Everything You Need To Know About Mirror Wrap VA Loans

Wraps are a form of seller financing in which an underlying lien remains in place (similar to a subto transaction).

Wraps may act as a “passthrough” for the existing loan with no change to the terms and balance, or they may act as a “container” which holds the existing loan(s) and a markup in principal balance and/or interest rate.

The VA home loan program helps active duty service members, veterans, and eligible surviving spouses purchase a home VA loans offer advantages like no down payment and limited closing costs But for some borrowers, even a VA loan may not be enough to buy the home they want. This is where mirror wrap VA loans come in.

A mirror wrap VA loan allows a buyer to wrap their VA mortgage around the existing mortgage of the seller. This creative financing technique can help buyers afford a home when other options won’t work. However, mirror wrap loans are complex and come with risks

This comprehensive guide will explain what a mirror wrap VA loan is, how they work, pros and cons to consider, and tips for buyers interested in this unique VA purchase option.

What is a Mirror Wrap VA Loan?

A mirror wrap VA loan takes place when a buyer gets VA financing to purchase a home, but instead of the seller paying off their existing mortgage, that mortgage remains active. The buyer’s VA loan “wraps around” the seller’s mortgage.

This situation creates first and second mortgages on the home. The seller keeps making payments on the original first mortgage loan. Meanwhile, the buyer makes payments to the seller on their VA mirror wrap loan, which sits in second position.

In most cases, the VA mortgage has a lower interest rate than the initial mortgage. The seller collects the difference between the two payments as profit.

The seller remains responsible for paying the first mortgage on time every month. If they default, the buyer risks foreclosure even if they make their VA loan payments. This risk is the main drawback of a mirror wrap VA loan.

How Does a Mirror Wrap VA Loan Work?

Here is a step-by-step overview of how a mirror wrap VA loan works:

Buyer gets pre-approved for a VA mortgage and searches for homes to purchase.
Buyer finds a suitable home still encumbered by the seller’s existing mortgage.
Buyer and seller agree to terms with the VA mirror wrap loan structure.
Buyer applies for official VA financing and goes through the approval process.
At closing, the buyer makes any required down payment and starts making principal and interest payments to the seller on their VA loan.
Seller continues making payments to the first mortgage holder on the original loan.
Seller forwards the difference in monthly payments to the first mortgage lender.

It may sound complex, but mirror wrap loans allow buyers to purchase properties that otherwise may have been unattainable for them. Sellers also benefit by having an expanded pool of qualified buyers.

Pros and Cons of Mirror Wrap VA Loans

Mirror wrap VA loans offer several advantages but also come with risks to weigh.

Pros

More Buying Power: Mirror wrap VA loans help buyers afford more expensive homes than a stand-alone VA loan would permit. This increased purchasing power provides more housing options.

Profit for Sellers: Sellers earn interest income by charging a higher rate on the second VA loan than their first mortgage rate. This extra profit incentivizes sellers to participate.

VA Benefits: Buyers still get VA mortgage perks like no down payment requirement, no monthly mortgage insurance, and low interest rates.

Cons

Risk of Foreclosure: If the seller stops making payments on the first mortgage, the home goes into foreclosure, even if the buyer makes their VA payments.

Complex Process: Mirror wrap loans require multiple parties and approval steps, so the process is less straightforward than a typical purchase.

Short-Term Solution: These loans often act as a bridge to help the buyer qualify for a conventional refinance down the road.

Is a Mirror Wrap VA Loan Right for You?

Mirror wrap VA loans make sense for buyers who want to purchase a specific home but cannot qualify for a large enough standalone VA loan to buy the property outright. It provides a workaround.

These loans also work for sellers having trouble finding buyers able to afford their listing price. Offering creative VA financing opens up more potential buyers.

However, the risks are real. The buyer must feel comfortable with the seller reliably making ongoing first mortgage payments. There should also be a plan to refinance into a conventional VA loan or other product eventually.

Working with an experienced real estate attorney is a must when considering a mirror wrap VA loan. An attorney can help structure the deal to protect both parties.

Tips for Getting a Mirror Wrap VA Loan

Follow these tips when seeking a mirror wrap VA mortgage:

Find an amenable seller open to the mirror wrap structure.
Consult a real estate attorney before signing anything or submitting the VA application.
Ask the original lender if they will allow the wrap mortgage. Some may prohibit it.
Have the title company draft the wrap-around deed and note.
Make payments directly to the underlying lender to reduce risk.
Get everything in writing. Do not rely on a handshake deal.
Set a timeline with the seller on when to refinance into a regular VA loan.

Taking these steps helps mitigate the risks of a mirror wrap VA loan. As with any real estate transaction, make sure you fully understand the terms before proceeding.

Alternatives to Mirror Wrap VA Loans

In some cases, other options may better serve a buyer’s needs:

VA Streamline Refinance – If the seller has an existing VA loan, the buyer may be able to do a VA streamline refinance and assume the seller’s loan.

Cash Purchase – If possible, buying with cash eliminates financing challenges. Some buyers take out a VA cash-out refinance on another property to get funds to purchase with cash.

Lower Purchase Price – The buyer may be able to qualify for a lower VA loan amount on the home. The seller would need to agree to a reduced price.

Down Payment Assistance – Down payment help from nonprofit organizations or government agencies can potentially allow the buyer to qualify for a larger standalone VA loan.

These alternatives are worth exploring to see if they can facilitate the purchase before pursuing a mirror wrap VA loan.

Refinancing a Mirror Wrap VA Loan

Most buyers utilize a mirror wrap VA loan as a short-term solution. The goal is to refinance into a conventional VA loan or other mortgage product after a certain period of time.

