The Special Kind of Mortgage for People Who Don’t Qualify for Traditional Home Loans

published Feb 22, 2021
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For borrowers who don’t qualify for traditional financing due to issues with their credit or income, homeownership may feel out of reach. Fortunately, there are some options available for those who need to get a little creative with financing their home. Wraparound mortgages are one of the options available to those who may need to sidestep traditional lending programs in order to get into their dream home. But they shouldn’t be your first choice for financing if you do qualify for a conventional mortgage.

What is a wraparound mortgage? 

Also known as seller financing, a wrap, or a seller carry-back, a wraparound mortgage is a junior loan that is issued by the seller and is provided in conjunction with a separate larger loan. “A wraparound mortgage is essentially an alternative way to provide seller financing on a home without the buyer obtaining traditional conventional financing,” explains Casey Taylor, founder of Taylor Elite Group. “This type of financing often involves a second mortgage that is provided to ‘wrap’ the existing first mortgage.” These types of mortgages can be used when a borrower won’t qualify for a loan that covers the entire purchase price of the property and needs to leverage the seller’s existing mortgage in order to finance the home. 

What does a wraparound mortgage look like in real life?

To purchase a home using a wraparound mortgage you’ll need to find out how much the seller still owes on their existing mortgage and what their monthly payment is. For example, if you want to purchase a home for $75,000, and the seller still owes $55,000 on their mortgage, you’ll need to ask them for a $20,000 wraparound mortgage. If they are paying $750 a month for their mortgage, and want you to pay $450 a month for the $20,000 note they’re issuing you, you’ll end up making a total monthly payment of $1,200 for a combined loan amount of $75,000. Instead of mailing two monthly mortgage payments, one to the seller and one to the bank that holds the original note, you’ll send one payment to the seller who would then cut a check to the mortgage holder every month. 

Both the original loan and the new subordinate (or second) mortgage will be secured against the property, and will be legally binding like a traditional mortgage. But, unlike traditional financing, you may not have to jump through as many hoops to get qualified which is why wraparound mortgages can be appealing in some situations. 

Is a wraparound mortgage right for you?

While it may be the perfect way to get into your dream home when you’re unable to obtain traditional financing, a wraparound mortgage isn’t always the best choice. Only assumable mortgages or those that can be transferred from one borrower to another during a sale (like some types of loans offered by FHA and VA lenders) are eligible. Additionally, you’ll need to find a seller with the means to offer this type of financing, since it will involve them having to forgo a lump sum payout in lieu of a monthly payment. “It is recommended that both buyers and sellers fully understand this method of financing due to its complexity,” Taylor says.