CHAPTER 9

WRAP AROUND MORTGAGES

 The assuming of a loan is not nearly as simple as it once was.  But with the use of a wrap around mortgage / all inclusive deed of trust you can still assume the unassumable loan.  You see, until a number of years ago, almost any loan was assumable by almost anyone under any circumstances.  Whether formal assumptions, "subject to" assumptions, etc... However, due to a number of court decisions, this is no longer the case.  Acceleration and alienation clauses that are, and had been contained in most loan documents, are now, in almost every case, enforceable.  These clauses stipulate that if the seller transfers any portion of his ownership of the property to another, unless the lender specifically allows the loan to be assumed by the buyer, the entire balance of the loan becomes immediately due and payable.

So, what it amounts to is that loans are still assumable, but only if the lender allows it.  The lender will allow a loan to be assumed only if the purchaser meets the lenders credit criteria.  In most cases, the lender's criteria is precisely the same as if the buyer were applying for a new loan and to top it off, even if the lender allows the assumption, chances are, they will charge a higher interest rate than the existing rate, plus, an exceptionally high assumption fee; $500 to $1,000 or more.  There is really no benefit for you or the buyer in assuming a loan under these circumstances.  So, the question is, how do you get around these acceleration and alienation clauses? Simple...

There is a type of loan that is sometimes called a "wrap around" mortgage or an "all inclusive" deed of trust.  This loan provides an effective way of circumventing those pesky clauses.

Although, in actual practice the wrap around mortgage is simple to use, the theory can be somewhat difficult to grasp.  If after this explanation you have any questions, call a local escrow company or Realtor. They will be more than happy to explain it to your satisfaction.  Here's how it works...

 1) Get all the pertinent information on the loan you would like to assume i.e. payments, loan balance, due date, interest rate, etc.

 2) You then execute a wrap around mortgage in favor of the seller at exactly the same terms of the loan that you are "wrapping" (assuming).

 3) You then handle the rest of the transaction as if you had simply assumed that unassumable loan.

 Any escrow company can create the wrap around document for you or you can get a pre-printed form that makes it so simple, that you can basically just fill in the blanks.

What the wrap around mortgage accomplishes, is that you now make the loan payments directly to the seller not the existing lender.  The seller then makes the payments to the lender.  If the lender received a payment from you, he might be tipped off that the property had been sold and the loan might be called due. 

In actuality, if the lender discovered that the property had been sold and that you were the new owner, if the payments had been made in a timely manner, the chances are small that the lender would call the loan due. However, it is almost certain that the lender would increase the interest rate and require the assumption fee we alluded to earlier.  Consequently, you are better off by not letting the lender know that you now own the property.

 (As a result of full disclosure laws, in some states, escrow companies will no longer handle transactions with wrap around mortgages.  These disclosure laws require escrow companies to disclose to all parties that have any interest in any transaction in which they are handling the escrow, any information that may be pertinent to that interest.  What this means is that if your reason for the wrap around was to assume a loan without informing the lender, the escrow company would be required, by law, to make the lender aware of that fact.  That, of course, defeats the whole purpose of your "wrapping" the loan.)

I'm a firm believer that if I pose a problem I should offer a solution.  Here it is...  The main reason for using the title and escrow company is to be certain that when you buy that property, you know without doubt that it has no undisclosed liens, bonds, or assessments, and to be certain that the seller actually owns it. Why not just go ahead and open the escrow and have the preliminary title report issued?  At this point there is usually no charge, since normally title and escrow fees are charged only if the escrow closes.

You now have the title report in your hands.  You have all the information you need regarding existing liens and confirmation of legal ownership.  So, what now?  Cancel the escrow.  You probably do not need title insurance since the title report gives you all the pertinent title information and with a few phone calls, you can probably find a real estate agent or Paralegal who will handle the escrow details, including the wrap and Grant Deed for a fee less than what the escrow would have charged.

Another problem with a wrap around mortgage or all inclusive deed of trust, is "How do you know that the seller is actually making the payments, and not just pocketing your money"?  If that were to happen, the lender would foreclose and you would lose your property. 

The way to avoid this is to have a bank account set up in the seller's name, which requires both seller's and buyer's signatures to withdraw funds, and stipulates that any money deposited into the account is automatically paid by the bank to the lender. 

You make the payment to the bank, the bank makes the payment to the lender, you have eliminated the above mentioned problem and "assumed" the nonassumable loan.