Seller-Financed Real Estate Part II (. . . Round, Round, Wraparound!)
Author: Clifton Gavin
This is part two of a Seller-Financed Real Estate blog. The first topic addressed Florida’s statutory requirements regarding filing a satisfaction after a buyer pays off a seller-financed mortgage. This article addresses a popular alternative financing tool for sellers of a home, who have a mortgage on the property.
Most everyone is familiar with the typical real estate transaction. The seller sells the home to a buyer and the seller uses the proceeds to pay off the existing mortgage. If, on the other hand, the seller does not wish to pay off the mortgage or if the buyer is unable or unwilling to obtain financing from either the seller or a traditional lender, the seller may want to explore a “wraparound” mortgage. A wraparound mortgage is a financing arrangement offering a seller the flexibility to sell the property to a third party without paying off the entire balance of the seller’s existing mortgage.
Generally, the seller and buyer enter a contractual arrangement where the seller agrees to accept a mortgage that is junior to the seller’s mortgage in an amount greater than the outstanding principal of the seller’s existing mortgage. The seller remains responsible to the lender for payments and compliance with the terms of the seller’s mortgage. The buyer agrees to make mortgage payments to the seller and the seller uses those funds to make the monthly payment. Just like the typical sales transaction, the seller executes a deed to the buyer, but the deed is subject to the seller’s mortgage.
Why haven’t you heard of this before? Well, likely because of the risk involved to the seller. Since the seller’s mortgage remains in place, the seller is still liable to the mortgage holder for all the terms and conditions of the mortgage and note. If the buyer stops making payments on the junior mortgage, the seller must continue to make the payments on the seller’s mortgage or the lender may foreclose.
Another risk to consider is that many mortgages have what is called a “due on sale clause.” This means that if the property is sold or conveyed to another party without the knowledge and approval of the seller’s mortgage holder, the lender can determine the seller is in default and require that the entire outstanding balance of the mortgage be paid. If not timely paid, the mortgage and note are in default and the lender could foreclose.
Although a wraparound mortgage could meet a seller’s needs under certain circumstances, it is not for everyone. If you are an individual holding a mortgage and promissory note on property and you have questions related to wraparound mortgages or if you’re a seller contemplating providing financing to a buyer, contact one of the experienced real estate attorneys at Moorhead Real Estate Law Group for a consultation.
Clif has been a member of the Moorhead team since 2017.
His primary area of expertise is Real Estate Law, Land Use and Zoning Law, and Estate Planning and Probate.
Click here to learn more about Clifton Gavin.