound mortgage will need to be structured around the terms of the existing first mortgage. You can still wrap an adjustable-rate first mortgage but fixed rate mortgages are easier to calculate a payment schedule. If the existing first mortgage has an adjustable rate and payments have increased, the wraparound payment should change to compensate for the increase in payment. If the first mortgage payment decreases because of a favorable rate change, it is easier to leave the overall payment the same and apply any additional money toward the balance. The seller pockets any difference in payments after the existing loan is paid.

4. Open an escrow account with a title company or hire a real estate attorney to handle the transaction.

5. Arrange a closing date. Project the exact balance owed on the first mortgage as of the closing date and calculate the required payment necessary to "amortize" both the first mortgage payment and the new wraparound mortgage payment. The attorney or escrow officer will usually calculate this information.

6. Keep a good record of payments after the closing. Wraparound mortgages are complex and can involve multiple liens. A seller must keep good track of payments including how much of each payment applies to interest and principal on both the first and wraparound mortgages. The seller must provide a form to the Internal Revenue Service reporting the amount of interest paid on a seller-financed mortgage.

7. Buyers should request copies of payment receipts from the seller for each payment the seller makes on the first mortgage. A buyer could lose the house in foreclosure even if he/she has made all the payments. If the seller fails to make payments to the original lender, the buyer could get into trouble. It is prudent to obtains copies of payment receipts or the ending (year-to-date) statement on the first mortgage to see exactly how much has been paid off. In most cases, in the event of default by the holder (seller) on the underlying note, the maker (buyer) is allowed to cure the default and reduce his obligation under the wraparound note subject to the original lender agreement.

8. Buyer should request proof that insurance and taxes are being paid.
Caveat

Wraparound mortgages are not legal in all states and some lenders will not allow their loans to be wrapped. This type financing is not very common since most mortgages have a due-on-sale clause. Wraparound mortgages may also be referred to as all-inclusive trust deeds (AITD).


Good Luck!

[Dan Auito]

Outstanding post! Great information & resources above folks. Thanks Semore!

[steve-homefree]

What if the buyer files bankruptcy,and the property becomes part of a court action.
What about the first lien holder (bank) then.

Seems like the DOS clause might come into play.

I know everybody says that it never happens,and I believe that in other situations as long as the payment is being made everything is okay.

But with bankruptcy,the bank would definitely know of the sale.
This is my concern /problem with using a wrap to sell sub2 deals as well.
Seems like things could get ugly.

Anybody had this experience?
I hope not,but if you have.....


steve

[ThreeRiversREI]

First off, anyone considering a Subject-To, Wrap Mortgage, Lease-Option, Land Contract, or similar purchase OR sale technique that leaves existing financing in place NEEDS to read John T Reed's article, The truth about getting around due-on-sale clauses (http://www.johntreed.com/dueonsale.html).

Three important points
Triggering the "Due on Sale" clause can be dangerous (from a financial standpoint) but isn't illegal or immoral.
Deliberately concealing actions that would trigger the "Due on Sale" clause CAN be illegal (jail time) and immoral (loss of Realtor license, censure of an attorney, etc.)
ANY transfer of beneficial ownership has the potential to trigger the clause.


Many people will tell you that they've never heard of anyone getting caught, but that doesn't mean that it's a good idea. After all, how many people get caught going 10 mph over the speed limit? But would you want to base your financial future on ALWAYS getting away with it? Also, we're entering a lending environment similar to the one that got all the legislation on Due on Sales clauses enacted in the first place. As interest rates rise, lenders want an excuse to get paid so they can re-lend the money at higher rates.

My advice, don't give them one!

If your existing financing is private paper that doesn't include a Due on Sale clause, then go for it. If you have the property free & clear, feel free to Lease Option it to a tenant-buyer. If the outstanding balance is small enough that you're certain you'll be able to pay the underlaying loan off within 30 days at any (and EVERY) point for the remainder of the term, then maybe it's worth rolling the dice and taking your chances.

But if your underlaying mortgage is conventionally financed and you're not 100% certain you'll be able to handle your lender accelerating the loan, I would never advise you to take that sort of chance.

Also, please note that just because you CAN get away with your creative financing doesn't mean that you're still not opening yourself up to chance of your title becoming clouded if the other party (seller, if you're being creative in your purchase; buyer, if you're being creative with your sale; or BOTH if you're doing something like a sandwich lease) gets sued, declares bankruptcy, etc. Regardless of the steps you've taken, there is always the possibility that a court will determine that there is an equitable interest that can have a lien placed against it.

[Debbie]

3Rivers...

See my response about DOS and attorneys at "Is this a good Deal?" post.

My response would apply to here too.

Don't worry, 3Rivers, we'll keep on teaching you....