BUY a House Without a New Loan

Buying a house with a wraparound mortgage is one of many ways to buy real estate with owner financing. Any time a seller will finance part of the purchase of a home, it’s usually a good thing, especially if it means you, the buyer, don’t have to apply for a new bank loan. There are some seller financing options that tend to be a better deal for the buyer, particularly buying the house “subject to” the underlying mortgage and paying the seller a cash down payment and/or giving the seller a note for his equity. But buying on a wrap is certainly a good option too.

If you have a basic understanding of owner financing in general and wraparound mortgages in particular, you can buy a house on a wrap, hopefully faster and with less hassle than applying for a new bank loan. Like the garden-variety real estate sale, buying on a wrap involves a contract, an inspection period, and a closing, but because there will be no new bank financing (and possibly no title insurance), the entire transaction could take 7 days or less. If you have a seller who has agreed to sell you his house on a wrap, here’s a step-by-step guide to buying your a house with a wraparound mortgage.

The following documents need to be signed and/or delivered before the closing:

Buyer’s Wraparound Bundle – $97

Agreement for Purchase and Sale of Real Estate – Buyer-Friendly

This document does not convey ownership of real estate, it is simply a promise for you to buy and for the seller to sell the property under certain conditions. This agreement allows you 30 days to inspect the property and the relevant documents and terminate for any reason or no reason at all within that option period. It also contains an agreement for the seller to convey all the personal property on the premises to you and a number of other pro-buyer provisions. If you are concerned that the seller may try to sell the property to someone else if a better deal comes along, you may want to record the agreement (or a memorandum of the agreement) with the county clerk, which would create a “cloud” on the title and allow you to enforce your agreement in several different ways.

Notice of Conveyance Encumbered by Lien

This document is of no real concern to you as the buyer. If either you or the seller is buying title insurance, this disclosure is not required, and even if there will be no new title policy, the obligations and potential liabilities for non-disclosure fall on the seller, not you. If you’re interested in this sort of thing, you can take a look at the Texas statute that requires the disclosure and establishes the penalties for the seller who fails to comply.

Authorization to Release Loan Information

You will definitely want this document when you sign the contract so that you can confirm all the information about the first mortgage (the seller’s mortgage that is not being paid off). Usually, requesting a copy of the latest statement will tell you the current principal balance, interest rate, monthly payment, and any amount in arrears, and sometimes will include information about the tax and insurance escrows, if any.

Limited Power of Attorney for Real Estate

It is okay to ask for this document at contract signing, but it’s certainly fine to wait until closing to get the seller’s signature. When the seller executes the POA and names you as the seller’s attorney-in-fact, it gives you the legal right to “stand in the shoes” of the seller in any situation relating to the property. You can do anything with the property that the seller could do – sell it, lease it, service the first mortgage, communicate directly with the first mortgage lender, etc. It is not absolutely necessary that you have a POA for this transaction, and some sellers may object pretty strongly, but you are taking full responsibility for the property and you should want full control over the property. If you don’t comply with the terms of your agreement, however, the seller would be able to revoke the POA and foreclose if necessary.

The following documents need to be signed at closing:

(General) Warranty Deed

This is the document that conveys title to the property. Even though the first mortgage is not being paid off, you are buying the property and taking legal title. The general warranty in this deed is the most expansive warranty of title allowed by law; the seller is warranting to you, the buyer, that no party has any superior claim of title to the property, including claims that may have arisen before the seller bought the property himself. The seller may reasonably request a vendor’s lien be included in the deed, but may not, because the seller will have a lien against the property when the deed of trust is recorded (see below). This document needs to be signed and notarized because it will be recorded in the county’s property records. You should record the original deed and have the recorded original mailed or delivered to you, with a copy to the seller.

Note Secured by Wraparound Mortgage

You are the borrower or maker and the seller is the lender or payee. This document is not recorded.

Deed of Trust (Wraparound Mortgage)

This is the actual document that secures your promise to pay the note by creating a lien against the property you are buying. If you do not pay the note as promised or otherwise default, the seller could accelerate the note, although this form does not include a power of sale that would allow the seller to foreclose easily. The seller may ask for a deed of trust and want to include a power of sale, which is standard. The seller may also ask for language in the deed of trust to secure your assumption of the obligations in the first mortgage (even though you are not formally assuming that mortgage, just agreeing to make the payments on it). This document needs to be signed and notarized because it will be recorded in the county’s property records. The seller should record the original and have the recorded original mailed or delivered to the seller, with a copy to you.

Closing Agreement and Due-on-Sale Acknowledgment

This is a crucial document that must be signed and initialed by both the seller and the buyer. It is an acknowledgment by both parties that the underlying mortgage (the first one, held by the original lender) is not being paid off at closing. This means that the mortgage is still in the seller’s name and must still be paid every month. It also means, most likely, that the conveyance of the property will trigger the “due-on-sale” clause, which would allow the original lender to accelerate its note or “call the note due.” If either of those things happens (the first mortgage does not get paid or the first lender accelerates the note), then the lender could foreclose on the property, which would wreck the seller’s credit and wipe out the seller’s wraparound mortgage and the buyer’s ownership of the property. So everyone needs to understand this and sign and initial this document. This document will not be recorded, but the seller needs to keep a signed original of this document and keep it in a very safe place (preferably a scanned digital copy and an actual signed original).

Limited Power of Attorney for Real Estate

If the seller has not already executed this document, the buyer should request it at closing. (See above.)

Bill of Sale and Assignment

The buyer’s purchase agreement should specify the personal property that will be conveyed along with the real estate, and if there are any leases, deposits, escrow accounts, vendor contracts, or other agreements associated with the property, the buyer should get an assignment of all of them at closing.

Buyer’s Wraparound Bundle – $97