Many new investors are easily confused by the concepts of “conditions” and “whole mortgages.” Both are very useful types of financing that can help you close a deal when conventional financing is not possible, without having to use expensive hard money.
The Subjects or “Sub2” are agreements in which the buyer purchases a property subject to the existing mortgage. The buyer will obtain the property and continue to make payments on the existing mortgage. The seller will often only give the payment booklet to the buyer. There is no new mortgage. Sub2s are often used when the seller is behind on their mortgage, and typically the buyer will pay the seller a small amount to cover the move.
One thing to keep in mind when buying a Sub2 property is the expiration clause on sale. Most mortgages have a maturity clause at the time of sale that states the loan balance is due if the property is sold. Normally, this would mean that the seller has to pay off the loan when the property is sold. However, banks rarely enforce this clause. As long as the mortgage continues to be paid, the banks are usually happy. Remember: banks don’t want houses to go into foreclosure, as they are not in the business of buying/selling real estate. So while you should be aware of the expiration clause on sale, it’s usually not a problem.
“Wraparound Mortgages” or “Wraps”
A comprehensive mortgage is commonly used when you sell a property on which you have an existing mortgage and are willing to finance it. You set the terms of the new loan so that the buyer makes you a higher monthly payment than the current payment on your existing mortgage. So the buyer is making a payment to you that you will use to make your payment, hence the “Wraparound”. The difference between your payment and your payment is your monthly cash flow.
So the bottom line of this is, use Sub2 when you buy and use Wraps when you sell.