The Advantages And Disadvantages Of A Wraparound Mortgage
A mortgage is a formal agreement between an issuer and a borrower, wherein the issuer agrees to pay a certain amount of money to the borrower for buying a property. A wraparound mortgage is a smaller mortgage that is granted to a borrower. It is a secondary mortgage accompanied by the primary one, which helps the borrower to make the full payment of the property. The property should have an ongoing mortgage to be able to qualify for a wraparound mortgage.
While the issuer agrees to finance the purchase of the property, it is usually with a certain amount of fee in the form of an interest. The borrower is responsible for making monthly payments to the issuer to capture the ownership of the property. To understand a little more about this type of mortgage, let us discuss the advantages and the disadvantages of a wraparound mortgage.
Advantages
- Own a property without a credit score
Since the mortgage is borrowed from an independent seller, the buyer need not worry about their own credit score. The loan can be granted with or without a decent credit score. The buyer only has to ensure timely repayment of the mortgage. - Avoid the credit approval process
While in the traditional credit approval process, you are required to follow protocol, with wraparound mortgage, you can get your credit approval faster than the case of other mortgages. - Get your home faster
Since the credit approval procedure is faster, the seller does not spend much time in the verification of your documents and instead issues a wraparound mortgage as soon as possible. This enables you to get your home faster.
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Disadvantages
- Wrong filing of documents
Since everything is rather informal in the process of claiming a wraparound mortgage, there are certainly several disadvantages to this type of loan. One of them is filling the documents incorrectly. In the process of getting a wraparound mortgage, information may not be correctly verified and therefore, there could be a problem with the documents and they may be wrongly filed. - Taxable profit for sellers
Now, this advantage only concerns the seller but it is useful if you are at the issuing end. A seller can claim tax benefits by showing that they have granted a wraparound mortgage to someone. They can include it in their application forms for getting a tax refund, too. Moreover, a wraparound mortgage is heavily dependent on the interest rates going on in the market. If the interest rates are lower, the seller may continue to charge the fixed interest rate from the borrower but may continue to pay lower interest rates from their end. - Lender may not pay on time
One of the biggest shortcomings of a wraparound mortgage is that the lender cannot be completely trusted. The paperwork and the verification process are quite brief and thus, the authenticity of the borrower cannot be validated. Thus, they may choose not to pay the installments on time.
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