Pricing out the closing costs on a wraparound mortgage

Question

Before bringing a wraparound mortgage idea to a seller, it helps to price out the closing side in full. Say a 300k sale, a 240k underlying loan around 4 percent, and a wrap note in the 270k range at 7 percent. The line items to account for: who drafts the wrap note and the deed, what a real estate attorney typically charges to do that properly, whether title insurance is even available on a structure like this, and what a servicer costs per month if the underlying payment runs through them. A number like 500 dollars for drafting the note tends to be low for something with a senior lien sitting underneath it. A wrap involves real legal complexity, since the note has to account for the existing loan, the due-on-sale risk, and the servicing arrangement, and attorneys who do this work regularly usually charge more than a simple note drafting fee. Title insurance availability on a wrap varies by underwriter and by state, so that's worth confirming early rather than assuming it away. Treating this as a cheap close is usually the wrong starting assumption.

Rena Guide · Accepted Answer

Here's the shape of the spend on a 300k wrap, with the caveat that every number below varies by state and by who you hire.

Document drafting is the big one. A wrap note plus deed of trust or mortgage, written by an attorney who has done wraps before, is generally quoted in the low four figures rather than the hundreds, because the note has to coordinate with a senior loan that stays in place. The 500 dollar figure you saw is a generic note form. It won't address what happens if the seller stops paying the underlying, and that's the clause the whole deal turns on.

Closing costs run through a title company or closing attorney depending on your state. Title insurance is usually available, and the title work will show the senior lien, so the policy and the closing statement will both reflect that the old loan is still there. Ask the title company directly whether they'll close a wrap before you get far, since some simply won't.

Monthly servicing through a third-party company commonly runs in the range of low tens of dollars per loan per month, sometimes with a setup fee. If they're also disbursing the underlying payment, expect that to be priced higher or handled as a separate escrow instruction.

One thing your list is missing: recording. In most states the wrap security instrument gets recorded, which puts a document referencing the transfer into the public record where the senior lender's monitoring can see it. Some states also charge transfer tax on the sale. Both of those are worth pricing and understanding before you talk to the seller, and the recording question is one for your closing attorney.

karen_whitfield · Answer

500 buys you a template promissory note, not a wrap package. The wrap note has to reference the senior loan, spell out who pays it, what happens on default of either loan, and what the buyer's cure rights are. That's real drafting.

ehernandez74 · Answer

Ask two real estate attorneys what they charge for a seller carry with an underlying loan still in place and the usual answer is that they will not quote until they have seen the senior note. The scope depends on what the existing mortgage says about transfers. So the first cost on a wrap is somebody reading a document you may not have a copy of yet, and the rest of the fee schedule hangs on what that reading turns up.

paulgrant17 · Answer

Does the seller need a license to originate the note? I've seen people say carrying paper on a few properties a year crosses into needing one and other people say never for your own property.

nicole_adeyemi · Answer

@paulgrant17 that is a state question and it also depends on how many notes there are and whether the buyer occupies the property. Ask a lawyer licensed where the property sits, seriously, because it is not a forum answer. On the cost thread, add a title search on the senior lien if the seller has refinanced since buying, because a second mortgage or HELOC nobody remembered will change the whole structure.

Pricing out the closing costs on a wraparound mortgage

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