Many new investors are easily confused by the concepts of “Subject-Tos” and “Wraparound Mortgages.” Both are very useful types of financing that can help you get a deal done when traditional financing isn’t possible, without having to use expensive hard money.
Subject-Tos or “Sub2s” are deals where the buyer purchases a character unprotected to the existing mortgage. The buyer will acquire the character and continue to make the payments of the existing mortgage. The seller will often times just hand over the payment booklet to the buyer. There is no new mortgage. Sub2s are often used when the seller is behind on their mortgage, and typically the buyer will pay the seller a small amount to cover moving.
One thing to be aware of when buying a character Sub2 is the Due-On-Sale clause. Most mortgages have a due-on-sale clause that states the balance of the loan is due if the character is sold. typically, this would average the seller has to payoff the loan when the character is sold. However, edges rarely enforce this clause. As long as the mortgage is nevertheless being paid, the edges are usually happy. Remember: edges don’t want homes to go to foreclosure, as they are not in the business of buying/selling real estate. So, while you need to be aware of the Due-On-Sale clause, it usually isn’t an issue.
“Wraparound Mortgages” or “Wraps”
A Wraparound Mortgage is commonly used when you sell a character that you have an existing mortgage on and are willing to owner finance. You set the terms of the new loan so that the buyer is making you a monthly payment that is higher than your current payment on your existing mortgage. So the buyer is making you a payment which you will use to make your payment, consequently the “Wraparound.” The difference between their payment and your payment is your monthly cashflow.
So the takeaway from this is, use Sub2 when you buy and use Wraps when you sell.