How do wrap around mortgages affect my DTI

6 Replies

Hi,

I am trying to understand how doing a wraparound mortgage will affect my ability to get more loans.  My rentals with regular mortgages on them add to my income (rent *.75 - payments).  But with a wraparound mortgage, there is no lease in place, even though there are monthly payments being made.  So would I show the details of the wraparound contract? What if it is for a new mortgage with the same bank? I wouldn't want them to know about the wraparound, since they can call the due on sale, right?  So how would I handle this?

Thanks in advance!

Originally posted by @Rivy S. :

Hi,

I am trying to understand how doing a wraparound mortgage will affect my ability to get more loans.  My rentals with regular mortgages on them add to my income (rent *.75 - payments).  But with a wraparound mortgage, there is no lease in place, even though there are monthly payments being made.  So would I show the details of the wraparound contract? What if it is for a new mortgage with the same bank? I wouldn't want them to know about the wraparound, since they can call the due on sale, right?  So how would I handle this?

Thanks in advance!

 If you are taking out a mortgage with a bank, fill out the application truthfully as asked. It is most likely a government insured loan you are applying for. Either way, you want to be truthful. You don't have to say anything beyond what is asked though. The bank will consider all income, all expenses and your credit report. You are borrowing somebody's money and just like you, they want to know it is a reasonable risk before they hand out their $$.

Normally, when you buy a property on a Wrap and you have a renter in there, it is simply treated as a rental with the same consideration as any other way you'd finance a rental. They will probably want to see proof of lease, rent amount, proof of payment on time, seasoning, etc. 

It is a totally different department that lends money than the department that services loans. The lending officer gets a commission every time they do a loan so they want the loan to succeed. They are very unlikely to call the servicing department and say anything (It could get them in trouble for divulging your private information.)

@Mike M. Thanks for the reply! Yes, I will definitely be honest when answering any questions, don't want to end my career in jail :)  I'm just trying to strategize and figure out how this approach will impact my ability to obtain loans.  

Just to clarify my situation, I would be *selling* with a wrap, not buying.  Meaning, after buying a property in cash, I will go to the bank and get a cashout refi (or delayed financing, depending on timeline).  After that, I will list the house for sale as an owner finance deal and close that with a wrap.  So I'd pay the loan to the bank, and the buyer would would pay his loan to me.  

I hear what you are saying about the loan originator not contacting the servicing department.  That makes sense. 

Originally posted by @Rivy S. :

@Mike M. Thanks for the reply! Yes, I will definitely be honest when answering any questions, don't want to end my career in jail :)  I'm just trying to strategize and figure out how this approach will impact my ability to obtain loans.  

Just to clarify my situation, I would be *selling* with a wrap, not buying.  Meaning, after buying a property in cash, I will go to the bank and get a cashout refi (or delayed financing, depending on timeline).  After that, I will list the house for sale as an owner finance deal and close that with a wrap.  So I'd pay the loan to the bank, and the buyer would would pay his loan to me.  

I hear what you are saying about the loan originator not contacting the servicing department.  That makes sense. 

Check with the bank to see how long they need for "seasoning" on a "cash purchase" property before they will do a refinance. Some will lend right away, some will want 6 months ownership, etc and ask what LTV (loan to value) they will do. Every bank is different.

Once you have done the refinance and sell to your buyer on a Wrap, (get a down payment from your buyer by the way) I get anywhere from $25,000 to $50,000 down, which I split with whatever partner I have that property with. 

If the buyer's payment is at least enough to cover your payment and taxes and insurance, you are good to go. Banks will typically limit you to 4 houses before they cut you off.

If you do things the way I do them by using "Subject To" to buy the properties, you get in more cheaply and there is no bank to cut you off so you can do as many of these as you care to. Your idea is sound. Just be aware that you can only do 4 that way. Using "Subject To" is unlimited.

When you sell using a Wrap, the loan still shows on your credit report. You can show the income from the buyer to offset the payment. Most banks view it as a "wash" and give full credit if the amount covers the underlying payment and taxes.

@Mike M. Thanks! That's exactly what I wanted to know. 

I believe the banks I talked to will do a cashout right away, they call it "delayed financing" within the first 6 months.  The difference is that delayed financing can only be done based on purchase price, not appraisal price.  The 6 month seasoning would allow the cashout to recover all the invested capital by basing it on appraisal price.  In this case, I'm opting not to wait, because I am not planning on putting significant work into the property, so I'm not sure I'd recover all my capital anyway, and I don't want to hold the property for 6 months because it's not in the best area.

Here's a rough idea of the numbers (if this deal works out, which I'm not sure it will)

Purchase price: 72k

Light rehab: 10k

Delayed Financing: 57k

Seller Finance: 110k, 10% down, 10% interest (I know someone who does many of these here in the DFW area for these numbers)

So my capital invested would be about 14k.  My monthly payments would be 297.  My monthly income from the note would be 869. Net monthly profit: 572, for an almost 50% yearly return, for the duration of the note. 

Also, about that limit of 4.  For some reason I thought that there is a limit of 10 for conventional loans.  Is it really just 4? A total of 8 (between me and my husband) would force me into non conventional much earlier than I was planning on.

Originally posted by @Rivy S. :

@Mike M. Thanks! That's exactly what I wanted to know. 

I believe the banks I talked to will do a cashout right away, they call it "delayed financing" within the first 6 months.  The difference is that delayed financing can only be done based on purchase price, not appraisal price.  The 6 month seasoning would allow the cashout to recover all the invested capital by basing it on appraisal price.  In this case, I'm opting not to wait, because I am not planning on putting significant work into the property, so I'm not sure I'd recover all my capital anyway, and I don't want to hold the property for 6 months because it's not in the best area.

Here's a rough idea of the numbers (if this deal works out, which I'm not sure it will)

Purchase price: 72k

Light rehab: 10k

Delayed Financing: 57k

Seller Finance: 110k, 10% down, 10% interest (I know someone who does many of these here in the DFW area for these numbers)

So my capital invested would be about 14k.  My monthly payments would be 297.  My monthly income from the note would be 869. Net monthly profit: 572, for an almost 50% yearly return, for the duration of the note. 

Also, about that limit of 4.  For some reason I thought that there is a limit of 10 for conventional loans.  Is it really just 4? A total of 8 (between me and my husband) would force me into non conventional much earlier than I was planning on.

 Sounds like a plan!

I have read on BP that some people have found banks that will do 10 but I think those are portfolio lenders. (Lenders who keep their loans.) You can ask a bank how many they will finance and under what conditions easily enough. From a quick look at the numbers, it looks like a sustainable way forward. ;-)

Well, it would have been nice.  I lose two deals in the last 2 days by being outbid by 1k or less.  

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