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I am interested in learning more about wrap around mortgages. How they work. Will i go on deed? am i then responsible for taxes and repairs? Can I make upgrades and changes?is insurance in my name? will i get the tax benefits? How can i make sure that seller is paying mortgage? can i have a escrow company or attorney handle payments and last if seller forcloses on another property will i lose my house? the house in question has a assumable mortgage. thanks so much for your help.

A wrap-around mortgage is a form of secondary financing in which a seller extends to a purchaser a junior mortgage which wraps around and exists in addition to one or more superior mortgages. Under a wrap, a seller accepts a promissory note from the buyer for the amount due on the underlying mortgage plus an amount up to the remaining purchase money balance.
The new purchaser makes monthly payments to the seller, who is then responsible for making the payments to the underlying mortgagee. Should the new purchaser default on those payments, the seller then has the right of foreclosure to recapture the subject property.
Because wraps are a form of seller-financing, they have the effect of lowering the barriers to ownership of real property; they also can expedite the process of purchasing a home. An example:
The seller, who has the original mortgage sells his home with the existing first mortgage in place and a second mortgage which he "carries back" from the buyer. The mortgage he takes from the buyer is for the amount of the first mortgage, plus a negotiated amount less than or up to the sales price minus the down payment and closing costs. The buyer pays the seller, who then continues to pay the first mortgage with the proceeds of the second. Once the second mortgage is satisfied, the seller is out, but this is rarely the case.
Typically, the seller also charges a "middle" on the first mortgage. For example, one has a first mortgage at 6% and sell the whole property with a rate of 8% on a wraparound mortgage. He/she make a 2% middle on the first mortgage amount, using other people's money to make money. So, it is in the best interests of a seller to keep the wrap, rather than allow the buyer to assume the first mortgage.
As title is actually transferred from seller to buyer, most wraparound mortgage transactions will violate the due-on-sale clause of the underlying mortgage, if such a clause is present.

Here's another explanation by Jack Guttentag:

A wrap-around mortgage is a loan transaction in which the lender assumes responsibility for an existing mortgage. For example, S, who has a $70,000 mortgage on his home, sells his home to B for $100,000. B pays $5,000 down and borrows $95,000 on a new mortgage. This mortgage "wraps around" the existing $70,000 mortgage because the new lender will make the payments on the old mortgage.

A wrap-around is attractive to lenders because they can leverage a lower interest rate on the existing mortgage into a higher yield for themselves. For example, suppose the $70,000 mortgage in the example has a rate of 6% and the new mortgage for $95,000 has a rate of 8%. The lender’s cash outlay is $25,000 on which he earns 8%, but in addition he earns the difference between 8% and 6% on $70,000. His total return on the $25,000 is about 13.5%. To do as well with a second mortgage, he would have to charge 13.5%. I have a spreadsheet on my web site that calculates the yield on a wrap-around.

Usually, but not always, the lender is the seller. A wrap-around is one type of seller-financing. The alternative type of home-seller financing is a second mortgage. Using the alternative, B obtains a first mortgage from an institution for, say, $70,000, and a second mortgage from S for the additional $25,000 that B needs. The major difference between the two approaches is that with second mortgage financing, the old mortgage is repaid, whereas with a wrap-around it isn’t.

In general, only assumable loans are wrappable. Assumable loans are those on which existing borrowers can transfer their obligations to qualified house purchasers. Today, only FHA and VA loans are assumable without the permission of the lender. Other fixed-rate loans carry "due on sale" clauses, which require that the mortgage be repaid in full if the property is sold. Due-on-sale prohibits a home purchaser from assuming a seller’s existing mortgage without the lender’s permission. If permission is given, it will always be at the current market rate.

Wrapping can be used to circumvent restrictions on assuming old loans, but I don’t recommend using it for this purpose. The home seller who does this violates his contract with the lender, which he may or may not get away with. In some states, escrow companies are required by law to inform a lender whose loan is being wrapped. If a wrap-around deal on a non-assumable loan does close and the lender discovers it afterwards, watch out! The lender will either call the loan, or demand an immediate increase in interest rate and probably a healthy assumption fee.

When market interest rates begin to rise, interest in wrapping assumable loans will also rise. The incentive to sellers is powerful, since not only do they acquire a high-yielding investment, but they can often sell their house for a better price. But the high return carries a high risk.

When S in my example sold his house with a wrap-around, he converted his equity from his house, which he no longer owns, to a mortgage loan. Previously, his equity was a $100,000 house less a $70,000 mortgage. Now, his equity consists of the $5,000 down payment plus a $95,000 mortgage that he owns less the $70,000 mortgage that he owes.

The new owner has only $5,000 of equity in the property. If a small decline in market values erases that equity, the owner has no financial incentive to maintain the property. If the buyer defaults on his mortgage, S will be obliged to foreclose and sell the property to pay off his own mortgage.

In some seller-provided wrap-arounds, the payment by the buyer goes not to the seller but to a third party for transmission to the original lender. This is an extremely risky arrangement for the seller, who remains liable for the original loan. He doesn’t know if the payment on the old mortgage was made or not -- until he receives notice from the lender that it wasn’t. I recently heard from a seller who did such a wrap-around in 1996, and has been getting the run-around ever since. Payments by the buyer have often been late, and the seller’s credit has deteriorated as a result.

Or it can work out well, perhaps 9 of 10 deals do. The problem is that unless you know the buyer, you can never be sure that yours is not the 10th that doesn’t. The home seller who does a wrap-around can’t diversify his risk.

