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What Is a Wrap-Around Owner Finance Transaction?

A wrap-around mortgage is a form of owner financing in which the seller finances the purchase of the property for the buyer while an existing mortgage or lien remains in place.  The buyer makes payments under the new wrap-around financing agreement, while the existing underlying mortgage continues to be serviced.

For example:

• A seller owns a property that still has an existing mortgage.
• The seller agrees to sell the property to a buyer using owner financing.
• The buyer makes payments to the seller under a new promissory note and deed of trust.
• The existing mortgage remains in place.
• The seller may use the buyer's payments to make the required payments on the underlying mortgage.

 

Because there can be multiple financial interests connected to the same property, the insurance policy needs to be carefully reviewed and structured.

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Why Insurance Is Important in a Wrap-Around Transaction

Insurance is an important part of protecting the property and the financial interests associated with the transaction.  A typical wrap-around transaction can involve several parties with an interest in the property, including:

• The current property owner or new property owner
• The buyer/borrower
• The holder or servicer of the existing mortgage
• The seller/lender providing the wrap-around financing

 

The insurance policy should be reviewed to determine how these interests should be reflected under the applicable insurance company's underwriting guidelines. Simply transferring an existing homeowner's insurance policy or assuming that the old policy will automatically protect everyone involved can create problems.

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Who We Help

Texas Real Estate Investors

Investors purchasing properties subject-to or selling properties through creative financing may need an insurance policy that reflects the property's new ownership and financing structure.

Owner-Financing Sellers

Sellers who finance a property through a wrap-around transaction may need to coordinate the insurance arrangement with the underlying mortgage and the new buyer's ownership interest.

Wrap-Around Buyers

Buyers should understand that insurance maintained by another party may not necessarily protect their interests. Texas law specifically addresses this issue in the wrap-mortgage disclosure requirements.

Loan Servicers

Insurance documentation is also an important component of maintaining an organized wrap-around loan servicing file.

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Wrap Around Owner Finance Insurance Structure:

*Primary Insured:  This will be the new owner of the property.  Some insurance company underwriters require that the primary insured be a natural person.  If the deed has been transferred to an entity (Trust, Corp, LLC, etc), the primary insured will need to be either the trustee of the trust, or the owner of either the corporation or LLC to which the deed to the property has been transferred.

*1st Mortgagee:  This will be the loan servicer on the mortgage between the previous owner and the current lender.  Please make sure that the loan servicer's or lender's appropriate mortgagee clause is listed, along with the appropriate loan number associated with this mortgage.  This information can be found in the previous owner's online mortgage account, or on a recent mortgage statement.

*2nd Mortgagee:  The 2nd Mortgagee will be the seller/lender offering owner financing to a new buyer.  A loan number will have to be created and listed related to this transaction as well.

*Additional Insured(s):  The previous homeowner that is the named borrower on the underlying mortgage needs to be listed as an additional insured.

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Don't Assume the Existing Insurance Policy Is Sufficient

One of the most common mistakes in creative real estate transactions is assuming that the existing insurance policy can simply remain in place after ownership or financing changes.  A change in ownership, occupancy, financing, or the parties with an insurable interest can affect how an insurance policy needs to be written.

For that reason, we recommend having the insurance arrangement reviewed as part of the transaction rather than waiting until after closing.  We also generally do not recommend maintaining two separate property insurance policies on the same property without first confirming with the applicable insurance professionals and carriers how coverage will coordinate. Conflicting policies can create uncertainty about which policy responds to a claim, or if both policies decline to pay the claim because of duplicate coverage.

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What Happens to the Existing Mortgage Escrow?

Wrap-around transactions can create another practical issue when the existing mortgage lender maintains an escrow account for property taxes and insurance.  The underlying mortgage servicer may have specific requirements for accepting or paying a new insurance policy, particularly when the person or entity listed as the insured differs from the borrower named on the underlying mortgage.

In some circumstances, the underlying mortgage servicer may not pay the new insurance premium from its escrow account.  For this reason, investors and sellers should not assume that sending a new declarations page to the underlying mortgage servicer guarantees that the premium will be paid from escrow.

The investor should be prepared to make the insurance payment directly if necessary and should verify the payment arrangements with the appropriate mortgage servicer.

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Wrap-Around Insurance for Texas Real Estate Investors

If you regularly purchase, sell, or finance real estate using creative financing strategies, having an insurance professional who understands the structure of these transactions can make the process easier.  Sams One Stop/Sams Insurance Group works with Texas real estate investors and property owners on insurance needs involving:

• Wrap-around owner financing
• Seller financing
• Subject-to transactions
• Landlord properties
• Homeowners insurance
• Rental properties
• Commercial property
• General liability
• Other real estate-related insurance needs

 

Our insurance services can also complement our Texas owner-financing and loan-servicing support.

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Insurance And Wrap-Around Loan Servicing

Sams One Stop/Sams Insurance Group also provides loan servicing support for Texas wrap-around transactions.  Our wrap-around loan servicing services can include collecting borrower payments, disbursing funds to the seller/lender, and, when requested, making payments toward the underlying mortgage. We also provide monthly borrower statements and assist with payment tracking and other servicing functions.

For wrap-around servicing, we request supporting documentation that can include the purchase agreement, seller finance addendum, HUD-1 settlement statement, promissory note, deed of trust, current insurance policy, first-payment letter, and current underlying mortgage statement. Keeping the insurance and loan-servicing information coordinated can help the parties maintain better records throughout the life of the transaction.

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Texas Wrap-Around Owner Finance Mortgage Deals Require Planning

Wrap-around financing is a specialized form of real estate financing, and Texas law contains specific requirements applicable to wrap mortgage loans.  For example, Texas Finance Code Chapter 159 addresses wrap mortgage loan financing and includes licensing or registration requirements as well as transaction disclosure requirements. The statute also contains a specific property-insurance warning concerning coverage maintained by someone other than the buyer.

Insurance is only one part of a compliant wrap-around transaction. Buyers, sellers, and investors should work with qualified Texas legal and real estate professionals regarding the structure and documentation of their transaction.  Sams One Stop/Sams Insurance Group can assist with the insurance component of the transaction and can coordinate with the parties involved to obtain the information needed for an insurance quote.

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Request a Wrap-Around Owner Finance Insurance Quote

If you are buying, selling, or financing a property using a wrap-around owner financing structure in Texas, contact us before closing so we can discuss the insurance requirements for your transaction.

Call: (210) 788-1034

Email: aaron@samsonestop.com

4063 East Houston St
San Antonio, TX 78220

We can review the basic transaction details, identify the information needed for a quote, and help you determine what insurance options may be available.