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What is a Wrap Around Mortgage? A Comprehensive Guide
Definition & Meaning
A wrap-around mortgage is a type of financing arrangement where a lender takes over an existing mortgage while providing a new loan that encompasses the original mortgage amount. Typically, the seller acts as the lender in this arrangement, allowing the buyer to make payments that cover both the existing mortgage and the new loan. This method is often used in seller financing situations.
Unlike a second mortgage, where the original mortgage is paid off, a wrap-around mortgage does not require the original loan to be settled. This arrangement is primarily applicable to assumable loans, which are loans that can be transferred to a new borrower without needing lender approval. Currently, only FHA and VA loans are automatically assumable, while most conventional loans include "due on sale" clauses that mandate full repayment upon property transfer.
Table of content
Legal Use & context
Wrap-around mortgages are commonly utilized in real estate transactions, particularly in seller financing scenarios. They are relevant in various legal contexts, including property law and contract law. Users can manage some aspects of this process independently by utilizing legal templates available through services like US Legal Forms, which can help in drafting necessary documents.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A homeowner has a $150,000 FHA loan with a low interest rate. They sell their home to a buyer who cannot qualify for a traditional mortgage. The seller offers a wrap-around mortgage of $200,000, which includes the existing loan. The buyer makes monthly payments to the seller, who continues to pay the original mortgage.
Example 2: A seller with a VA loan wants to sell their home quickly. They offer a wrap-around mortgage to a buyer, allowing the buyer to take over the payments while the seller retains the original mortgage. This arrangement benefits both parties when traditional financing is not feasible. (hypothetical example)
State-by-state differences
Examples of state differences (not exhaustive):
State
Wrap-Around Mortgage Regulations
California
Wrap-around mortgages are generally permissible but must comply with state lending laws.
Texas
Specific regulations exist regarding seller financing and wrap-around mortgages, requiring disclosures.
Florida
Wrap-around mortgages are allowed, but lenders must ensure compliance with state usury laws.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Description
Key Differences
Wrap-Around Mortgage
A loan that wraps around an existing mortgage.
Does not require the original mortgage to be paid off.
Second Mortgage
A loan taken out against a property that is already mortgaged.
Requires the original mortgage to be paid off.
Assumable Loan
A loan that can be transferred to another borrower.
Not all loans are assumable; only certain FHA and VA loans are automatically transferable.
Common misunderstandings
What to do if this term applies to you
If you are considering a wrap-around mortgage, it is essential to understand the terms and implications of this financing method. Here are steps you can take:
Consult with a real estate attorney to ensure compliance with local laws.
Explore US Legal Forms for templates that can help you draft necessary agreements.
Consider your financial situation and whether a wrap-around mortgage is the best option for your needs.
In complex situations, seeking professional legal assistance is recommended.
Find the legal form that fits your case
Browse our library of 85,000+ state-specific legal templates.
A wrap-around mortgage is a financing arrangement where a new loan wraps around an existing mortgage, allowing the seller to finance the buyer's purchase.
Yes, wrap-around mortgages are legal, but they must comply with state-specific regulations.
Only assumable loans, such as certain FHA and VA loans, can be used in a wrap-around mortgage.
If the buyer defaults, the seller can initiate foreclosure proceedings on the property.
Yes, wrap-around mortgages can be used for investment properties, but it is essential to understand the associated risks and regulations.