Wrap around mortgage/owner financing

6 Replies

I have a client who wants to buy a house now, but is looking for owner financing.  The client is an attorney who is low on cash but has a case paying out in a couple of months, so they can't get a tradional mortgage now.  The issue is the house they want to buy is not owned outright.  Could they do a wrap around mortgage where they purchase the house at a higher interest rate than the current owner has and would the bank who owns the current mortgage have any say?

Your client could certainly buy the property through a wrap if the seller agreed to it. It would be in violation of the due on sale clause in the underlying mortgage, but the banks generally do not call loans due as long as they are getting their payments. Especially if it was a fairly short term agreement, like less than 3 years, the bank would be very unlikely to find out or care.

As I understand it the "Due On Sale" clause is an option that the bank can exercise and that it is not a violation of the mortgage. The Loss Mitigator would have to decide if it would be worth the trouble to go thru foreclosure especially if there is little equity and poor economy in the local area. If mortgage payments are made on time, the property is in good repair and everything else is going smoothly  there isn't an immediate concern by the bank in my opinion. 

Find a residential mortgage originator to write the loan and do the wrap. Close with a knowledgeable attorney. Most real estate attorney handle this without a problem. The due on sale clause is a trigger, not a rule to be broken. It give the bank the option which they don't exercise if the mortgage is paid. Just keep the insurance in the homeowners name and add the new owner to the policy. Done...

Whoever is representing the seller should also be careful here; If the attorney's big case doesn't come through, and he can't keep making his payments, it'll be really tough to evict a wrap-purchaser, as he arguably has equity in the property.  Likewise, it'll be tough to foreclose on him, as the 1st-position lender would get notice, which could also trigger the due-on-sale clause.

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