If you have a basic understanding of owner financing in general and wraparound mortgages in particular, you can sell your house on a wrap, hopefully faster and at a better price than waiting for all cash or a new loan. Like the garden-variety real estate sale, selling 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 buyer who’s ready to sign up, here’s a step-by-step guide to selling your a house on a wraparound mortgage.
The following documents need to be signed and/or delivered before the closing:
Seller’s Wraparound Bundle – $97
Agreement for Purchase and Sale of Real Estate
This document does not convey ownership of real estate, it is simply a promise for you to sell and for the buyer to buy the property under certain conditions. Ask the buyer to make two separate payments to you – an option fee, which is non-refundable but allows the buyer to terminate for any reason within a certain time period, and earnest money, which is refundable during an inspection period when the buyer is allowed to inspect the property, review title, and possibly renegotiate the terms of the sale. Once the inspection period ends, the earnest money “goes hard” and is non-refundable unless the seller defaults. This document can be recorded but as the seller, you do not want the buyer to record it and create a “cloud” on your title, so the form includes a clause preventing the recording of the agreement.
Notice of Conveyance Encumbered by Lien
If you or the buyer is buying title insurance, this disclosure is not required. If neither party is buying title insurance, then you must deliver the notice to the buyer and the lender at least 7 days before the effective date of your Agreement. To do this, give the notice to your buyer at the same time you sign the contract, but make the effective date of the contract at least 7 days after the date you sign it, then fax or scan/e-mail the notice to the lender that same day. (Or if you mail the notice to the lender, make your effective date at least 10 days after the signing date.) Or just buy the title policy and save yourself all this hassle. This document is not recorded.
Authorization to Release Loan Information
As the seller, you do not have to give the buyer this document and it is not required for the transaction, but if the buyer asks for it, it is a fair request. The buyer is well within his rights to confirm your mortgage information before he actually takes over responsibility for paying it off.
Once these documents are executed, make a copy for the buyer and a copy for the title company, attorney, or whoever is going to conduct your closing. If neither you nor the buyer is going to buy title insurance, then you can proceed to closing as soon as the inspection period ends.
The following documents need to be signed at closing:
Special Warranty Deed With Vendor’s Lien
This is the document that conveys title to the property. Even though the first mortgage is not being paid off, you are selling the property to the buyer and the buyer is taking legal title to the property. The vendor’s lien creates a lien against the property that will allow the vendor (you) to foreclose if the buyer fails to pay you the note as promised. This document needs to be signed and notarized because it will be recorded in the county’s property records. The buyer should record the original deed and have the recorded original mailed or delivered to the buyer, with a copy to you or your trustee.
Note Secured by Wraparound Mortgage
You are the lender or payee and the buyer is the borrower or maker. This document is not recorded.
Deed of Trust to Secure Assumption
This is the actual “wraparound mortgage,” but it is officially called a deed of trust in Texas. In a technical legal sense, the Grantor (the borrower/buyer) conveys the property to a Trustee (usually an attorney) to hold for the benefit of the Beneficiary (you, the seller/lender). This document secures the buyer’s promise to pay the note by creating a lien against the property you are selling. (This lien is fairly redundant to the vendor’s lien in the special warranty deed, because in most cases, the seller and the lender are not the same entity. So this is a bit of a belt-and-suspenders approach, but too much protection is far better than too little.) The deed of trust also secures the buyer’s promise to pay your mortgage, even if the buyer is paying your lender directly. If the buyer fails to pay either the first mortgage (to the lender) or the second mortgage (to you), you would be able to foreclose. This document needs to be signed and notarized because it will be recorded in the county’s property records. You keep the original, record it and have the recorded original mailed to you or your trustee, with a copy to the buyer.
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).
Bill of Sale and Assignment
This is not a required document and as the seller, you do not have to volunteer to sign this agreement, but if the buyer asks for it, it is certainly a valid request. The bill of sale conveys the personal property that is located on the property (basically, everything that is not nailed down – or make that everything that is not permanently nailed down). Usually the personalty is addressed in the purchase and sale agreement, and if not, presumably you will have removed any personal property you want to keep before the closing. However, if there are any leases, security deposits, escrow accounts, vendor contracts or other agreements associated with the property, this document would assign those items to the buyer.
Seller’s Wraparound Bundle – $97