protecting yourself using wrap financing.

[Ivan Reyes]

We're purchasing a home using seller financing and a wraparound mortgage. The seller is the owner of the house we've been renting for 2 years.

My question is what protections should I be thinking about to make sure the first lien holder is being paid. Escrow agent?

If I find for some reason down the line that my landlord/seller has defaulted on the first, do I have to bring the first current to prevent them from foreclosing? I'd like to have a little more security in knowing the first is up to date.

Thanks for your input.

[Jon Holdman]

A wrap is sort of like a subject to, but not exactly. With a subject to deal, the buyer "takes over the payments" of the seller's existing mortgage. The buyer now makes the payments directly to the seller's lender, either directly or indirectly via an escrow service. The amount of the payment and the loan balance taken on by the buyer is exactly the same as the seller's original mortgage. The buyer is only responsible for the remaning payments.

With a wrap, and new loan is created between the buyer and the seller. This is independent of the seller's existing mortgage. The amount of the new loan, payment, interest rate, and terms are subject to negotiation between the buyer and seller. The new loan is said to "wrap" the original mortgage, or said to be a "wraparound mortgage."

Note that the seller's lender is not involved in any way with this new mortgage. Both a subject to or a wrap involve transfering owner ship from the seller to the buyer via a deed. As such, they violate the due on sale clause in the seller's mortgage.

A subject to makes sense when there's no equity. The buyer just takes over payments and the seller walks away with nothing.

If there's a small amount of equity, and the seller want's a little cash and the buyer has that amount of cash, then the cash can be handed over along with the subject to deal.

If there's a fair bit of equity, more than the buyer can pay out of pocket, a wrap makes sense. The seller gets some case (if desired) and gets a stream of payments that's larger and possibly longer than the stream of payments they must make on their existing mortgage.

In both cases, the existing mortgage stays on the seller's credit report. If that mortgage isn't paid, the lender will foreclose and take the property. The buyer would be out of luck, since the lender's claim on the property would override the buyer's claim.