Wrap Around Transactions
A Wrap Around Transaction is a form of seller financing. There is a difference however, between a traditional seller financing of a property and a Wrap Around Transaction in that on a “Wrap” or “Wrap-Around” the current Mortgage lien on the property is not paid off. In this type of real estate Transaction the property is conveyed while the Mortgage lien that has the seller’s name on it stays in place. The Wrap Transaction now has a second, junior lien held by the seller.
Just to clarify, a Wrap Around Transaction is not illegal. A Wrap-Around is not a breach of contract nor a violation of the term “due-on-sale” clause that is part of most traditional mortgage transactions. According to Investopedia the due-on-sale clause is “A provision in a mortgage contract that requires that the mortgage be repaid in full upon a sale or conveyance of interest in the property that secures the Mortgage.” While in a Wrap Around Transaction the property is being transferred without the lender’s written permission and the lender could call the loan due, the language does not necessarily prohibit transferring the property specifically using a Wrap Around Transaction.
Home buyers today are asking about lease/purchase properties or assuming an owners loan, so is a Wrap the same as an assumption? No in both cases and here is why; in an assumption the buyer is assuming legal responsibility of the first mortgage lien “note” and in a lease/option the buyer doesn’t actually purchase the property until after the “lease” portion of the agreement has been met.
Please realize that in a wrap around mortgage, once the transaction has closed you now own the property. Other questions that often come up are when would the WrapAround end and who pays the taxes on the property? Who pays the taxes on the property is the simplest to answer and that answer is the new owner of the property and they also get the tax advantage via the interest deduction. As to when the Wrap Around Transaction ends is an open answer. Simply put it ends when the property is either sold or refinanced where the underlying note is paid in full and the remaining money that is due to the wrap lender is also paid in full.
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