Wraparound Mortgage Closings: What Gets Recorded, and What Gets Insured
A wraparound mortgage (wrap) closing puts two documents on record: the deed that moves title to the buyer, and a mortgage (or deed of trust) that allows the seller to foreclose if the buyer doesn't pay.
This post is about the closing: what reaches the county, what the title commitment shows, what the policy covers, and what where you're still exposed.
Creative TC's article already covers what a wrap is and when to use one in their wraparound mortgage guide.
Special note: I'll use "mortgage" in this article but it carries the same meaning as "deed of trust".
What Gets Recorded at a Wraparound Mortgage Closing
Three documents come out of a wrap closing and only two of them reach the recorder.
The deed gets recorded and conveys title to the buyer.
The wraparound promissory note stays private and sets the money terms.
The wraparound mortgage gets recorded and is the leverage allowing the seller/lender to foreclose if the borrower defaults on the note.
A Promissory Note isn't Protection
A promissory note is a just a contractual promise to pay. On its own it, it's "unsecured" and only gives you a claim against the borrower. If the borrower defaults, you have to sue and seek a judgment, which may or may not get you paid.
A mortgage the "security instrument" that allows you to force the house to be sold to pay you back.
Can You Get Title Insurance on a Wraparound Mortgage?
Yes, in most cases, because a wrap conveys title. The deed moves ownership to the buyer at closing, and that conveyance is an insurable event, so an owner's title insurance policy can be issued. What varies between companies is appetite for the structure, not whether a wrap sale is insurable in principle.
Worth understanding by contrast: on a contract for deed the seller keeps legal title and the buyer takes equitable interest, so there is no new ownership event for a policy to attach to.
On the policy amount, you insure the full purchase price, not just your cash-to-close figure. The balance you took over is exposure whether or not it came out of your pocket at the table.
What the Title Commitment Shows About the Underlying Loan
The title commitment doesn't hide the loan that is staying in place. It gets added to the exceptions. The Exceptions portion of a title commitment is where the title is saying, "We won't pay out any claims related to any of the following things..." and the old, unreleased mortgage is on that list.
If you have never worked through one line by line, Schedule A and Schedule B are worth an hour of your life. On a wrap file, the sections to read twice are the ones describing the existing mortgage and anything conditioning the new one.
Why Some Title Companies Decline a Wrap File
Plenty of offices will not touch a wrap, and the reason is almost never legality. Underwriter appetite differs, internal policy differs, and staff experience differs, so the same file gets declined in one office and closed as routine work in another. The full version of that argument is its own post.
What makes a decline expensive is if you only find out about it days before closing. They say yes when you ask, but when they actually look at the file, they realize they don't understand or don't want the deal. Ouch. I've seen this plenty of times, since I own a transaction coordination business as well.
Creative finance closings are standard fare at Creative Title, rather than an exception we may or may not accommodate. When we take on a deal, it's with both eyes wide open. And yes, we have been known to turn deals down when they're poorly structured, or especially when it becomes evident that someone doesn't understand the deal they've gotten themselves into. Our mission is to bring stewardship to real estate transactions, and that demands we not drive things forward when someone can't follow along.
Closing a wrap? Book a call and we'll help you get it done right. Send your contract to [email protected].
This article is general information, not legal advice. Loan documents, instrument terms, recording practice and state law vary, and outcomes depend on the specific facts of a transaction. Consult a qualified attorney in the relevant state before acting. Creative Title is a licensed title and settlement services provider in Colorado and Tennessee.
Read next: The Settlement Statement, Line by Line, on a Creative Finance Deal
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