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If a homebuyer’s credit scores are not good and he is hoping to qualify for a mortgage from the financial institutions and is unable to then another option is a wraparound loan.
In a wraparound loan, a homebuyer takes out a loan from the home sellers, who wraps this new loan to the mortgage that they already owe on their home.
The seller still continues paying the original mortgage, and the buyer pays off his own wraparound loan to the seller, which can be used to help pay off their original loan by the seller, or he can use the money for other purposes.
A wraparound loan provides some advantages to buyers and sellers, even though it comes with risks. Let us know more about wraparound loans, to decide it is the right mortgage for you.
In a wraparound loan, there are two lenders: the seller, and the lender for the original mortgage.
Wraparound loans are considered as a “junior mortgage,” which is an additional loan alongside the primary loan and both are secured using the home as collateral.
The buyer and seller agree on a price for the home, then the seller gives the buyer a loan for the difference between the amount owed on the existing mortgage and the home’s new sales price.
For instance, if the balance due on the original mortgage is $100,000, and the buyer agrees to purchase the home for $250,000. The seller will create a second mortgage for the difference, of $150,000.
Then the buyer makes the payments to the seller on the new loan, and the seller makes the payments on the original first mortgage.
Wraparound loans are unconventional, and a good chance for both homebuyers struggling to secure a mortgage and sellers in distress.
It gives buyers an opportunity to purchase property with their low credit score and don’t qualify for a traditional mortgage.
As the buyer is working directly with the seller he may be able to negotiate for a better price and expect a faster closing time frame.
Likewise, sellers can negotiate a higher interest rate on the wraparound loan than what they pay. Enabling the sellers to earn a profit which could help in paying off their own loan or take care of other expenses.
The seller can also complete the sale faster especially if their home has been sitting on the market for a while.
Despite the benefits of a wraparound loan both the buyer and seller, should be aware of the risks on both sides.
As either party could default on the loan at any time, leaving the other partner in trouble.
So even if the buyer doesn’t make his mortgage payment, the seller would still need to make his payments or risk defaulting on the loan.
In a wraparound loan, the seller’s mortgage takes priority so if the seller doesn’t make the mortgage payments, leading the bank to foreclose.
Sellers also need to check with their mortgage lender to make sure their loan doesn’t have a due on sale clause before getting into a wraparound loan.
Where a homeowner requires to pay off his mortgage in full when selling his home, and prevent them from participating in a wraparound loan.
A buyer risks foreclosure in a wraparound loan if the seller doesn’t pay the original mortgage.
A buyer in addition to paying higher interest rates sometimes may need to shell out a huge, non-refundable down payment.
Reference Source: Realtor.com
