Wrap Mortgage

I spent much time reading blogs on the owner financing real estate transactions, and there seems to be myth out there that you can not make financing owner if the property is not free and clear. I'm here to bust that myth.

A common way to sell a property with an existing mortgage is the process of "conditioning" of the mortgage. In other words, the seller makes a note that is at least as large as the mortgage, and then uses the proceeds of incoming payments making the mortgage payments.

For example, suppose that the price of the house is $ 100 000, and the existing mortgage is $ 60,000. The payments on the mortgage are $ 500 per month. Billy buyer seller told Sam that he has only $ 20,000 to put down. In addition, Billy has some bruised and my credit are struggling to qualify for a mortgage. Sat retiring and moving to a smaller place. If he received $ 20,000 from the transaction, it would be OK.

Sam says to Billy, "Pay me $ 20,000 down payment, and give me a ticket for $ 80,000 to pay $ 700 a month." Sam will pay $ 700, use it to make their mortgage payments and pocket $ 200 a month. Billy did not get a mortgage, closing costs are lower, and it can move within weeks instead of months.

The note wraps $ 80,000 $ 60,000 mortgage. The product of the highest grade used to pay the smallest debt.

This is the great simple concept. Of course, there are details much more complicated than that, and it is a topic for another article. But there is one important thing to watch.

The mortgage company usually has the right to call the mortgage due and payable on any sale of the property.

That means several months or years after the sale, if the company discovers that Billy mortgages moved into the property it will ask Sam to pony up the whole $ 60,000 he owes. The mortgage company can not expect Billy to be paid, because he lent money to Sam But if it excludes the house, Billy is out of the house and all the money he paid Sat

Sounds scary, is not it? It may be, but here's the truth: it rarely happens. In today's market, the mortgage company would have preferred a mortgage of the stage, even if Sam does not live in the property to an empty house to foreclosure. I worked for a company that serves thousands of contracts wrapped, and there was only one mortgage called because of the last fifteen years due to a film.

Now, if interest rates go up, and mortgage companies are more market, this could change. If interest rates to 8%, 9%, 10% or higher, mortgage company of Sam will become more active in seeking mortgages wrapped. They will not hang on Sam's interest-free loan lower rate, and ask that it be re-funded.

Thus, the packaging of mortgage is relatively safe for the moment, but it can not always be so. The reason of sale clause is the source of the myth that it is not possible to sell a property by the seller financing with an existing mortgage. Is possible. He is not uncommon. It is not illegal. But there is some risk to it. You need to assess this risk.

As always, check with your lawyer and realtor before making any commitment. I strongly recommend that you do not all real estate transactions with professional advice. I am neither a lawyer nor a broker, I can not advise you.