A wraparound mortgage, wraparound trust deed, overriding trust deed or all-inclusive trust deed (AITD), also more commonly known as a wrap mortgage, is a mortgage in which the buyer of a property takes on the existing mortgage of the seller. The buyer does not take over the note of the mortgage; rather, he or she is taking advantage of the existing terms of the mortgage by paying the seller the mortgage payment every month. In turn, the seller will make the payments on behalf of the new buyer for the loan.
The wrap mortgage is common for buyers who cannot obtain traditional methods of financing and is particularly beneficial in periods of high interest rates. It is typical for the buyer of the property to use the wrap mortgage until he or she has the ability to qualify for the loan, at which point the conventional loan would replace the wraparound mortgage.
In the event the new buyer fails to make payments on the mortgage, the seller has the right to foreclose on the property. The buyer must pay the difference between the loan amount and the sold amount. This essentially acts as their down payment towards the house. Sellers have the ability to collect interest for the wraparound mortgage for the service they are providing the buyer.
To verify that this is a potential option, buyers and sellers should consult an experienced real estate lawyer to verify the possibility of this option. Some lenders do not legally allow for the borrower (seller in this case) to attempt to wrap their existing loan to a buyer.
Example of a common reason why a seller would assume a wraparound mortgage
Eric wants to purchase the Meyer’s property on Stuckey Street. The issue they are facing is interest rates have increased dramatically over the past six months, making the cost of ownership substantially higher than in the past. The Meyer’s have had little to no luck with their listing because the interest rates have made buying a home a less appealable option for buyers. When Eric approaches the Meyer’s and informs them of his interest rate, he mentions that he wants the property but the cost of financing makes it nearly impossible to afford the property being that interest rates are a full 4% higher than standard rates. The seller offers to provide the buyer with a wraparound mortgage to incentivize the buyer to purchase the property. Eric agrees.
A sale-leaseback is a method used by companies and individuals to sell an existing property and subsequently agree to lease it back. This strategy is particularly common for businesses that do not want the liability of having a mortgage and wish to save on costs incurred to their business (i.e. property taxes, maintenance.) It is also common for businesses that wish to sell the property for a profit. By selling the property, businesses and individuals reduce their liability while increasing their profits with reduced payments.