Wraparound mortgage...

Financing, Hard Money Lenders, Private Money
1

I’m considering selling an existing rental to my tenant via a wraparound mortgage. I have a couple questions on this scenario-

  1. If my buyer wants to refinance his note with me a few years down the road, how will his bank react when they see that there is already a first position note, and the note he is refinancing is a promissory note ‘wrapped’ around the first? Can he refinance his note with me in any way?

  2. What if my buyer wants to take some of his equity out via a home equity line of credit or loan? Can he go to another bank for this or do I have to loan him more money?

  3. How does home owner’s insurance work in this situation? I’m currently paying it and its in my name. Do i tell my insurance company about the deal and change it into my buyer’s name?

Thanks,

Simon

2

If you sell with a wrap, your buyer runs the risk of the underlying loan being called. Doesn’t happen very often, but it does happen. I only do this if I’m dealing with a VERY sophisticated buyer. If your buyer later wants to refi, both the underlying loan and your wrap get cashed-out. Each of you will be requested to provide appropriate pay-off statements.

The Equity Line of Credit is a personal loan but ties-up the property with still another encumbrance. Your buyer’s bank will lend in accordance with their appraisal of his credit standing and the net equity in the property regardless of the form of underlying financing.

Regarding insurance, I HOPE you meant to say you have a fire insurance policy and not a Homeowners policy on this rental. You do not have an insurable interest in the property of the tenant. When the tenant buys the property and takes title to the property, he gets his own Homeowner policy. You should be named as an “additional insured” on his policy. The “sticky” part here is that the underlying lender will then be notified that there has been a change in insurance. Since the underlying lender is still involved, they’ll want replacement coverage. You have the option to continue with your present insurance coverage and simply have your insurance note your now-new-buyer as an additional named insured. No notice will be sent to the underlying lender in this case. If/when the new buyer refinances down the road, a new insurance policy issued at that time will replace the current policy.

3

Thanks OldGuy. If the underlying loan is called, couldn’t I just refinance it and continue receving payments on the buyer’s wrap note?