To qualify for a refinance, the buyer typically needs to:

Make at least six consecutive VA loan payments to the seller
Have improved finances or credit score since purchase
Secure an appraisal confirming the home’s value has not decreased
Receive permission from the second lienholder (seller) to refinance

Work closely with your loan officer to time the refinance appropriately. You want to refinance as soon as possible to get out from under the risks of a mirror wrap loan.

Closing Costs with a Mirror Wrap VA Loan

VA loans allow buyers to roll closing costs into the loan amount. Buyers can typically finance up to 4% of the total loan amount in closing costs.

Common VA closing costs include:

VA funding fee (up to 3.6% of loan amount)
Appraisal fee
Credit report fee
Recording fees
Title insurance premiums
Survey fee
Home inspection fee
Origination fee
Discount points

This ability to fold closing costs into the loan makes the upfront cash outlay more affordable for buyers using a VA mirror wrap loan.

How to Calculate Entitlement for Mirror Wrap VA Loans

VA entitlement refers to the maximum amount of VA home loan funding a qualified borrower can access. Here are the steps to calculate entitlement for a mirror wrap VA loan:

Determine available entitlement by subtracting any previously used VA entitlement from $36,000 if you are a first-time buyer or $144,000 if you’re a repeat VA borrower.
Calculate 25% of the purchase price of the home.
Choose the lower of the two amounts above. This is your maximum entitlement available.
Subtract any down payment you plan to put towards the purchase.
The remaining amount is your maximum loan amount for a mirror wrap VA loan.

Knowing your entitlement and structuring the deal accordingly helps ensure you will have sufficient VA financing to complete the transaction.

Partnering With an Experienced Lender

The underwriting process for mirror wrap VA loans is nuanced. Finding an experienced VA lender familiar with these transactions will make getting approved much easier.

The lender needs to account for both the existing mortgage and the mirror wrap VA loan when evaluating the buyer’s ability to afford the monthly payments. An expert VA lender knows how to structure the deal for the best chance of approval.

The Bottom Line

While risky, a mirror wrap VA loan provides a path to homeownership for buyers unable to qualify for a large enough stand-alone VA mortgage to purchase the home they want. Along with speaking to an attorney, partnering with a knowledgeable lender maximizes success when using this creative financing technique.

For buyers with strong credit and finances, a conventional VA cash-out refinance or purchase loan remains the simpler and safer choice. But for the right buyer and seller, a mirror wrap VA loan can achieve a purchase

Mirror Wrap – The Passthrough

A mirror wrap is also known as an exact wrap. There is no markup of the principal amount or the interest rate.

In a mirror wrap, the seller doesn’t make any monthly profits. It’s effectively a passthrough construct that grants rights of foreclosure to the seller in case the buyer defaults.

Wraparound Mortgage

A wraparound mortgage is a form of financing in which an existing loan(s) is incorporated (wrapped) into a new loan of same or greater value and same or greater interest rate.

The wraparound mortgage gives the seller a lien position so they can foreclose if the buyer doesn’t make payments or otherwise defaults. In a subto transaction, there’s no such protection for the seller.

Functionally, the buyer makes payments to the seller, who then continues to pay their original mortgage and keep any difference (if any). The actual payment arrangement may vary.

mirror wrap

FAQ

What is a VA mirror wrap?

In a mirror wrap, the buyer buys a property from the seller by giving them a note that mirrors their existing payment. The seller acts as the lender, and the terms of the loan between the buyer and seller should mirror or be higher than the seller’s existing loan.

Can you do a wraparound mortgage on a VA loan?

The only loans that can become a part of a wraparound mortgage are assumable loans. A conventional loan is not typically assumable, but an FHA, USDA, or VA loan is. A wraparound loan is a form of seller financing. That’s because the seller acts as the lender and offers financing terms to the buyer.

Who is liable in a wrap around mortgage?

A wraparound mortgage is a financing mechanism where the buyer issues to the seller an installment obligation in an amount that effectively includes the seller’s outstanding mortgage encumbering the property. The seller remains liable for and continues to make payments on the existing mortgage.

Are wrap around loans legal?

A wraparound mortgage is a unique form of seller financing in which the seller keeps their mortgage and extends a loan to the buyer. The buyer pays the seller each month and the seller uses that money to pay their own mortgage. For this to be a legal option, the seller must have an assumable mortgage.

What is a wrap around mortgage?

Sometimes real estate investors need to get creative with financing ideas. A wrap around mortgage — also known as a wrap loan, overriding mortgage, carry-back, all-inclusive mortgage, or simply conjoining the words to wraparound mortgage — is (usually) a form of seller financing. A unique form, that leaves the original seller’s mortgage in place.

Can a seller offer a wraparound mortgage?

If a seller wants to offer a wraparound mortgage, they’ll need to check whether their home loan is “assumable.” An assumable mortgage is a home loan where the buyer takes over, or assumes, the same terms of the seller’s existing mortgage.

What happens if a seller uses a wrap-around loan?

Sellers who offer owner financing and use a wrap around loan run the risk that the buyer defaults on their payments. That leaves the seller stuck paying the existing mortgage while they go through the lengthy and expensive foreclosure process to reclaim possession.

What is the difference between a mirror wrap and equity wrap?

In a mirror wrap, the seller doesn’t make any monthly profits. It’s effectively a passthrough construct that grants rights of foreclosure to the seller in case the buyer defaults. In an equity wrap, a portion of the seller’s equity is financed in addition to the underlying debt (mortgage).