What is a wraparound mortgage in Texas?
If you are considering buying or selling a home in Texas, you may have heard of a “wraparound mortgage.” A wraparound mortgage is a type of financing in which the buyer may purchase property from the seller subject to an existing mortgage. Subsequently, the buyer and seller enter into a second mortgage that wraps around the existing mortgage on the property. This can be an abrasive option for some buyers and sellers, but it is important to understand the pros and cons before entering into a wraparound mortgage agreement.
What are the pros of a wraparound mortgage in Texas?
1.) Flexible Terms: Wraparound mortgages are private agreements between the buyer and seller. Therefore, they can be more flexible than traditional mortgages offered by banks and other lenders. This can make it easier for buyers to qualify for financing for sellers to find a buyer for their property; and
2.) Lower Closing Costs: Wraparound mortgages do not require the involvement of a bank or other lenders; they often have lower closing costs than traditional mortgages. This can make it more affordable for buyers and sellers to complete a transaction.
What are the cons of a wraparound mortgage in Texas?
1.) Legal Complexity: Wraparound mortgages can be more complex legally than traditional mortgages. If the seller has an existing mortgage on the property, they will need to obtain permission from their lender to enter into a wraparound mortgage agreement. Additionally, wraparound mortgages can involve multiple parties and require detailed documentation to ensure that all parties are protected.
2.) Default Risk: Wraparound mortgages involve multiple loans on the same property. There is a higher risk of default than with traditional mortgages. If the buyer defaults on the wraparound mortgage, the seller may be unable to remit payment toward the existing mortgage on the property. For example, if the seller was relying on the buyer’s payment under the second mortgage (proceeds that were intended to be paid towards the existing mortgage), the buyer’s failure to pay may put the seller at risk of defaulting under the existing mortgage.
3.) Due-On-Sale Clause: Most traditional mortgages contain a due-on-sale clause that can be enforced by a lender. If enforced, the borrowed may be required to pay off the entire loan if the property is sold and/or conveyed. This can make it difficult to sell a property with an existing mortgage. While some lenders may allow wraparound mortgage to be entered into, others may call the loan due if they discover that a wraparound mortgage has been executed.
Wraparound mortgages can be a useful tool for buyers and sellers in Texas real estate transactions, but they also come with risks and legal complexities. If you are considering a wraparound mortgage, please reach out to our office to schedule a consultation at 832-416-0950.
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