Assumption vs wrap and subject too

12 Replies

Originally posted by @Nate Bibbo :
I am familiar with how an assumption works. How is a “Wrap” and “Subject too” different? Thanks!

Wrap is a wrap around mortgage.

You as the BUYER buys a property with an existing mortgage on it. Seller agrees to sell on owner financing - and a Mortgage Note is created that "wraps" the existing mortgage. Title is conveyed upon you fulfilling or satisfying the note (or the terms of the seller financing).

In a Subject to - it's short for buying a house subject to the existing mortgage.

You as the BUYER gets the property deeded to you (title change from seller to you). There is no mortgage created and you're getting the deed.

@Nate Bibbo - With an assumption you would be responsible for the mortgage from the point you assume the loan. In subject to the seller will always be responsible for the mortgage and as the buyer it will never be in your name, the mortgage that is.

A sub 2 can trigger the due on sale clause unless you get approval from the note holder and is usually done as a direct to sale resolution, a wrap is usually done with longer term benefits to the seller and through a proper title company that can assure its legally set up and protected from clauses triggered

Originally posted by @Michael Ealy :
Originally posted by @Nate Bibbo:
I am familiar with how an assumption works. How is a “Wrap” and “Subject too” different? Thanks!

Wrap is a wrap around mortgage.

You as the BUYER buys a property with an existing mortgage on it. Seller agrees to sell on owner financing - and a Mortgage Note is created that "wraps" the existing mortgage. Title is conveyed upon you fulfilling or satisfying the note (or the terms of the seller financing).

In a Subject to - it's short for buying a house subject to the existing mortgage.

You as the BUYER gets the property deeded to you (title change from seller to you). There is no mortgage created and you're getting the deed.

 just to add on to this.. Google All inclusive deed of trust  in CA.. and read that document..  wraps are seconds and in most that we have done title transfers just like a sub too.. if title does not transfer then thats a contract for deed.. minor difference 

Originally posted by @Justin Kane :

A sub 2 can trigger the due on sale clause unless you get approval from the note holder and is usually done as a direct to sale resolution, a wrap is usually done with longer term benefits to the seller and through a proper title company that can assure its legally set up and protected from clauses triggered

the wrap is simply a junior mortgage..  but unlike say you have a 100k first and a 20k second ( junior) your wrap is 120k wrapping the 100k but is still a junior mortgage. 

CA dealt with this in the early 80s  and came up with a deed specific for these transactions   Called

All inclusive deed of trust.. I suggest folks read these they are really informative on how these deals go down on paper.

My dad had a company call CA wrap LOL circa 1980 he did hundreds upon hundreds of them.  Keep in mind this was when interest was 15 to 18%  we would buy sub too at 5 or 6 % old mortgages and then wrap them with 15 to 18% wraps. so we made delta on the price jump and major delta on the interest.. have not thought about that in 25 years but thats what we did most of the 80s.. I think one year he did 800 transactions.

Originally posted by @Michael Thompson :

@Nate Bibbo - With an assumption you would be responsible for the mortgage from the point you assume the loan. In subject to the seller will always be responsible for the mortgage and as the buyer it will never be in your name, the mortgage that is.

 With an Assumption you have to make formal application to the lender who then runs your credit, checks your income, etc just like applying for a normal mortgage loan. There will be a title report and escrow. The lender will require it. They either approve or reject your application. Assumptions are pretty rare right now. The general benefit would if rates were high and the loan had a low interest rate and you could "assume" that low interest rate. If rates are low there is no incentive to assume the loan.

A Subject To is taking over the loan on a property. No bank is involved. The Due on Sale clause can be invoked but rarely is at this time. You should always have a title report, and always close escrow just like any other purchase. The loan stays in the name of the seller but they have no way to get the house back or do anything if you stop making payments. It is bad form to stop making the payments, so always make the payments. You can have a third party service handle payments. You send the payment to the service company (escrow) and they send it to the lender. Sometimes people send the payment to the seller who spends the money. That is bad form. Don't send the money to the seller. Subject To is very risky for the seller. There is little risk to the buyer. 

As stated above a Wrap is simply creating a new note that "wraps" the original one. You should always have a title report, and always close escrow just like any other purchase. 

So for instance, the house is worth $200,000 and the seller has a loan on it of $160,000 at 4% for 30 years and payment is $764 and he is willing to sell to you for $190,000 at 5% for $1,020 a month. 

The original loan stays in place and an additional loan is created for $190,000 from you to the seller. You pay the seller $1,020 a month on your note and the seller pays the lender $764 a month on his note and keeps the difference of $256. 

So, he has sold the house and he didn't have to pay a real estate agent 6% of $190,000 saving $11,400 and wait for the property to sell 

and you have bought the house and you didn't have to qualify with a bank.

Originally posted by @Nate Bibbo :

@Mike M. what do you think about using a wrap instead of an assumption on an FHA loan to avoid the residency requirement?

 To do an assumption you have to apply just like a normal loan. There is no advantage. 

A Wrap would work but title companies are reluctant to do that with FHA loans for obscure reasons. Use an attorney that understands real estate.

Originally posted by Account Closed:
Originally posted by @Nate Bibbo:

Account Closed what do you think about using a wrap instead of an assumption on an FHA loan to avoid the residency requirement?

 To do an assumption you have to apply just like a normal loan. There is no advantage. 

A Wrap would work but title companies are reluctant to do that with FHA loans for obscure reasons. Use an attorney that understands real estate.

we never wrapped a bank loan only seller carry back.. you could do that back in those days were there were tons of seller carry mortgages because of the environment we were in.  Plus my Dad was pretty sharp. :)