What is a Wraparound Mortgage?
A wraparound mortgage (also called a "wrap" or "all-inclusive trust deed") is a form of seller financing where the seller creates a new mortgage that literally wraps around the existing mortgage on the property. The buyer makes payments to the seller on the wraparound loan, and the seller continues making payments on the original underlying mortgage. The wrap mortgage encompasses both the existing loan balance and any additional financing provided by the seller.
For example, if a property is worth $200,000 and has an existing mortgage balance of $120,000, the seller could create a wraparound mortgage for $180,000. The buyer makes payments to the seller based on the $180,000 wrap. The seller uses part of those payments to cover the original $120,000 mortgage and keeps the difference. The seller profits from both the spread in loan amounts ($60,000) and the interest rate differential between the two loans.
How the payment flow works
The mechanics of a wrap are straightforward once you understand the money flow. The buyer pays the seller monthly based on the wrap mortgage terms. The seller then pays the original lender on the underlying mortgage. The seller's profit comes from two sources: the interest rate spread (the wrap is typically at a higher rate than the underlying loan) and the principal spread (the wrap amount exceeds the underlying balance).
Example payment flow:
Underlying mortgage: $120,000 at 3.5% = $539/month
Wrap mortgage: $180,000 at 6.0% = $1,079/month
Seller's monthly cash flow: $1,079 - $539 = $540/month
This structure is similar to a subject-to acquisition, with one critical difference. In a subject-to deal, the buyer takes title and makes the mortgage payments directly (or through a servicing company). In a wrap, the seller retains responsibility for the underlying mortgage while the buyer's obligation is to the wrap note only. The underlying mortgage stays in the seller's name, and the seller remains on the hook for it.
Why investors use wraps
Wraparound mortgages solve several problems for both buyers and sellers. For buyers, wraps provide financing without qualifying for a traditional mortgage. The buyer negotiates terms directly with the seller, which can mean lower down payments, more flexible credit requirements, and customized loan terms. For sellers, wraps generate ongoing income from the interest rate spread while providing a higher sale price than a quick cash sale might yield.
Real estate investors use wraps to acquire properties with little money down and generate immediate positive cash flow. If you buy a property subject to the existing 3.5% mortgage and sell it on a wrap at 6%, you pocket the interest spread every month. Some investors build entire portfolios using wrap financing, acquiring properties from motivated sellers and selling them to buyer-occupants on wraps.
The due-on-sale risk
The single biggest risk in any wraparound mortgage is the due-on-sale clause. Virtually every conventional mortgage originated since 1982 contains a due-on-sale clause that gives the lender the right to demand full repayment if the property is transferred. A wraparound mortgage involves transferring ownership, which technically triggers this clause.
In practice, lenders rarely enforce due-on-sale clauses as long as the underlying mortgage payments are being made on time. Lenders don't want to foreclose on performing loans. However, the risk exists, and if the lender does call the loan, the seller must pay the full remaining balance immediately or face foreclosure. This risk must be disclosed to all parties and carefully considered before entering a wrap transaction.
Legal requirements and protections
Wraparound mortgages are subject to the Dodd-Frank Act and state-specific seller financing regulations. In Texas, the Texas Property Code requires specific disclosures when seller financing involves a wrapped underlying mortgage. The seller must disclose the existence, balance, and terms of the underlying lien. Many states require loan servicing through a third-party servicer to protect the buyer from the seller failing to forward payments to the underlying lender.
A third-party loan servicer is strongly recommended for any wrap transaction. The servicer receives the buyer's payment, forwards the underlying mortgage payment to the original lender, and distributes the remainder to the seller. This protects the buyer from the scenario where the seller collects wrap payments but stops paying the underlying mortgage, which could result in foreclosure even though the buyer has been making payments.