Issue link: https://nest.uberflip.com/i/1391738
What is a wraparound loan? Wraparound loans are a type of seller financing—where the seller loans the buyer money to purchase the house—but the key difference with a wraparound loan is that there are two lenders: the seller, and the lender for the original mortgage. With [traditional] seller financing, the seller is the only lender, however with a wraparound loan, there are effectively two loans. There's the seller's existing mortgage on the home, which remains intact, and the new, wraparound loan the buyer pays the seller, which covers whatever price the buyer has agreed to pay for the home. Wraparound loans are considered a "junior mortgage." A junior mortgage is an additional loan that exists alongside the primary loan— both of which are secured using the house as collateral. How wraparound loans work To start a wraparound loan, the buyer and seller agree on a price for the home. Then the seller gives the buyer a loan that covers the difference between the amount owed on the existing mortgage and the home's new sales price. For example, let's say the balance due on the original mortgage is $100,000, and the buyer agrees to purchase the home for $250,000. The seller would create a second mortgage for the difference, which would be $150,000. From there, the buyer makes the payments to the seller on the new loan, while the [seller] who holds the second mortgage makes the payments on the original first mortgage. Benefits of a wraparound loan Wraparound loans are unconventional, but they can be an opportunity for both home buyers struggling to obtain a mortgage and sellers in distress. Wraparound loans give buyers an alternative way to purchase property when they have a low credit score and don't qualify for a traditional mortgage. Buyers may also be able to negotiate a better price for the home and a faster closing time frame, since they're working directly with the seller. So what's in it for the seller? Sellers can (and in most cases should) negotiate a higher mortgage interest rate on the wraparound loan than the interest they pay themselves. This, in turn, would enable the sellers to earn a profit that could go toward paying off their own loan or other expenses. A wraparound loan works best for buyers who do not qualify for traditional mortgages with lenders and sellers who aren't able to pay their mortgage on their own. Another benefit for sellers is that they can also complete the sale more quickly—an important consideration if their home has been sitting on the market for a while.