RE Broker wants a WRAP rather than Sub2 - Explain like I'm 5?
South Central Alaska · Member since 2016 · 57 posts · 10 votes
I'm not sure about the suggestion of the broker that is selling this property.
I requested a Sub2 agreement with the seller (It's in probate, they're just trying to get out without losing money), and the broker said that a simultaneous closing won't work (because it's an FHA loan, I'm guessing?). She did suggest that we do a Wrap, and asked if I was interested in that. I'm thinking "same difference?"
The only benefit I can think of to doing the wrap is that the loan will season while we repair and sell the property, I think?
Do you see a good reason for the Wrap? I am asking her today, but I also know that she is not MY broker, she is the seller's. So I thought I'd reach out to the wisdom of BP.
Thank you in advance!
To be clear, a "wrap" is a form of a sub2, only the existing underlying loan gets "wrapped" into a new loan, given by the seller. As a Seller, I would Never do a sub2 as the seller gives up title and control, and hopes the buyer pays the underlying mtg, and has no recourse if they don't. With the wrap, they can at least foreclose if you don't pay the mortgage. It's no problem as long as you plan on paying the loan properly.
To be clear, a "wrap" is a form of a sub2, only the existing underlying loan gets "wrapped" into a new loan, given by the seller. As a Seller, I would Never do a sub2 as the seller gives up title and control, and hopes the buyer pays the underlying mtg, and has no recourse if they don't. With the wrap, they can at least foreclose if you don't pay the mortgage. It's no problem as long as you plan on paying the loan properly.
Derrick the reply that Mr Brooks wrote is the answer to your question. With that being said some folks are using forms that goes by other names just to give the seller security, example ( performance mortgage to secure assumption, ect)
@Wayne Brooks Thank you, I feel the same were I in the seller's seat, but if they will let me buy this way it saves me a down-payment, a lot of fees, and time.
@Account Closed I agree, it is probably just salesmanship. Just a way for the broker to get the seller to go for it and get the property off their table.
Anyone else have input?
I did some research into this, including using a lawyer to look over what I was doing, and I came to the conclusion that wrapping an FHA loan is a bad idea.
I'm my case, the loan didn't say they 'may' call the note due, it said they 'WILL' call it due upon transfer of ownership interest...
The experts on here I don't think we're focused on that aspect, but they are very knowledgeable and detailed in the many other reasons why they tell you not to do sub 2 and wraps on FHA loans.
Personally, I'm still open to doing a sub 2, as long as it's just temporary to get the home under contract. But I would definitely have a plan A and B on how to quickly get rid of the property's original financing...
Regarding federal loans that are guaranteed e.g. FHA
You always find a due on sale clause in the mortgage when you consider doing some kind of taking over payments like subject to for wrapping existing financing in a wraparound mortgage or all-inclusive trust deed
When Selling: avoid wrap-aitd, sub2, land contracts; do a lease with rofr and help the buyer get bank financing (search lease + rofr is better than a lease + option on BP)
When buying: best is sub2, then wrap, then cfd-lc, then lease w option.
I always say,
exit with a month to month lease on sub2 or
a fix and flip with a sub2;
NEVER wrap a sub2 purchase.
Also see Bill Gulley's TIC arrangement.
There are a number of reasons why a seller might prefer a WRAP over a Sub-2.
A seller concerned about satisfactory payments being made and their credit might use a WRAP to ensure buyer's payments are collected and forward, therefore credited to the original debtir's account.
However, estates are unconcerned with a deceased debtor's FICO score.
A WRAP with no equity might produce equity over time upon mortgage amortization principal pay down. I have several different versions depending on which hat I'm wearing.
There are other ways to mitigate assurance of payments by a sub-2 buyer. Another way is to give the seller a performance trust deed subordinate to the sub-2 mortgage that secures that payments are made and that equity is not skimmed.
‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑[Space Above This Line For Recording Data]‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑
DEED OF TRUSTTHIS DEED OF TRUST is dated
by and between [SELLER(S) NAME]
the grantor herein, whose address is [SELLER MAILING ADDRESS]
and YOUR COMPANY, Inc., whose address is
PO BOX 1234 COLORADO SPRINGS, CO 80949
The grantor, by an agreement dated even herewith is indebted to the beneficiary in the sum of
$[RETAIL VALUE – PURCHASE PRICE] Principal and interest are to be paid in such manner and at such place as designated in said obligation.In consideration of the obligation, grantor hereby grants, mortgages and coveys unto said Public Trustee all the real property together with all appurtenances and all the estate and rights of grantor in and to such premises described as
[INSERT FULL LEGAL DESCRIPTION – OBTAIN FROM O/E REPORT-USE LEGAL ON CURRENT DEED]
also known by street and address as [PROPERTY ADDRESS]
The grantor covenants that at the time of this Deed of Trust, he is seized of the property in fee simple, and that said property is free of encumbrances, except the existing 1st mortgage/deed of trust.
