Many new investors are easily confused by the concepts of “Subject Mortgages” and “Surrounding 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 hard and expensive money.
Subject-Tos or “Sub2s” are agreements in which the buyer purchases a property subject to the existing mortgage. The buyer will obtain the property and will continue to make the existing mortgage payments. Often the seller will simply hand over the payment booklet to the buyer. There is no new mortgage. Sub2s are often used when the seller is behind on their mortgage and the buyer will usually 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-on-sale clause that states that the loan balance must be paid if the property is sold. Typically, 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, banks are usually happy. Remember: banks do not want homes to go to foreclosure as they are not in the business of buying / selling real estate. So while you need to know the sell-by clause, it’s generally not a problem.
“Whole mortgages” or “envelopes”
A comprehensive mortgage is commonly used when you sell a property that you have an existing mortgage on and are willing to finance. You set the terms of the new loan so that the buyer will make you a monthly payment that is higher than your current mortgage payment. Therefore, the buyer is making you a payment 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 to this is, use Sub2 when shopping and use Wraps when selling.