Regardless of which insurance expert is sought, I would suggest all seek the advice of an expert in this area before making any insurance decisions.
When does a wrap loan end?
The wrap loan will end either by its terms or when the property is sold or refinanced. Upon the sale or refinance, the underlying/original mortgage is paid off and the remaining dollars go to the wrap lender.
Who owns the property after a wrap transaction?
The seller will execute a warranty deed conveying the property to the buyer. This warranty deed is filed in the property records for the county in which the property resides. The buyer is the legal owner of the property with the seller maintaining similar rights of redemption/foreclosure as a traditional mortgage lender.
Who pays the taxes on the property after a wrap transaction?
The buyer is legally responsible for all taxes once the warranty deed is filed indicating the buyer is the legal owner of the property. The buyer also receives the tax advantage of being able to write off interest payments on the loan. The property taxes can be paid via a servicing company as in traditional mortgage lending (see further information below).
Who gets the interest deduction?
The seller continues to be able to deduct interest paid on the wrapped loan. Nothing has changed there. As to interest on the wrapped note, interest received by the seller must be reported as income, and interest paid by the buyer is deductible. More details must be obtained from your tax advisor. The Law Offices of T. Alan, PC Ceshker cannot provide tax advice.
What happens if the buyer defaults on the wrap loan? If the buyer fails to issue payments under the terms of the wrap promissory note, the seller will need to pursue non-judicial foreclosure under the terms of the deed of trust and the applicable foreclosure laws. Do note that the seller remains responsible for the existing mortgage until it is paid off in full; regardless of the end buyer’s payment of the new wrap mortgage required payments.
Texas laws regarding foreclosure are very favorable to the lender. Property Code Sec. 51.002 requires
that a homeowner be given a 20-day notice of default and intent to accelerate the note if the default is not timely cured. If the deed of trust is on a FNMA form, then a 30-day notice and opportunity to cure is required.
Then, the default notice must be followed by a second letter stating that since the default was not cured, the note is accelerated and the property is being posted for foreclosure. This second notice must be given 21 days before the first Tuesday of the month in which the foreclosure will be held. Thus, a Texas foreclosure can take as few as 41 days to complete.
The Seller can also seek and obtain a deficiency judgment if the sales price at foreclosure is not sufficient to pay all that is owed for the wrap note plus accrued interest and fees. The seller thus has the same ability to enforce his note and lien as does any other big bank lender.
After foreclosure, the former owner may still refuse to leave and eviction may be necessary. Again, Texas law is favorable for the foreclosing lender/owner. The owner must give a 3-day notice to vacate, file a petition in justice court, get it served, get it heard by the Justice of the Peace, and then wait 5 days for a final judgment and a writ of possession. One must then wait until the constable posts a 48-hour notice on the door and then forcibly removes occupants who are otherwise unwilling to leave. The process can be accomplished in about 3 weeks, although an appeal to county court can lengthen this process significantly. Further information regarding the eviction process can be obtained from the Law Offices of T. Alan Ceshker, PC.
What if the seller does not issue payment to the existing mortgage lender? / What if the buyer does not issue a payment to the seller? / What if the buyer does not pay taxes? / How does the seller calculate the payoff amount when the property is refinanced?
All of these questions (and others) can be answered by utilizing a loan servicing company in the same manner as conventional mortgages. A loan servicing company will issue late notices, issue acceleration notices, escrow funds for taxes and insurance, issue payments for property tax and insurance, receive payments from the buyer, issue payments to the existing lender, etc. All of the functions of a traditional loan servicing company are provided to seller finance/wrap transactions.
Therefore, all buyers and sellers in a wrap transaction are encouraged to speak with an experienced loan servicing company for guidance in this area. I would suggest all seek the advice of an expert in this area before making any loan servicing decisions.
Lastly, our wrap loan documents will include an agreement that if the seller fails to make payments to the wrapped lender the buyer may do so and receive credit against the wrapped note. The buyer should retain the authority to request documentary proof from the underlying lender that the wrapped note is current.
What happens if the seller files bankruptcy/dies?
In both cases, the buyer could be forced to refinance the debt on short notice. In the case of bankruptcy, the seller should (and does) agree in the wrap agreement to execute a reaffirmation agreement on the wrapped debt (i.e., rather than seeking to discharge it in the bankruptcy). As for the death of the seller, the heirs need to be advised that the payments will continue to be issued to the deceased seller but can be made payable to the heirs.
What are the advantages of a wrap?