If grantor satisfies the obligations secured by this Deed of Trust, pays all taxes and assessments, maintains insurance against fire and other hazards, and does not suffer or commit waste on the premises, then this Deed of Trust shall be void.
It is agreed that in case of default in payment of said principal or interest or a breach of any covenant herein, then said principal sum secured hereby and interest thereon may, at the option of the beneficiary, be declared due at payable at once.
“Riders” means all riders to this Security Instrument that are executed by Borrower.
The following riders are to be executed by Borrower [check box as applicable]:
__Adjustable Rate Rider
__Condominium Rider Second Home Rider
__Balloon Rider Planned Unit Development Rider
__Other(s) [specify] Performance
__1-4 Family Rider Biweekly Payment RiderRider
Executed the day and year first above written.
__________________________________________________________________
Grantor/ Grantor/
On ________________, 20___, before me, _______________________, a notary public in and for said state personally appeared _________________________________, personally known to me (or proved to me based upon satisfactory evidence) to be the person(s) whose name(s) are subscribed to the within instrument and acknowledged that (s)he/they executed the same in his/her/their signature on the instrument the person(s) or entity on behalf of which they acted, executed the instrument.
_________________________
Signature of Notary
State of
My Commission expires______[SEAL]
PERFORMANCE RIDER TO
MORTGAGE OR DEED OF TRUST
Rider and addendum to Security Instrument dated ________________, 20_______
SELLERS NAME (“Obligor”), has executed a certain agreement dated ______________________ 2007 ("Agreement") under which Obligor is under an obligation to perform certain acts, promises and/or covenants to BUYER NAME (“Obligee”) on or before [END DATE OF LEASE PURCHASE AGREEMENT].
The attached Security Instrument (mortgage or deed of trust) secures to Obligor the performance of Obilgor's promises, covenants and agreements under said Agreement.Wherever the words “grantor,” “mortgagor,” “trustor,” or “borrower” appear in the attached Security Instrument, the word “Obilgor” shall be substituted therefore. Wherever the words “mortgagee,” “beneficiary” or “lender” appear in the attached Security Instrument, the word “Obligee” shall be substituted therefore.
_______________________________________________________________
Borrower/ Obligor – Borrower/ Obligor –
_________________________________
Lender/Obligee – BUYER
State of ___________________)
) ss:
County of _________________)
Sworn to and subscribed before me this ______ day of ____________, 20______ by the following individuals____________________________________________
____________________________
NOTARY PUBLIC
State of ______________________
Commission expires_____________
[SEAL]
With a wrap, there is formal documentation of the wrap. This gives the seller some legal protection. If the buyer defaults on payments to the seller on the wrap mortgage, the seller has the right to foreclose. A wrap is a form of sub 2 because the underlying mortgage is left in place. It different in that the wrap mortgage is the legal agreement between the buyer and seller. In a pure sub to, the seller has very little legal recourse if the buyer stops paying on the underlying mortgage.
Read the specific mortgage, but the general rules are that ANY sort of transfer of ownership constitutes a breach of the mortgage. While subject to and wrap are obvious, contract for deed, options and even leases longer than three years typically are considered breaches.
@Jon Holdman is talking about the Garn St Germain Act of 1982
"Part C Preemption of Due on Sale Prohibitions
DUE-ON SALE CLAUSES
(d) A lender may not exercise its option pursuant to a due-on-sale clause upon--,
(1) the creation of a lien or other encumbrance subordinate to the lender's security instrument which does not relate to a transfer of rights of occupancy in the property;
(2) the creation of a purchase money security interest for household appliances;
(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;
(5) a transfer to a relative resulting from the death of a borrower;
(6) a transfer where the spouse or children of the borrower become an owner of the property;
(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board. "
The Full Act is at
I see a lot of people recently buying their Sub-2's on a wrap. I agree with Brian on this one and prefer to just buy Sub-2.