WRAP Loan TechniquePosted on May 6, 2013 by
When you sell a property, a wrap will assure you retain control of a loan you have on the property. This may be a loan you got using the property as collateral or a subject-to loan when you purchased the property.
After the sale, the buyer pays you the full payment on the wrap and you pay the underlying mortgage payment. I suggest that you make the payment to the first mortgage holder automatically each month. Don’t wait around until your buyer pays you. Yeah, I know, properly constructed wrap documents do not require you to make the payments if the buyer doesn’t pay you.
But think about it. That underlying loan is in your name and it is your credit is on the line. Or it is in the name of someone who trusted you to make the payments when you took the property subject-to. In that case their credit could be damaged.
In either case, by keeping it current, you keep the lender from scrutinizing the loan and avoid late fees and foreclosure. When your buyer is in default, you want to control the collection process without the underlying mortgage holder interfering.
Another critical issue when wrapping a loan is to handle insurance properly. Since the lender is expecting to see the name on the policy that is their borrower, you should have the buyer get a policy showing the policy holders as himself and underlying loan borrower’s name (you or your old seller) with the designation “As Their Interests May Appear” or ATIMA. In addition, the underlying lender should be shown as the First Mortgagee and you should be shown as Second Mortgagee.
I am sure you are wondering about the due-on-sale clause. Yes, they can call the loan due any time you pass title. However, our experience and that of thousands of other investors over the years is they don’t call it due as long as payments, taxes and insurance are current. They have enough defaulted loans to deal with already. Don’t wrap and sell for cash if you are not comfortable and are not sure you can handle the possibility of the loan being called.