Many homebuyers or real estate investors only think of mortgages when it comes to financial aid in real estate purchasing. Lately, with the increasing desire of homebuyers to not be immobilized financially by a bank or a loan, alternative financing options have started surfacing. Some of these alternatives are types of seller financing, and the all-inclusive trust deed (AITD) is one of them. Through an all-inclusive trust deed, the buyer can deal directly with the seller, which is beneficial, especially for the buyer. They no longer have to qualify for a typical mortgage loan or take a much smaller mortgage for the property.
An all-inclusive trust deed or a wraparound mortgage is used by homebuyers when purchasing a property that is still under an existing mortgage. An all-inclusive trust deed definition is a document that is secured by a promissory note between the seller and the buyer that takes the remaining balance from the existing seller’s mortgage into account and adds to it the difference between that balance and the sale price of the property. Another way to define an all-inclusive trust deed is as secondary or alternative financing for purchasing real estate.
An all-inclusive trust deed, as any other trust deed by definition, allows the lender to take back possession of the property if the buyer defaults on their mortgage. Because of the wrapping aspect of all-inclusive trust deeds, if the buyer defaults on their mortgage, the original lender will be the one foreclosing the property.
There are specific situations in which an all-inclusive trust deed is used for a home purchase. Maybe the buyer can’t access a loan to cover the full price for the purchase, or the original mortgage’s interest rate is too attractive to give up on. Whichever is the reason, an all-inclusive trust deed can make it easier for homebuyers to purchase homes.
Through an all-inclusive trust deed, the seller can be the financing partner for the buyer. By extending a junior mortgage towards the buyer, the seller keeps their existing mortgage at the original interest rate, which might be better than what a new mortgage would require from the buyer. This junior mortgage doesn’t stop the original mortgage, but they work together. The all-inclusive trust deed wraps both the original and the junior mortgage into one payment that the buyer must pay the seller. The seller continues their payments to their existing mortgage and keeps the surplus.
Seller Sam wants to sell his home to John with $80,000 left on his mortgage with an interest rate of 5%. As the house is selling for $300,000 and John can’t take out such a significant loan, they make an all-inclusive trust deed. Like this, John will take out a loan for the difference between $300,000 and $80,000, which is something he can access. Through his mortgage, John pays a 7% interest rate and a monthly fee of around $650. To this, John adds Sam’s remaining mortgage fee of about $230. John’s all-inclusive trust deed will add the two fees into one of $880.
Seller Sam needs to sell his home with $175,000 left on his mortgage with an interest rate of 6% and a monthly cost of $1,100. The selling price Sam and John agreed on is $250,000. The difference between Sam’s balance and John’s purchase price is $75,000, and John can’t pay off the original mortgage. John can take over the original mortgage payment and pay the difference as a second seller-financed mortgage at Sam’s interest rate. Sam agrees and will carry back the second mortgage at an 8% interest rate. The second mortgage of $550 will wrap around the first mortgage, and John will pay Sam a monthly fee of $1,600.