Wrap-Around Loan
Candlefocus EditorThe seller of the property continues to maintain an outstanding first mortgage on the property, but the new buyer partially pays it off using the wrap-around loan. The remainder of the original loan is paid off by the mortgage payments from the new buyer. This offers an advantage to buyers because they don’t need to obtain a conventional bank loan, but just a loan from the seller.
For sellers, wrap-around loans provide an incentive for buyers to purchase the property, since the buyers don’t need to obtain a loan from a third-party bank or lender. Additionally, the seller can also negotiate better terms on the additional loan with the buyer and receive benefits from it.
However, wrap-around loans come with certain risks and obligations for both buyers and sellers. For the buyer, the risk is that the loan terms may be more complex than a conventional loan, which could make it difficult to qualify for or understand the loan. Additionally, the buyer may be in a financial situation where paying off the loan on time could be difficult.
For the seller-financier, the full default risk of both the existing and new loan are taken on, and they must ensure that they are able to pay off the original loan in full if the buyer fails to do so. This risk is compounded by the fact that the seller cannot foreclose on the property if the loan defaults.
In conclusion, wrap-around loans are a type of financing that can be beneficial for both buyers and sellers, but comes with its own set of risks. Buyers can save money on a conventional mortgage, while sellers can negotiate better terms on their loan. However, they must ensure they are aware of the full risks associated with the loan before proceeding.