Real estate Q&A: Creative mortgage may be too risky

FORT LAUDERDALE, Fla. – June 19, 2015

Question: We rent a house, and the owner wants to sell it to us. Our credit is not so great, and the seller can’t afford to pay off the existing mortgage. So he offered to give us a new mortgage and then use the payments we are making to him to pay off his existing loan. I’ve never heard of something like this. Is it legal? – Stu

Answer: Yes, it is legal, but it generally is not a good idea. This is called a wraparound mortgage and is most commonly used by sophisticated real estate investors in certain scenarios.

Most mortgages contain a “due on sale clause,” which means that when a property is sold to a third party, the existing mortgage needs to be paid in full. If it can’t be paid, the lender will foreclose. Even if this doesn’t happen, another problem could arise if the seller does not pay his existing mortgage with the money you pay him.

It’s possible that the seller’s lender will allow you to take over the mortgage, so you may want to see if that’s an option. You also should check with local banks and credit unions. They often will look beyond a borrower’s credit score and consider the person’s overall financial situation.

If nothing can be worked out, it may be better to keep renting and improving your credit score so that you can buy a home with a traditional mortgage.

About the writer: Gary M. Singer is a Florida attorney and board-certified as an expert in real estate law by the Florida Bar. He is the chairperson of the Real Estate Section of the Broward County Bar Association and is an adjunct professor for the Nova Southeastern University Paralegal Studies program.

The information and materials in this column are provided for general informational purposes only and are not intended to be legal advice. No attorney-client relationship is formed. Nothing in this column is intended to substitute for the advice of an attorney, especially an attorney licensed in your jurisdiction.

Copyright © 2015 Sun Sentinel, Gary M. Singer. Distributed by Tribune Content Agency, LLC.