Up to 70% of all existing home sales made during the early 1980’s mortgage interest crunch involved seller-held mortgages. I know it’s not the ’80’s anymore, but seller-held mortgages are still pretty popular.
Example: You want to buy a home for $70,000. You can make a downpayment of $20,000 and get a first mortgage for $40,000. That leaves you $10,000 short. You ask the seller to “take back a mortgage” for the $10,000 balance. In effect, the seller is accepting your IOU, secured by the home, for part of the selling price.
Wraparounds: In some cases, the seller may have had an older low-interest loan with a due-on-sale clause. Had the lender learned of the sale, it could have forced the buyer to finance the mortgage at market rates, possibly killing the sale. To prevent this from happening, some sellers continue to make mortgage payments on their first mortgages even after they have made a second mortgage arrangement with the buyers. This second mortgage is called a “wraparound” because it included (or “wrapped around”) the first, and it was often made at a high rate.
Major Drawbacks: A “wrap” may create problems about who actually has title to the property and may leave the buyer exposed to having to repay the old mortgage at once if the lender demands it.
You are taking a huge chance with this type of mortgage, so buyer beware.