Wraparound mortgages can help home sellers boost their prices

With rates below 3%, these seller-financed loans can be a boon for buyers with bad credit and a money-maker for sellers. But they also can be risky.

April numbers are beyond horrifying.

An astounding 3.6 million homeowners were past due in April, an increase of 1.6 million since March. At 6.5% of all borrowers, April national delinquency rates nearly doubled compared to March data.

This is the largest single-month jump ever recorded, and it’s nearly three times the previous monthly record set back in 2008, according to Black Knight.

Back in the Great Recession, many borrowers saw their credit get wrecked through no fault of their own and got banished from conventional financing for seven long years.

It would be wise for Federal Housing Finance Director Mark Calabria to reconsider this Fannie, Freddie seven-year mortgage foreclosure timeout. We can always hope.

The mortgage underground economy may just provide a workaround for borrowers who currently are getting their on-time payment credit reputation wiped out by COVID-19.

With 15-year mortgages as low as 2.25% and 30-year mortgages as low as 2.75%, rates are as close to zero as you are going to see. It’s a no-brainer to pay the points and buy the rate down if you are going to keep the property for a long period of time.

What if you are going to sell within a few years? Does it still make sense to pay points and buy the rate down?

If you want to use the low rate as bait for a buyer, then yes.

A once-popular financing method called the “all-inclusive-trust-deed” (AITD), also known as a wraparound mortgage, can make it possible for you to take advantage of today’s low rates and then sell your home, financing a portion of the buyer’s loan yourself.

Under an AITD, the seller accepts a promissory note from the buyer without paying off his or her original mortgage. The buyer makes monthly payments to the seller, and the seller makes payments to the underlying lender.

For example: A buyer agrees to pay $1 million for a home, making a down payment of 35% or $350,000.

The seller’s existing first trust deed is a $500,000, 30-year fixed at 2.99%. The seller agrees to add $150,000 of his own funds to cover the gap between his $500,000 note and the buyer’s $650,000 note.

These wraparound mortgages are legal, but in some cases terms of an existing mortgage may not allow it.

When permitted, however, these loans could allow you to get a higher sales price on your house or earn a profit by providing a second mortgage or marking up the existing mortgage rate — or all three.

A buyer may be willing to pay more or pay a marked-up mortgage rate because he or she cannot qualify for a loan or because the mortgage rate offered is still much better than the current market rate.

Institutional lenders have standard “due on sale” clauses that mean they can call the note due when you sell the property. But lenders have a history of looking the other way as long as the monthly payment is being made. I have never heard of a note being called when an AITD was being paid on time. There’s no guarantee, though.

I’ve heard of many instances where the AITD documents are notarized but not recorded. Unrecorded deeds are probably a bad idea though.

“This is highly risky,” said Glenn Awerkamp, vice president at Lawyers Title.

A title company may reject a future title insurance policy on a previously unrecorded deed. And unscrupulous sellers could record other liens before this one eventually gets recorded.

Always get legal and tax advice before you execute an AITD or anything like it.

If you decide to go down this path, be sure to have a Plan B  should the seller’s mortgage holder come calling at a later date.

If you can save say 2% on a mortgage in a few years when rates are higher or buy a home when you otherwise may not qualify, an AITD should be of serious consideration.

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Jeff Lazerson - Mortgage Columnist since 2011