During the crazy 1980s, when interest rates skyrocketed into the high teens and it was almost impossible to motivate any real estate investor to buy real estate, creative financing became quite popular. An All Inclusive Trust Deed (AITD), or wraparound loan, for instance found its way into many investment real estate transactions.

Given the post-sub prime debacle we’re experiencing today, banks are making it tough for real estate investors to qualify for loans. The investors’ FICA ratings seemingly must meet higher minimum levels, and lenders generally have become more stringent about loan-to-value ratios and property quality. In other words, wraparound mortgages might make a come back in some real estate investing cases for real estate investment property to exchange hands.

Okay, what is a wraparound mortgage? In reality, the wrap¬around is a second mortgage granted by a seller to a buyer, but the buyer makes only one loan payment.

When the buyer of a prop¬erty wants to gain the benefits of an existing low interest rate mortgage, for example, he or she “wraps” the existing loan with a new wraparound loan at a higher interest rate. The seller continues to make payments on the existing low-interest loan while the buyer makes payments to the seller on the new wraparound loan. The seller profits on the spread in interest rates while the buyer bypasses rigorous and rigid lender requirements.

If you “wrap” a non-assumable mortgage, the seller’s underlying mortgage lenders may choose to exercise its “due-¬on-sale” clause and the sellers would have to payoff the seller’s mortgage and work out some other type of financing. So use caution if you’re considering the sale of investment real estate with a wraparound mortgage, and don’t agree to do anything until you are certain that a wraparound mortgage is feasible.