What Does Mortgage Assignment Mean?
It means exactly what it says: It’s when a seller assigns their mortgage directly to a buyer, but this should not be confused with an ‘assumption’ even though some attorney’s would argue that a subject to purchase is simply a ‘silent assumption’ if you are choosing not to disclose the transaction to the lender.
Think of it this way … as investors, we buy properties “Subject-To” the existing financing all the time. Well, quite simply, a mortgage assignment is when you help a normal every day home-buyer facilitate a Subject-To purchase and you are playing an intermediary role in the transaction and getting a fee for your expertise.
For all you experienced investors reading this article, you’ll understand me when I say it this way: A mortgage assignment is nothing more then an investor wholesaling a subject to contract to an every day home buyer instead of an investor.
What Does Wrap Around Mortgage Mean?
A wrap-around mortgage is a loan transaction in which an investor assumes responsibility for an existing mortgage and then wraps that mortgage with a new note to an end buyer. For example, Sally Investor, bought a property subject to a $70,000 mortgage. Sally then sells that property to Billy the Buyer for $100,000. Billy pays $5,000 down and borrows $95,000 on a new mortgage note. This new mortgage “wraps around” the existing $70,000 mortgage because Sally Investor will be making the payments on the old mortgage while accepting payments on the new mortgage.
Why Is The Wrap Around Mortgage Strategy Attractive To Investors?
This strategy is attractive to investors because they can leverage a lower interest rate on an existing mortgage into a higher yield for themselves by selling the property on a wrap-around mortgage to an end buyer.
For example, suppose the $70,000 mortgage in the example has a rate of 6 % and the new mortgage for $95,000 has a rate of 8 %. The investor has 4 profit centers here, so let’s review each one individually:
- Back end Profit: The investor has a $25,000 back end profit (the difference between the $70K underlying loan and the $95K wrap loan).
- Monthly cash flow: If the underlying lien at 6% is around $420/mth (principle and interest only) and the new note at 8% is around $698/mth (principle and interest only), then the investor’s monthly cash flow is $278.
- Shorter Loan Term: The cherry on top is if the underlying lien has less then 30 years. Let’s say the underlying lien only has 25 years left. That means for the last 5 years of this loan, the cash flow for the investor will be the full $698 instead of the $278 because the underlying loan will have been fully paid off.
- Down Payment: Typically when selling a property with financing already in place, the end-buyer will come to the table with a down payment which the investor gets to pocket.
The Road To Passive Income & Financial Freedom Is Through Wrap Around Mortgages:
If you are not sure what to think about this strategy, join the club. Many investors fear this strategy at first glance. It looks complicated and risky but in my humble opinion, it’s the exact opposite. My team and I did many mortgage assignments before embracing wrap around mortgages. We didn’t fully understand the process and we were fearful of being stuck in the middle if the buyer defaulted. And now, with the new Dodd-Frank regulations, it’s gotten that much more complicated.
The good news is that we took a leap of faith and hooked up with a few attorneys to make sure all of our ducks were in a row and it turned out that this strategy wasn’t so hard after all and certainly not risky!! In fact, once I educated myself a bit more about wrap around mortgages, this strategy is far less risky, easier and less stressful then being a buy and hold investor which is the only other path I know to secure passive income and be able to achieve financial freedom through real estate investing.!
One of my strongest recommendations when doing deals of any kind is to align yourselves with lawyers who can make sure that you are staying legally compliant with all the changing rules. Dodd-Frank has changed the game for any investor who creates a new loan like you do in a wrap around mortgage. Trust me when I tell you that it’s better to be proactive and protect yourself from lawsuits, jail time and bankruptcy then to experience any of those things and have to pay for the lawyer after the fact.
Mortgage Assignments & Wrap Around Mortgages Helps The Seller, The Buyer and You the Investor
One of my favorite things about doing mortgage assignments or wrap around mortgages is that these transactions are beneficial to many people. In fact, I call it a 5 Win System:
- The seller is able to sell an unsellable house, and keep their credit intact.
- A buyer who is unable to obtain a bank loan, is still able to buy a home.
- The investor is able to help both parties and have a profitable business.
- The lenders have performing loans instead of another short sale or foreclosure on the books.
- The neighborhood is saved from another short sale or foreclosure effecting the value of nearby homes.
What About the Due On Sale Clause?
The due on sale clause is a clause in nearly every mortgage since the 1980’s and it gives banks the right, but not the obligation to call a note due if title transfers without their permission. It is very rare for a bank to call a note due on a performing loan (a loan that is being made on time every month) so this is not a big concern for investors who have been doing subject to transactions for a long period of time.
There are two strategies you’ll find in the real estate investing world when it comes to the due on sale clause. First, there are investors who will disclose the risk to the buyer and seller but not notify the bank since it’s so uncommon for a bank to actually call a note due.
Second, there are investors like us, who prefer to stay as above board as possible and protect ourselves from every being accused of even the possibility of mortgage fraud. We have a specific and proven process for notifying the banks about each of our transactions which makes us feel safer and makes our buyers and sellers much more comfortable with the transaction.
In either case, when doing a wrap around mortgage, the investor should be prepared to handle a due on sale notification in the event it arises. Additionally, they should be able to positively cash flow the property and be ready to maintain the underlying loan payments in the event the end buyer defaults.
The Truth About Mortgage Assignments & Wrap Around Mortgages
While this solution can help the seller, the buyer and you the investor, you need to do your due diligence when doing these type of deals. Make sure you check out our Legal Corner to find out more information about aligning yourself with the right lawyer for these transactions.
To Wrap It All Up
In summary, this type of creative real estate transaction allows the investor to acquire the deed or title of the property while leaving the mortgage loan in the home-seller’s name. The real estate investor, now accountable for making payments on the house loan for the seller, looks to find a home-buyer that won’t be able to be considered for traditional loans, and creates a wrap around mortgage.
A wrap around mortgage is really a brand new home loan that is created on the property or home that “wraps around” a pre-existing home loan. The real estate investor gets a down payment to get initial income, charges a higher rate of interest than the current mortgage loan for regular monthly income, and charges a higher purchase price for money in the future through equity. Since none of the investor’s credit is being used, they are able to perform as many deals as they can (unlike a buy and hold strategy where you are limited by bank guidelines on how many loans you can get for investment properties).
If you’d like to learn more about building passive income by buying and selling real estate for a profit with no money down using strategies like subject-to and wrap around mortgages, then check out our very affordable REI Rockstars Back Stage Access Coaching Series for both new and seasoned investors!
If you prefer not to stay in the middle of transactions and simply want to sell your contracts for a quick fee, then you’ll want to learn more about how to do mortgage assignments and wholesaling, and we teach that in our coaching series as well! For under $100/mth, you’ll learn Four (4) No Money Down Real Estate Investing Strategies so that you can better evaluate the deals you come across in order to make maximum profit!