Use Caution When Considering Wraparound Mortgages in New York Estates

In a regular mortgage, the person who sells the house gets the money upfront, uses it to pay out an existing mortgage and keeps the rest. In a wraparound mortgage, the seller gets the money in installments, using every month’s installment to pay the existing mortgage and keeping the rest of the payment.

With a wraparound mortgage, the owner of property sells their property to a buyer and also acts as the lender by providing seller financing to the buyer. This works well for a buyer who is unable to qualify for traditional financing from a financial institution. Typically, the rate on a wraparound mortgage is higher than on a mortgage obtained from a bank.  The seller, in turn, gets to sell the home and gets the benefit of collecting interest on the debt they are essentially lending to the buyer. One way to look at it – the seller is lending the house as opposed to lending money, except they are not renting the house but transferring it completely to the buyer.

The seller must still pay their existing mortgage payment on their New York property because the buyer has not yet paid the seller in full yet for the home. The deal is structured so that the buyer pays the seller a monthly mortgage payment over a set period of time which is more than the seller’s existing mortgage payment. The seller uses the mortgage payment received from the buyer to pay the seller’s existing mortgage payment and keeps the excess amount.

I am not a big fan of wraparound mortgages for New York estates. There is too much of an opportunity for the buyer to not make payments. NYC’s housing laws favor people who occupy property and foreclosure is difficult in New York City, so it will take years for the unfortunate seller to get the property back if the deal goes sour, with virtually no recourse for the missed mortgage payments. Meanwhile, the bank is sure to foreclose on the property if mortgage payments are not made.

The tax consequences to the seller are also an issue in a New York wrap around mortgage transaction. It is important to keep in mind that the interest you receive from a private mortgage that you financed is taxable to you and cannot be offset by the interest you are still paying on your existing mortgage.  If you do not itemize your tax deductions on your federal tax return, the mortgage interest you are paying may not benefit you in tax savings. You should discuss the tax and legal implications of a real estate wrap around mortgage with your New York probate and estate tax attorney to determine if this strategy is beneficial to you.

Wraparound mortgages are particularly problematic in New York estates. Estate proceedings are meant for a quick transfer of property, and cannot be open for the tens of years it will take for the buyer to fully pay out a wraparound mortgage. If a wraparound mortgage is determined to be the best possible deal for the estate, a better way to implement it is to first transfer the property to the beneficiaries or heirs, close the estate, and only then do the mortgage.

If you die before the buyer pays off the mortgage, the note would pass to your estate. However, if you own the property in your sole name, your heirs would have to establish a probate proceeding with the New York Surrogate’s Court to get the title transferred to them. Therefore, it is also a good idea to speak with your New York probate and estate attorney about establishing a trust.

If you wish to speak to an NYC estate attorney, call the Law Offices of Albert Goodwin at (212) 233-1233.