The downsides of a wrap-around mortgage
Q: My sister just got married and would like to sell her house. She will be moving into her new husband’s current home not far away. I would like to buy my sister’s home. Unfortunately, my credit isn’t very good. My soon-to-be brother-in-law says that we can all get what we want through a wrap-around mortgage. What is this?
A: This is a simple concept that can have some risky downsides. Simply put, a wrap-around mortgage is on is which the seller of the house acts as the lender by collecting mortgage payments from the buyer without paying off the seller’s original mortgage.
The advantage for you is that you won’t have to go through a mortgage approval process. All you have to do is come to an agreement about the terms of the mortgage and create a legal document to memorialize these terms.
The risks of this are many. The first is that many mortgages from traditional lenders have an acceleration clause that requires a payment in full should the ownership of the property change. If your sister keeps this change a secret from the original lender, there could be trouble in her future.
A second risk involves the dependability of her payments to the original lender. Is she falls behind, even if you are up to date, she may not be able to transfer the title to you in the future. In the worst case, the original lender could foreclose.
A similar option, if your sister has the financial capability, is to provide owner financing. This means that she would have to pay off the original mortgage and accept mortgage payments from you, just as would a mortgage company. You would receive title to the property at the closing.
Another option is for you to obtain a sub-prime loan. Unfortunately, the interest rates and terms are not as attractive as loans that are available to those perceived as less of a credit risk.
A third option is for you to lease from your sister with an option to buy. If you are close to repairing your credit, it may not be very long before you are able to obtain a traditional mortgage.
Exploring the risks and advantages of methods of financing the purchase of your sister’s home with a mortgage attorney is a good idea.
Attorney Sylvia Heldreth is a Certified Specialist in Real Estate Law. Her office is located at 1215 Miramar Street in Cape Coral.
This article is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.