Found this interesting article on wraps:


MYTH #1 - The Seller Must Own Property Free and Clear to Offer Owner Financing
FACT: While zero existing debt on a property can be an advantage in seller financing it is NOT a requirement. In fact, the majority of owner-financed transactions have a prior debt incurred by the seller from when they bought the property. When the seller offers financing and this mortgage remains it is commonly known as a “Wraparound Mortgage” or “All Inclusive Trust Deed (AITD)”.
As the buyer makes payments to the seller on the new owner financing the seller must in turn continue to keep payments current with their lender. This type of arrangement comes with risk, including a senior mortgage holder calling their note all due and payable for violation of the due on sale clause as explained in Wraparounds With Underling Liens.
MYTH #2 – Seller Financing Just Involves FSBO Deals
FACT: - A portion of seller financed notes are created from For Sale By Owner (FSBO) transactions but there are equally as many sellers using the services of a Real Estate Agent. Experienced agents will often encourage sellers in slow markets to include “Owner Will Finance” in the MLS property listings.
These agents are still paid their commission at closing from proceeds, generally from the down payment funds. In the rare cases there are not sufficient proceeds to cover the commission at closing some agents have elected to take back a note themselves for a portion of their fee.
MYTH #3 – There Are Only Second Liens With Seller Carry Back Financing
FACT: The majority of seller financed notes sold to investors for cash on the secondary market are NOT second liens. If the seller wrapped an existing mortgage and still owes money the note investor will pay off the seller’s debt at closing from the note purchase proceeds. This puts the seller-financed note in first position.
There are also many second liens created from some version of the 80-10-10 transaction. This is where the buyer puts 10% down, obtains an 80% bank loan the seller carries back the 10% remaining balance as a second lien. The buyer’s new bank loan is in first position and the seller is in second position.
These small second position notes are highly risky transactions, especially in a falling real estate market. Many note investors decline to purchase a small second due to the high risk of default on a low equity high LTV subordinate lien. This is covered in more detail in Should I Owner Finance a Second Mortgage?
Recognizing these common misconceptions and their myth busters will help sellers, investors, brokers, and buyers put seller financing to good use during the sub prime mortgage meltdown.

A wrap-around mortgage is a loan transaction in which the lender assumes responsibility for an existing mortgage. For example, S, who has a $70,000 mortgage on his home, sells his home to B for $100,000. B pays $5,000 down and borrows $95,000 on a new mortgage. This mortgage "wraps around" the existing $70,000 mortgage because the new lender will make the payments on the old mortgage.

A wrap-around is attractive to lenders because they can leverage a lower interest rate on the existing mortgage into a higher yield for themselves. For example, suppose the $70,000 mortgage in the example has a rate of 6% and the new mortgage for $95,000 has a rate of 8%. The lender’s cash outlay is $25,000 on which he earns 8%, but in addition he earns the difference between 8% and 6% on $70,000. His total return on the $25,000 is about 13.5%. To do as well with a second mortgage, he would have to charge 13.5%. I have a spreadsheet on my web site that calculates the yield on a wrap-around.

Usually, but not always, the lender is the seller. A wrap-around is one type of seller-financing. The alternative type of home-seller financing is a second mortgage. Using the alternative, B obtains a first mortgage from an institution for, say, $70,000, and a second mortgage from S for the additional $25,000 that B needs. The major difference between the two approaches is that with second mortgage financing, the old mortgage is repaid, whereas with a wrap-around it isn’t.

In general, only assumable loans are wrappable. Assumable loans are those on which existing borrowers can transfer their obligations to qualified house purchasers. Today, only FHA and VA loans are assumable without the permission of the lender. Other fixed-rate loans carry "due on sale" clauses, which require that the mortgage be repaid in full if the property is sold. Due-on-sale prohibits a home purchaser from assuming a seller’s existing mortgage without the lender’s permission. If permission is given, it will always be at the current market rate.

Wrapping can be used to circumvent restrictions on assuming old loans, but I don’t recommend using it for this purpose. The home seller who does this violates his contract with the lender, which he may or may not get away with. In some states, escrow companies are required by law to inform a lender whose loan is being wrapped. If a wrap-around deal on a non-assumable loan does close and the lender discovers it afterwards, watch out! The lender will either call the loan, or demand an immediate increase in interest rate and probably a healthy assumption fee.

When market interest rates begin to rise, interest in wrapping assumable loans will also rise. The incentive to sellers is powerful, since not only do they acquire a high-yielding investment, but they can often sell their house for a better price. But the high return carries a high risk.

When S in my example sold his house with a wrap-around, he converted his equity from his house, which he no longer owns, to a mortgage loan. Previously, his equity was a $100,000 house less a $70,000 mortgage. Now, his equity consists of the $5,000 down payment plus a $95,000 mortgage that he owns less the $70,000 mortgage that he owes.

The new owner has only $5,000 of equity in the property. If a small decline in market values erases that equity, the owner has no financial incentive to maintain the property. If the buyer defaults on his mortgage, S will be obliged to foreclose and sell the property to pay off his own mortgage.

In some seller-provided wrap-arounds, the payment by the buyer goes not to the seller but to a third party for transmission to the original lender. This is an extremely risky arrangement for the seller, who remains liable for the original loan. He doesn’t know if the payment on the old mortgage was made or not -- until he receives notice from the lender that it wasn’t. I recently heard from a seller who did such a wrap-around in 1996, and has been getting the run-around ever since. Payments by the buyer have often been late, and the seller’s credit has deteriorated as a result.

Or it can work out well, perhaps 9 of 10 deals do. The problem is that unless you know the buyer, you can never be sure that yours is not the 10th that doesn’t. The home seller who does a wrap-around can’t diversify his risk.