In a situation where a buyer cannot obtain traditional financing, a wrap transaction allows them to achieve the benefits of home ownership.
The seller is also able to increase their buyer pool by offering their property for sale as “seller financing”.
What are the disadvantages of a wrap?
The seller has to wait until the wrap note balloons in order to receive the full proceeds of the sale. Additionally, the underlying wrapped loan will remain on the seller’s credit reporting. If the seller finance/wrap borrower defaults, the seller must foreclose, which is not usually a problem with Texas’ favorable foreclosure laws. In the very unlikely event a loan is accelerated, the end buyer may have to secure traditional financing.
Who drafts the documents for a wrap/sub to transaction?
A properly drafted wrap transaction will include a warranty deed, deed of trust, promissory note, a wrap agreement/contract and several disclosure documents. These are complex documents that are customized for each particular transaction. Only a qualified real estate attorney experienced in preparing wrap documents should be used to draft these papers. There are no adequate forms available from the Texas State Bar or the TREC.
What are the fees for a wrap transaction?
The parties will need to provide sufficient funds to issue payments for real estate commissions, closing costs and any down payment amount desired by the seller. The legal fees including the lien search fees, recording fees, courier fees, party consultation with attorney and attorney’s fees for document preparation are based on the size and complexity of the transaction.
What if there are insufficient funds to pay realtor fees?
If the realtors agree, the commissions can be paid monthly via the payments issued by the buyer. The loan servicing company can issue the realtors’ funds along with the existing mortgage payment, taxes, insurance, etc.
What happens after the wrap transaction closes?
The buyer will need to prepare to refinance or sell the property before the wrap promissory note matures. If the note matures and the buyer is not in a position to refinance or sell the property, the seller will have a right to foreclose on the property.
What if the buyer cannot refinance by the maturity date?
The buyer needs to ensure that they are able to either refinance the loan or sell the property by the maturity date. If not, the seller may not allow an extension and could foreclose on the property if not paid off before the maturity date.
What is the SAFE Act?
The SAFE Act places a licensing requirement on certain types of owner finance transactions. This Act does apply to wrap transactions. However, the seller is not required to be licensed if the property is the seller’s homestead or the sale is to a family member. If a residential property is being sold to a non-family member, the transaction and the parties are subject to the SAFE Act and the seller is required to have a residential mortgage loan origination officer assist with the buyer application process. This rule only applies to residential properties.
The SAFE Act does not apply to persons who make five or fewer owner-financed loans in a year (a de minimus exemption under Finance Code Sec. 156.202(a)(3)).
What is the Dodd-Frank Bill?
The Dodd-Frank Bill overlaps the SAFE Act in its regulatory effect.
This law applies for persons doing more than three owner financed transactions per year. However, there is no exception from confirming that the buyer/borrower has the ability to repay the loan. A seller is obligated to investigate Buyer’s credit history, current and expected income, current obligations, debt-to-income ratio, employment status, etc. in order to make this determination. Additionally, the loan must be fully amortizing (i.e., there is no balloon). Lastly, the owner financed note must have a fixed rate or, if adjustable, must adjust only after five or more years and be subject to reasonable annual and lifetime limitations on interest rate increases.
To comply with the Dodd-Frank Act, it is advised the parties use an RMLO (residential mortgage loan originator) to confirm the buyer’s credit worthiness and ability to pay the mortgage.
What is Senate Bill 43?
Senate Bill 43 has sweeping changes and regulations for mortgage wraps in the State of Texas. These laws apply to all wraps, subject to, assumptions, seller finance wraps, etc. after a seller completes their third transaction in a 12 month period. If you sell a property and the mortgage is not paid off, this is now regulated by SB 43.
A wrap seller/lender must comply with the following:
1. Provide to the buyer/borrower the Texas Property Code Section 5.016 disclosures on or before the 7th day before the wrap mortgage loan agreement/documents are signed;
2. Provide a notice regarding property insurance on or before the 7th day before the wrap mortgage loan agreement/documents are signed;
3. Provide written disclosures in the buyer’s native language;
4. The wrap borrower/buyer may rescind the purchase agreement within 7 days from receiving the disclosures;
5. If the disclosures are provided after closing, the wrap borrower/buyer may rescind the transaction within 21 days from receipt of the disclosures; and
6. If the wrap borrower/buyer does not receive the notices, the wrap borrower may rescind the wrap loan agreement at any time by providing the wrap lender notice of rescission in writing.
