Understanding Wraparound Mortgages in Real Estate

Wraparound mortgages are a creative financing strategy where the seller keeps their existing mortgage and extends a new loan to the buyer. This new loan "wraps around" the seller’s original mortgage balance and includes any additional amount financed to the new end-buyer. Because wraps are a form of seller financing, they allow buyers who might not qualify for a bank loan to purchase a home, while the seller's interest rate stays in place.

What is a wraparound mortgage?

Instead of a buyer obtaining a new bank mortgage, the seller keeps their existing mortgage and issues a new loan to the buyer that contains the old one. In some states it's a wrap mortgage, and in others it's an all-inclusive deed of trust.

The buyer’s payments cover both the seller’s mortgage payment and any additional amount financed to the buyer/borrower. The seller remains responsible for the original mortgage, receives payments from the buyer, and forwards the appropriate amount to the lender. This arrangement allows the buyer to gain title without a new conventional mortgage.

Wraparound mortgages are most common when the seller’s existing loan carries a lower interest rate than current market rates. Because the buyer signs a promissory note directly with the seller, wraps are considered a form of owner financing and often close faster than traditional mortgage transactions.

How do wraparound mortgages work?

Consider this example:

1. Seller owns a home with an outstanding mortgage balance of $80,000 at 4% interest.

2. Buyer agrees to purchase the home for $120,000. Instead of applying for a bank loan, the buyer pays a down payment and signs a new promissory note for the remaining $108,000 at 5% interest.

3. The seller keeps the original mortgage in place and uses the buyer’s monthly payments to pay the first mortgage while keeping the spread between 5% and 4%.

Wraparound mortgages are legal as long as they’re properly structured. Title is transferred to the buyer, but the seller retains a second mortgage or deed of trust that secures the wrap (allowing the seller to foreclose for nonpayment). Each month the buyer pays the seller, and the seller pays the bank. This arrangement continues until the wrap is refinanced, paid off, or otherwise satisfied.

Key components of a wraparound mortgage

- Promissory note and deed of trust: The buyer signs a note promising to make payments to the seller. A deed of trust or mortgage secures the note against the property.

- Interest rate and payment terms: The interest rate is negotiated between buyer and seller. Sellers typically charge more than their existing mortgage rate to earn a spread. Terms can be interest‑only or amortizing over a few years.

- Underlying loan: The seller’s existing mortgage remains in place. The wrap must not violate the original loan’s requirements, particularly any due‑on‑sale clause.

- Insurance and taxes: The buyer is responsible for property taxes and insurance, often naming the seller as an additional insured.

Benefits of wraparound mortgage

Wraparound mortgages can benefit both buyers and sellers when used appropriately:

• Easier qualification for buyers: Buyers who don’t meet conventional lending requirements can secure financing because the seller determines qualification criteria.

• Faster closings: Without a bank’s underwriting process, wraps can close more quickly, which is attractive when timing is critical.

• Income and interest spread for sellers: Sellers earn the difference between their existing mortgage rate and the rate charged to the buyer. If the seller doesn’t need a lump‑sum payout, a wrap provides monthly cash flow.

• Flexible negotiation: Because wraps are private agreements, parties can negotiate terms such as down payment, payment schedule, and interest rate.

Wraps are especially popular among real‑estate investors using creative finance strategies. They allow investors to acquire properties with little upfront capital and to offer financing to buyers as part of a wrap investment strategy. Wraps work hand‑in‑hand with "subject‑to" strategies—where a buyer purchases a property subject to the existing mortgage.

Risks and due‑on‑sale clause considerations

While wraparound mortgages can come with significant risks.

• Due‑on‑sale clause: Most mortgages in the United States include a due‑on‑sale clause, which gives the lender the right to demand full repayment of the loan if the borrower sells or transfers the property. In a typical sale, the original loan is paid off and a new loan is obtained. With a wrap, the original mortgage remains. If the lender discovers the transfer, it may demand immediate payment or even foreclose on the property. Although lenders often choose not to enforce the clause unless there is a default, the risk is always present.

• Default risk form 2 angles: Wraparound mortgages involve two mortgages: the seller’s original mortgage and the buyer’s wrap. If either party fails to pay, foreclosure is possible. For example, the seller could fail to forward the buyer’s payment to the bank, leading to foreclosure even though the buyer paid on time. Alternatively, the buyer might default, leaving the seller unable to make payments on the underlying mortgage. This dual default risk makes wraps inherently riskier than traditional mortgages.

• Legal compliance: Wraps must comply with state and federal laws, including disclosure requirements and regulations for residential mortgages. Improperly structured wraps can expose both parties to fines or litigation. Sellers should consult professionals to ensure they are not acting as unlicensed lenders and that the transaction meets title and escrow requirements.

Before entering into a wrap, both parties should perform due diligence. Buyers need to verify the seller’s mortgage terms and ensure payments are forwarded. Sellers should obtain proof of insurance naming them as mortgagee and may require the buyer to escrow taxes and insurance. Everyone should consult legal counsel to draft enforceable documents and confirm compliance with due‑on‑sale clauses.

When to consider a wraparound mortgage

Wraparound mortgages can make sense in situations such as:

• Investment acquisitions when interest rates are high or traditional financing is unavailable.

• Helping buyers who cannot qualify for conventional financing.

• Selling a property with a low‑interest mortgage to earn a spread by offering higher‑rate financing.

• Portfolio disposition by investors who sell properties to owner‑occupants using wraps to generate passive income and spread out capital gains.

How Creative TC can help

Wraparound mortgages are at the heart of creative finance, but they are not DIY projects. Creative TC helps investors and homeowners implement wraps safely by offering:

• Due‑on‑sale clause remediation: We evaluate existing loans for alienation clauses and advise on risk mitigation strategies.

• Wraparound mortgage consulting: Our experts structure wraps, prepare promissory notes and deeds of trust, and guide you through negotiations.

• Subject‑to investing guidance: Wraps often pair with subject‑to deals; we help you understand when to use each technique and how to combine them.

• Title and closing coordination: Wrap transactions require meticulous coordination with title companies; our team ensures documents are executed and recorded correctly.

• Seller financing and private lending support: Whether you’re a buyer seeking financing or a seller looking to act as a lender, we help structure transactions that meet legal requirements and protect your interests.

At Creative TC, we see wraps as powerful tools, but only when used responsibly. Our team brings real-world experience and first-hand knowledge to navigate the complexities of creative financing. Contact us to schedule a consultation and discover how wraps can fit into your investment strategy.

Conclusion

Wraparound mortgages offer a flexible alternative to traditional mortgages by allowing sellers to finance buyers without paying off their existing loans. They can open doors for buyers who can’t qualify for bank loans and provide steady income for sellers. However, wraps carry substantial risks—including due‑on‑sale clause enforcement and dual default exposure—that require careful planning and professional guidance. By understanding how wraps work, weighing the benefits and risks, and working with experts like Creative TC, you can harness this creative financing technique to achieve your real‑estate goals.