How to Avoid Foreclosure in a Wrap Around Mortgage

Wrap around mortgages can benefit both the buyer and the seller when approached in a responsible manner. This type of mortgage often allows buyers with less-than-stellar credit to make home purchases. Sellers with existing mortgage amounts can relocate, while paying off existing debt. Avoiding foreclosure in wrap around mortgages is the responsibility of both parties and can be achieved with proper planning.

Instructions

1. Ask a lawyer to review the mortgage contract. Laws regarding wrap around mortgages vary depending on property location. Even the most well written plans should be tested to ensure their validity under applicable laws. This will also prevent issues such as unfair rate increases and penalties. Both the buyer and the seller should feel comfortable with the resulting contract before making final commitments.

2. Get third party payment verification. The transaction needs to be efficient and secure to protect both the buyer and the seller. Since a successful wrap around mortgage requires payments to be transferred from the buyer, to the seller, and finally the bank, there are more chances for mistakes and even dishonesty. The buyer is entrusting his mortgage payment to the seller for timely bank deposit. The seller is also counting on the buyer to fulfill his payment obligation to avoid bank troubles. There have been cases of sellers defrauding buyers by pocketing mortgage payments and of sellers skipping out on contract arrangements.

3. Access yearly bank transaction statements. Compare the amount paid with your financial records to ensure the totals match. This will provide proof the payments are being made, as well as prevent bank errors. Keep these records on file for future reference. Cashed check receipts may not be enough if a payment dispute arises.

4. Examine yearly tax and insurance statements. The buyer is responsible for paying these amounts as outlined in the wrap around mortgage contract. Since failure to do so can lead to foreclosure proceedings, it's important for both parties to remain aware of the situation. The buyer and seller may even be able to work out arrangements in certain cases of back property taxes or insurance premiums.

5. Establish a solid relationship prior to making a commitment. Consider setting up a trial period of at least 6 months to ensure honest communication is present between both parties. For example, letting a potential buyer lease a home with an option to buy later allows the potential seller to monitor payment patterns and purchase enthusiasm. This also allows the potential buyer time to see if the home is a right fit for his lifestyle and budget.

Tips & Warnings

• Read the fine print of the seller's initial mortgage agreement before entering into a wrap around mortgage. Some contracts may have clauses that prohibit this type of third party agreement.

Resources

• FInd out ways to avoid foreclosure at hud.gov