Posted on August 31st, 2023

In the real estate world, the term "mortgage" often pops up frequently, yet the complexities behind it remain a mystery to many. 

Whether you're an investor, a wholesaler, or someone just looking to dip their toes into property investments, understanding the variety of mortgage options available is crucial. 

Two of the lesser-known, yet incredibly impactful, mortgage options are the 'Subject To' and the Wrap Around Mortgage. 

Navigating the waters of these options can seem daunting, but with the right knowledge, they can be lucrative strategies. That's where Prop-Hub, LLC steps in. Based in Austin, Texas, our expertise lies in providing in-depth insights and guidance on these very topics. 

This blog aims to demystify these two mortgage options and highlight their differences. 

So, let's embark on this enlightening journey together, and unlock the potential of these powerful real estate tools.

What is a Wrap Around Mortgage?

When diving deep into the realm of real estate, some terms might sound complex, but they offer simple solutions to age-old challenges. A wrap around mortgage is one such term. In essence, it's a form of secondary financing where a new mortgage is created, "wrapping around" an existing one. Imagine a blanket that snugly fits over a smaller one; that's the concept here.

Definition and a simple example.

A wrap around mortgage occurs when a property seller offers to lend buyers the necessary resources to buy a property. For instance, if Sarah has a home with a $100,000 mortgage and sells it to Bob for $150,000, she could provide a wrap around loan for $150,000. Bob would then make monthly payments on this $150,000 loan to Sarah, and Sarah continues to make her monthly payments on the original $100,000 mortgage.

Elaboration on how a wrap around mortgage works.

The seller, in this scenario, "wraps" their loan around the buyer's loan. This means the seller remains on the original loan, and the buyer pays the seller based on the terms of the new, larger loan. The seller then uses the payments from the buyer to make the original loan's payments.

Benefits of wrap around mortgages for investors and wholesalers.

For investors, wrap around mortgages can offer an avenue for properties that might not qualify for traditional financing. Wholesalers, on the other hand, can leverage this option to provide more flexible financing options to potential buyers, making properties more attractive and facilitating faster sales.

What is a 'Subject To' Mortgage?

It's hard not to be intrigued by a term like 'Subject To.' It sounds conditional, somewhat secretive, but in reality, it’s a straightforward concept in the realm of real estate. Essentially, a 'Subject To' mortgage is when a buyer purchases a property subject to the existing financing. The loan stays in the seller's name, but the buyer takes control of the property and the payments. Let's delve a bit deeper.

Explanation of the term "Subject To" in relation to mortgages.

'Subject To' simply means that the sale of a property is subject to the existing mortgage. The buyer doesn't obtain a new loan to purchase the house; instead, they take over the current payments. The loan remains in the seller’s name, but the deed transfers to the buyer.

Explanation of the subject to mortgage contract and its implications.

The subject to mortgage contract stipulates that the buyer agrees to take over the home's payments without officially assuming the loan. If the buyer fails to make payments, the mortgage company can still go after the seller, since their name remains on the loan. Thus, trust is an essential element in this type of agreement.

The appeal of a subject to mortgage home for sale.

For buyers, the allure often lies in the ease of obtaining a home without traditional financing or the need for a significant down payment. Sellers benefit by quickly offloading a property, especially if they're in a tight financial situation or the property has been on the market for an extended period.

5 Key Differences Between 'Subject To' and Wrap Around Mortgages

Now that we've set the stage with a basic understanding of both types of mortgages, let’s distinguish between them. Often, these two methods are confused or wrongly used interchangeably. However, they cater to different scenarios and come with their own sets of advantages and challenges.

1. Financial Structure

In a wrap around, the new mortgage encompasses the previous one, and the buyer pays the seller directly based on this larger, "wrapped" loan. Conversely, with 'Subject To,' the buyer simply takes over the existing loan payments, without creating a new mortgage.

2. Risks Involved

Wrap around mortgages often involve risks for sellers, as they’re responsible for both the original and new loans. If a buyer defaults, a seller could end up paying two mortgages. On the other hand, in a 'Subject To' deal, the primary risk lies with the seller as well. If the buyer defaults, the lender can pursue the original borrower (the seller) for missed payments.

3. Contractual Obligations

The wrap around mortgage typically requires a detailed contract outlining the new loan's terms, while 'Subject To' is more about transferring property deeds with an understanding that the buyer will make payments on the existing loan.

4. Duration and Terms

Wrap around mortgages can vary in duration, often depending on the agreed-upon terms between buyer and seller. 'Subject To' mortgages, however, follow the original loan's duration and terms, as there's no new loan created.

5. Seller and Buyer Benefits

Wrap around mortgages can provide home sellers higher selling price and often potential interest thats extra income. Buyers benefit from possibly not needing a credit check or formal loan application. In contrast, 'Subject To' offers sellers a quick property sale and can provide buyers with a home without the rigors of traditional financing.

When to Consider Each Option

Navigating the vast sea of real estate financing can sometimes feel like you're steering without a compass. But understanding when to use specific financing tools, like 'Subject To' and Wrap Around Mortgages, can make the journey smoother. Let's explore ideal scenarios for each.

Scenarios where a wrap around mortgage is more beneficial.

Wrap around mortgages are particularly appealing when:

• Interest rates on existing loans are lower than current market rates. Buyers can benefit from those lower rates wrapped into their new mortgage.
• Sellers want to earn a potential income from the interest difference between the two loans.
• Buyers who may not qualify for traditional financing, due to credit issues or other factors, seek alternative options.

Situations where 'Subject To' is the ideal choice.

Considering a 'Subject To' mortgage is advantageous when:

• Sellers need to move the property quickly, perhaps due to a relocation or financial strain.
• Buyers want to bypass the lengthy loan approval process.
• Properties have little or no equity, making traditional sales or refinances challenging.
• Both parties seek a simpler transaction without creating a new mortgage.

Tips for investors and wholesalers on how to make the best decision.

Always consult with a real estate attorney when navigating these non-traditional financing options. They can provide clarity on the legal implications. Moreover, understanding the local real estate market and having a clear communication channel between the buyer and seller will make these processes smoother.

Conclusion

And there you have it: a deep dive into two of the most intriguing real estate financing tools - 'Subject To' and Wrap Around Mortgages. While both come with their own sets of benefits and challenges, understanding when to deploy each one can greatly enhance your real estate ventures. Whether you're an investor, wholesaler, or someone just venturing into the property market , knowledge is your greatest asset. And as always, Prop-Hub, LLC is here to guide you through these complex terrains. 

If you found this information useful, or if you're looking to explore more about our services, especially our stellar House sell service, we're just a text or email away. 

Reach out at 806-256-8729 or drop a line at [email protected]. 

Let's make your real estate dreams a reality!