Owner Financing with an existing mortgage: Subject-To wrap
First of all, I must disclose that I am NOT a licensed attorney and that I am giving my humble opinion as to the question and the matters at hand, for better or for worse, correct or incorrect. I advise everyone to seek their own professional legal council on all matters “legal” such as the topic we are about to discuss..
Here is my “opinion…”
You absolutely can! It’s called a “Wrap-Around Mortgage” …where the person you owner financed your property to pays you and you pay your lender. Their mortgage “wraps around” your mortgage.
But be aware, technically you need permission from your lender (The 1st lien holder) to “wrap” their mortgage or they could call the note due.
I borrow money from private lenders and community banks that know from the very beginning of the conversation that I am looking for money to purchase properties that I will sell on a wrap. The permission to wrap is understood and expressly written into my loan agreements with them.
Wrap-Around Mortgages disclose your underlying debt to your purchaser. After all, if you DO NOT pay your first lien holder, everyone, including your buyer, could lose their interest in the property. Your buyer is at risk; they are in the 2nd lien position.
So it’s important that your buyer know how much you owe, to whom do you owe, and for how long do you owe. They may want to verify that you are staying current and making the first lien payment each month.
The good news is, there are ways to handle both kinds of wrap-around mortgages.
• The kind you have permission from the 1st lien holder to wrap.
• The kind you DO NOT have permission from the 1st lien holder to wrap (Subject-To deals).
SUBJECT-TO means you’ve take over control of a property “subject to” an existing lien or set of encumbrances. FYI – Many times, that act alone could give the lien holder(s) reason to call the note due…if you didn’t have the 1st lien holders permission.
The key is that both the buyer and seller completely understand the risks and sign off on them in writing. Finding an attorney to draw up documents for s simple “Wrap-Around Mortgage” is one thing. Finding an attorney to draw docs between you and your buyer for a Subject-To wrap (where you DO NOT have the first lien holder’s permission to wrap) is a totally different ball game!
Finding an attorney to draw up such a unique and niche document can be very challenging. The attorney you’re looking for must be very, very experienced in the arena of creative real estate investing. The good news is, they’re out there.