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Encyclopedia > Wraparound mortgage
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What is a Junior Lien

A junior lien or subordinate mortgage is a 2nd mortgage, that sits behind a (usually) larger first mortgage. The wraparaound is a way of lowering the barriers of entry, and speeding the process to purchase a home.


Example

The seller, who has the original mortgage sells his home with the existing first mortgage in place and a second mortgage which he "carries back" from the buyer. The mortgage he takes from the buyer is for the amount of the first mortgage, plus a negotiated amount less than or up to the sales price minus the down payment and closing costs. The seller then continues to pay the first mortgage with the proceeds of the second. Once the second mortgage is satisfied, the seller is out, but this is rarely the case.


Typically, the seller also charges a "middle" on the first mortgage. ie. I have a first mortgage at 6% and sell the whole property with a rate of 8% on a wraparound mortgage. I make a 2% middle on the first mortgage amount, using other people's money to make money. So, it is in the best interests of a seller to keep the wrap, rather than allow the buyer to assume the first mortgage.


Why are there so few wraparounds today?

The first mortgage must be assumable, or the mortgagee must permit this type of assumption to occur on the loan. Today, only the FHA writes assumable loans, as most mortgage bankers have found that the main expenses (and profits) of a transaction occur at origination. Most mortgages have a due on sale clause, to prevent the use of wraparounds


 
 

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