In a recessionary economy, when obtaining home financing is extremely difficult, obtaining seller financing is often a great way to help each party on both sides of the transaction. One type of seller-assisted financing is the comprehensive mortgage. In a comprehensive mortgage, the seller will have equity in his home at the time of sale, the borrower will pay him directly, and continue to pay his own mortgage, pocketing the remainder to cover the equity he left the borrower to finance. . Sound confusing? Click the link above for a more detailed breakdown of how these things work.
In an economy in recession, with difficult financing to obtain, more and more people, both sellers and borrowers, want to adopt the “whole” approach. While this type of financing certainly has its advantages, it definitely has its drawbacks as well, and these drawbacks are not small.
Let’s start this party by listing the pros:
1. A borrower is often creditworthy, but tight and illiquid credit markets provide financing only to those with perfect credit, income and savings histories. Having difficulty obtaining financing makes the market even worse for those looking to separate from home. In a comprehensive mortgage, the seller basically makes the decisions when it comes to who can and cannot buy their home.
2. The ability to obtain seller financing, when direct bank financing is simply not an option, as detailed above, is certainly a great advantage for both parties. Also, if rates have risen substantially since the seller got their original loan, this mortgage may allow the buyer to pay them a lower-than-market rate, an advantage to the buyer. The seller will maintain a higher rate, compared to when they negotiated their initial financing, so you can maintain the margin, a great advantage for the seller. For example, the seller’s initial 30-year fixed had a rate of 5%, but currently the 30-year fixed average is 7%. The seller charges the borrower 6%, while the seller keeps the extra 1% and the borrower pays 1% less than he would have if he obtained the traditional means of financing. Win, Win!
If it sounds too good to be true, it probably is. Scam time:
1. If the seller does not have an assumable mortgage and the bank finds out that he has transferred his property to someone else, but has not requested that his mortgage be assumed by a new party, then he can “cancel the loan” and foreclose. . the property. The borrower may have been up to date with the payments, but is evicted from his home. In a tough market where people are not making their payments, banks are (unsurprisingly) less concerned with the source of the payment and much more concerned with whether or not the payment is being made. So don’t expect this to happen if the mortgage stays current.
2. If the bank has a “maturity on sale” clause, and the bank is not disclosed that the property has changed hands, the same problem as listed in n. # 1. The borrower is current on the loan, but the seller never informed the bank of the sale, so mama bank gets mad and forecloses. The poor borrower lives in a box for a few months after moving into his new house and paying the seller on time every month.
3. The biggest concern / disadvantage for the seller is that the borrower does not pay his mortgage on time. A benefit of a wrap vs. A straightforward assumption of the mortgage is that the seller at least knows when the borrower is paying late and can make the payment to the bank for the borrower. However, in a case like this, the seller is basically paying for someone else to live in a house. It is not fun.
4. Some “wrappers” make the seller pay the bank directly or through a third party. If this is the case, and the borrower is late, the seller’s credit suffers and he runs the risk of losing the home.
Wraps are great if both parties follow the rules. It is important that the borrower and the seller know the risks of a “wrap” and make the necessary preparations to mitigate them.