What is a Wrap Mortgage
Complete Guide to Wrap Mortgage
Everything you need to know about Creating or Selling a Wrap Real Estate Notes
Over 30 Billion Dollars of Seller Financed Notes were created in 2022!
Mortgage (Aka Deed of Trust): A Legal Security Document that “secures” a piece of real estate to an obligation to repay money (Promisory Note)
Note (Aka Promissory Note, IOU): A Legal Document between a Lender and a borrower, which the borrower agrees to pay the lender back. It includes the Amount, Interest, Term, Monthly Payment and balloon amount, if applicable.
Land Contract (AKA CFD, Contract for Deed): A Mix between a Mortgage and a Rent Agreement. The borrower agrees to pay a designated amount until a determined date. At which time the deed is transferred to their name.Sell Your Wrap Note
What is a Wrap Mortgage?
(Aka wrap loan, overriding mortgage, agreement for sale, or all-inclusive mortgage.)
A type of Seller Finance Junior Mortgage which includes (or wraps-around) the original 1st mortgage. The seller of the wrap will sell the property to a new borrower who will pay a monthly payment (Principal and Interest) to the seller.
The New Borrower will sign a Promissory Note which includes the cost of the 1st note plus additional amount to cover the cost of the sale price of the home.
Benefits of a Wrap Real Estate Mortgage
- You are into a property where a 1st position mortgage is at a low interest rate
- You can create a loan without any capital
- The new loan allows you to create great cashflow!
- Sell the new Wrap to a Note Investor, then go get another one to repeat the process.
- Create an opportuntiy for buyers who don’t qualify for bank mortgages.
Risks of Creating a Wrap Mortgage
- If the seller still has an existing mortgage, especially one that’s still relatively high, the original lender must agree to this secondary loan.
- If Wrap Borrower defaults you still need to make the payment to 1st Mortgage
- If Wrap Borrower defaults you will have to foreclose.
- Ensuring you have all the legal documents from the original Borrower to speak and act on their behalf for the 1st Mortgage.
*What to look out for “Dos and donts”/Pitfalls
What is needed to ensure Wraparound Mortgage Safe?
- Ensure all the Subject-to and legal documents are collected from the original borrower are collected.
- Power of Attorney
- Authorization forms
- 1st Position Mortgage holder approves
- New Wrap Borrower is underwritten correctly
- Check Usure Laws for your state to stay below max Interest Rate
- Check Debt License requirements for your state.
- Ensure the Mortgage and Note is professionally written up.
Selling a Wrap Note for Highest $$
For Note Buyers, there are multiple factors that go into buying a note to come up with a bid price. The focus is always around the desired return. If a note is Performing or Non-Performing and what state the property is located. Note buyers will buy either off of the Unpaid Legal Balance of the note or Property value, which ever is lower.
Create a 80/20 note for the new borrower so that you can sell the 80% and keep the 20%!
Note Factors to reduce the Discount off the Unpaid Principal Balance and get the most money for the note.
- Lower the term the less of a discount
- High Interest Rate (Without going over State Usury Rules)
- Stay in states that have a faster foreclosure process and dont require a Debt License.