Issue link: https://nest.uberflip.com/i/1391738
The risks of wraparound loans Despite the benefits of a wraparound loan to both buyers and sellers, both should be mindful of the risks on both sides before agreeing to this type of financing. Both buyers and sellers take on extra risks with wraparound loans, since either party could default on the loan at any time, leaving the other side in the lurch. For instance, if the buyers don't make their mortgage payments, the sellers still have to make their own mortgage payments or risk defaulting on their loan. If the buyer can't make those payments, the seller could then fall into default on their mortgage, meaning that their lender could take over ownership of the home through the foreclosure process. The seller's mortgage takes priority over the wraparound loan, which means if the seller doesn't make the mortgage payments, the bank could foreclose. Sellers should check with their existing mortgage lender before getting into a wraparound loan, to make sure their loan doesn't have a due-on-sale clause. This clause requires homeowners to pay off their mortgage in full when they sell their home, and prevent them from participating in a wraparound loan. Likewise, buyers risk foreclosure in a wraparound loan if the sellers don't keep up their end of the bargain to pay the original mortgage, and sometimes, in addition to paying higher interest rates, buyers may be asked to shell out for a large, nonrefundable down payment. The buyer owns property subject to someone else's mortgage—the seller's. Which means if the seller defaults, the buyer could end up losing the home. Should you consider a wraparound loan? Wraparound mortgages are rare, probably because they're complicated. Most buyers and sellers find traditional lenders and conventional or government-insured mortgages, such as a U.S. Department of Veterans Affairs or Department of Agriculture loan, much easier to work with. But sometimes, a wraparound loan may be the only way a buyer can qualify for a loan, and for homeowners to sell their home. In that case, a wraparound loan can be a helpful step to accomplish both of these goals. Buyers who can't qualify for a mortgage or don't want the hassle with the paperwork may benefit from a wraparound loan. Sellers having trouble selling a property with an existing mortgage or looking to convert equity into cash flow may be a good fit for a wraparound mortgage.