Final answer:
True, a junior lien or second mortgage can wrap into the balance of the first lien in seller financing, known as a wraparound mortgage. This process includes the seller financing the buyer for both the property price and the remaining balance of the initial mortgage.
Step-by-step explanation:
The statement regarding a junior lien or second mortgage wrapping into the balance of the first lien, frequently used in seller financing, is true. This is known as a wraparound mortgage. Such financial arrangements can be part of creative real estate transactions, particularly when the seller acts as the lender.
In the context of seller financing, the seller may provide a secondary mortgage to a buyer that encompasses and includes the remaining balance on any existing first mortgage. Therefore, the seller is essentially lending the buyer enough funds to cover both the property's selling price minus any down payments and the balance that is still due on the original mortgage. The buyer will then make payments to the seller based on this combined debt.
It is important to approach such arrangements with caution though, especially in light of the fragility highlighted by the era of subprime loans and financial securitization. During the mid-2000s, banks were incentivized to scrutinize borrowers thoroughly if they intended to hold the mortgage loan.
However, with the intent to sell the mortgage in the secondary market, there was less scrutiny which led to risky lending practices and the issuance of NINJA loans - loans to individuals with No Income, No Job, or Assets.