Never underestimate the ability of a wrap around mortgage as a low-cost / no-cost way to finance a real estate investment or to sell one. A wrap mortgage is also called an “all inclusive mortgage” or a “trust deed”. Both terms are critical to the difference between an installment contract and a wrap around mortgage. 

The primary difference between the two is that with a wrap mortgage, the title is typically passed to the buyer at closing. With a contract sale the seller retains the title until the contract is fulfilled by the buyer. In both scenarios, the seller retains the ability to foreclose on the property if the buyer stops making payments. 

With a wrap around mortgage, the seller deeds the property to the buyer subject to the seller’s existing mortgage. The buyer signs a promissory note for the full purchase price that is made out in the name of the seller. The note is secured by a deed of trust on the property. At closing, the buyer is given title to the property and the seller’s promissory note becomes a second mortgage junior to the existing first mortgage. 

With an installment contract, the seller retains the title. The contract includes language conveying equity title to the buyer for each payment made. Only when all conditions of the contract are met does the buyer receive the title to the property. Normally, the seller signs a deed of trust transferring the property to the buyer that is held by the escrow company until the buyer fulfills the contract. This is to ensure the buyer obtains title in the event the seller disappears or for some reason refuses to convey title when the time comes.  

Typically, in both cases it’s necessary to go through the foreclosure process if the buyer stops making payments. However, depending on state laws and how the installment contract is written, it’s possible in some states to evict the buyer and retake possession of the property when the buyer defaults. 

Under more normal economic conditions, real estate investors typically buy property with a wrap around mortgage or an installment contract and sell by requiring end buyers to cash them out. In today’s distressed economy, investors need to keep seller financing as an option when they need or want to sell real estate holdings. 

There are several reasons you want to keep this option open as an investor. First, with all of the foreclosures that are and will continue happening, there will be a glut of people wanting to buy houses but they will not be able to qualify for a conventional mortgage for years to come. By you offering seller financing, you will have many more prospective buyers in a slow market. 

Second, you improve your profit margin when you offer seller financing. First, you are able to command a higher selling price because you are offering favorable terms and conditions very few other sellers offer. 

Third, you earn a higher than market interest rate. Both on the existing loan and the second mortgage. On the existing loan, you can earn a point or two on other people’s money. 

Fourth, with the national average of reduced real estate values at over 30%, many people that could not afford loan payments before can now do so with much more ease. 

Seller financing almost always includes a balloon payment after a few years. What you need to know about balloon payments is that Fannie Mae reduced the time period some people have to wait to again qualify for a traditional loan from four years to two years. This applies to people that cooperated in getting out of a house they could not afford with either a short sale or deed in lieu of foreclosure. For those that did go through foreclosure the waiting period is five years.