Table of Contents Page Home Page

What are the drawbacks of a wraparound mortgage?

My brother is buying the house he lives in directly from the owner. He has been paying for it for ten years and has five more years to go. I heard that the previous owner has been late in making mortgage payments on the house. What will happen to my brother if the bank forecloses? What will happen to the money he has already paid to buy the house?

ANSWER:

A mortgage is a contract by which specific property is pledged for the repayment of a debt. Title to the mortgaged property may be taken away by foreclosure proceedings if the debt is not paid.

The object of a foreclosure action is to sell the right, title and interest that the owner and others might have in the property in order to satisfy the debt owed to the lender. If the lender is the successful bidder, then the lender becomes the new owner. Generally speaking, if there is a higher cash bidder, then the higher bidder becomes the new owner with cash going to the lender. Either way, upon completion of a foreclosure sale, the prior owner and your brother would lose all their rights, title and interest in the property including any equity your brother may have built up.

You indicated that he is making payments to the seller. Presumably your brother signed a note and mortgage where he promised to pay the seller. The seller in turn was supposed to make payments to the bank that already had a mortgage before the property was sold to your brother. This type of arrangement is usually called a "wraparound" mortgage because the seller’s note and mortgage amount includes the debt owed to the bank. The second debt (the one your brother owes to the seller) wraps around (and includes) the bank’s debt.

Generally speaking, the seller/second lender would want to keep up his end of the bargain and make the payments to the bank because the second lender/seller would not want to have his mortgage lien "wiped out" by the bank’s foreclosure.

There are some things your brother might do to protect his interests, but this will assume that the bank is aware that he is the new owner and the bank consented to the purchase and the seller’s wraparound mortgage. One, your brother could ask the bank to give him written notification whenever payments to the bank are delinquent. Your brother should check the note and mortgage documents he signed for the seller along with the general rules of law to determine what rights he may have to make up delinquent payments to the bank and what rights he might have to offset such payments against what is owed to the seller. Perhaps the agreement with the seller can be changed so that your brother splits his payment between the bank and the seller each month. This way, the seller gets only the portion owed to the seller and your brother knows the bank is being paid directly by him each month.

This information is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.

Back to the top of the page