Many Texas homeowners believe that if a house has a mortgage, it cannot be sold without first paying off that mortgage. This is simply not true! Highly effective, surprisingly profitable, and perfectly legal ways exist that allow homeowners to sell a house without paying off the existing loan. 1 way is using what’s called a “wrap around mortgage”, which is often referred to simply as a “wrap”. This article will help you wrap your mind around the fundamental components of a wraparound mortgage, the situations for which they are most suited, and it details how homeowners in Texas can sell their house using the wrap around mortgage technique.
What’s in it for you
Selling a house through a wrap around mortgage means using a creative form of owner financing whereby the seller keeps the existing mortgage in place and creates a new, non-cash loan (the “wrap loan”) for the buyer that wraps around and is subordinate to the original mortgage (the “wrapped loan”). At closing, the buyer signs a promissory note which sets out the terms and payment plan of the wraparound mortgage, and, as security, the buyer signs a deed of trust in favor of the seller which allows them to foreclose and take back the house if the buyer defaults. The buyer-borrower then, like a conventional mortgage, makes monthly payments to the seller who continues making monthly payments on the original mortgage (another option is for the buyer-borrower to make mortgage payments directly to both the seller and original mortgage company). In short, using a wrap around mortgage to sell a house in Texas is like a conventional sale, except for 3 differences that are profitable for sellers:
In lieu of explaining the mortgage wraparound home sale process, we find it best to play out mortgage wraps with a recent real-life example of a homeowner who figured out how to sell a Texas home using a wraparound mortgage to GVH:
Seller Stella wants to sell her home for $200,000, investor Buyer Birdie wants to buy the home for $200,000, and she’ll even agree to a 10% ($20,000) down payment, provided Seller Stella extends a non-cash credit through a wrap around mortgage for $180,000. Seller Stella reviews the terms of her existing mortgage and sees that it has a 5% interest rate and a principal balance of $120,000 so she agrees to sell her home through a wraparound mortgage to investor Buyer Birdie for $200,000 and she’ll extend $180,000 in credit at 8% interest.
As a result, wrap mortgage investor Buyer Birdie pays Seller Stella a monthly principal and interest payment of $1,320.78 on her 8%, $180,000 wrap loan. Seller Stella’s existing mortgage payment is just $644.19 so Seller Stella keeps the difference ($676.59) between her existing mortgage payment and investor Buyer Birdie’s monthly wraparound mortgage payment. More astonishing is that Seller Stella extended just a $60,000 non-cash credit by using the wrap around mortgage technique and therefore her effective interest rate is earning a 13.53% return ($676.59 x 12 months) = ($8,119.08) / ($60,000).
Depending on your home’s equity position, Texans interested in selling to a we buy houses wrap around mortgage company like GVH, most often have the power to choose 2 of 3 variables: (1) High sale price, (2) high down payment, and (3) high monthly payment. For example, central Texas homeowners can often use a home mortgage wraparound to sell and get the highest possible sale price and to receive a high down payment. In so doing, the wrap around mortgage monthly payment a seller receives would likely then be reduced. Conversely, a high monthly payment and high sale price would likely limit the down payment. The bottom line is these 3 variables are not exclusive and therefore sellers can most often choose any 2.
The number 1 reason Texas homeowners sell a house via wraparound financing is that Good Vibes Homebuyers can pay market value, which is critical during a cool housing market or for homes with low equity. Moreover, wrap around financed home sales reduce transactional costs meaning that sellers pay zero closing expenses and realtor fees, GVH’s closing costs are less, and we pass those cost savings onto you. Other reasons homeowners sell houses through a wrap-around transaction include situations where they want (a) to earn passive income, (b) to sell without having to make and pay-out-of-pocket for repairs, (c) to eliminate bank approvals and contingencies, (d) to negotiate terms (e.g., interest rate spread, sale price) that are superior to a traditional sale, and (e) a free, quick, and simple closing.