We recently encountered a situation where an elderly homeowner lost her home despite making all her payments on time. She had purchased the home using a wrap-around note and deed of trust. A wrap-around contract is a device where a purchaser agrees to make the payments on the seller’s first mortgage loan instead of obtaining his or her own financing and paying off the seller’s loan. It is a form of seller financing. Decades ago, these used to be common, but they have fallen out of favor since most mortgages now contain due on sale clauses. Wrap-around financing for a purchase violates the due on sale clause and creates a risk that the lender will call the loan all due and payable and foreclose if it is not immediately paid in full.

There are other risks as well. In our case, the original seller, despite collecting payments from the buyer/homeowner, stopped payment on the first mortgage loan. The lender foreclosed for non-payment. No notice was sent to the homeowner because she was not the borrower. The loan was still in the seller’s name.

In the current housing market buyers might find wrap-around mortgages attractive to enable them to take advantage of a low interest rate and low mortgage payment on a seller’s existing first mortgage loan. They may be unaware of the risk or deem the risk acceptable to get the benefit of a very low interest rate. We strongly recommend against this practice.

There are circumstances where a wrap-around purchase contract might be used to advantage but only where it is structured by a real estate attorney and then only for persons with the means to pay off the wrapped loan should it be called all due and payable.

If you have questions concerning a real estate matter or other legal matter, call one of our experienced attorneys at 602-277-4441 or use the form below to schedule a free consultation.