Wraparound Mortgage

A wraparound mortgage (also called a wrap loan, overriding mortgage, agreement for sale, or all‑inclusive mortgage) is a form of seller financing in which the seller keeps their existing mortgage and extends a new, larger loan to the buyer that “wraps” the original note. The buyer makes payments to the seller, and the seller uses those payments to continue paying the original lender.

Key points

• The wrap includes the unpaid balance of the seller’s original mortgage plus any additional amount needed to reach the agreed purchase price.
• The seller collects payments from the buyer at a negotiated interest rate and pays the original mortgage with those proceeds, typically keeping the difference between rates.
• A wraparound is a junior (subordinate) lien; senior claims on the property have priority in foreclosure.
• Wraparounds are commonly used when the existing mortgage cannot be paid off or when conventional financing is impractical.

How it works

1. Seller and buyer agree on a purchase price, down payment, interest rate, and term.
2. The seller retains the original mortgage and creates a new promissory note with the buyer for the wrap amount.
3. The buyer makes monthly payments to the seller under the wrap terms.
4. The seller uses part of those payments to service the original mortgage and retains any spread between the two interest rates.

Depending on the contract, title may transfer to the buyer at closing or remain in the seller’s name until the wrap is satisfied. Because the wrap is subordinate to the original mortgage, the original lender’s rights remain intact.

Risks and limitations

• Due‑on‑sale clause: Many first mortgages include a clause that lets the original lender call the loan due if the property is sold. That can jeopardize a wrap arrangement.
• Priority risk: If the buyer defaults and the original lender forecloses, the senior lender is paid first and the wrap lender (seller) may lose equity.
• Credit and servicing risk: The seller must reliably forward payments to the original lender; failure to do so can trigger default.
• Legal and tax complexity: Proper documents, escrow arrangements, and tax reporting are important—seek legal and tax advice.

Wraparound vs. second mortgage

• Wraparound mortgage: The seller’s new loan includes the outstanding balance of the original mortgage rolled into the new payment stream. The seller remains responsible to the original lender.
• Second mortgage (junior lien): A separate subordinate loan that does not roll the original mortgage into a single payment; it is based on home equity and is independent of the first mortgage’s terms.

Wraparound vs. conventional mortgage

• Conventional mortgage: A bank or mortgage lender issues a loan directly to the buyer, and the buyer repays the lender.
• Wraparound: The seller acts as lender. The buyer pays the seller, who continues to pay the original mortgage.

Related concepts

• Seller financing: Any arrangement where the seller lends money to the buyer instead of (or in addition to) a bank loan. Wraparounds are one form of seller financing.
• Assumable mortgage: The buyer takes over the seller’s existing lender loan (with lender approval) rather than creating a new loan or wrap. This can be attractive if the existing rate is lower.

Example

Seller (Mr. Smith) has an existing mortgage balance of $50,000 at 4%. He sells the home for $80,000 to Buyer (Mrs. Jones). Mr. Smith provides a wrap loan for the $80,000 purchase at 6%. Mrs. Jones pays Mr. Smith monthly; Mr. Smith pays his original lender from those receipts. Mr. Smith earns profit from the difference in principal (sale price minus original balance) and the interest rate spread (6% minus 4%), while remaining responsible for the original mortgage.

Pros and cons

Pros:
* Can enable a sale when the buyer cannot obtain conventional financing.
* May allow seller to earn higher interest income.
* Potentially faster, more flexible transaction.

Cons:
* Risk that the original lender enforces a due‑on‑sale clause.
* Seller retains liability on the original mortgage.
* Interest rate spread and default risk create potential losses for the seller.
* Complex legal and tax implications.

Practical considerations

• Use clear, written loan documents and a secured promissory note.
• Consider an escrow or servicing agent to collect payments and pay the original lender.
• Confirm whether the original mortgage allows a wrap (check for due‑on‑sale or assignment restrictions).
• Consult a real estate attorney and tax professional before proceeding.

Legal protections

Mortgage lending discrimination is illegal. If you suspect discrimination based on race, religion, sex, national origin, disability, familial status, or other protected characteristics, you can report it to federal authorities such as the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).

Bottom line

A wraparound mortgage is a seller‑financing tool that bundles an existing mortgage into a new loan between seller and buyer. It can facilitate deals that conventional lenders won’t fund, but it carries notable legal, priority, and default risks. Proper documentation, professional advice, and careful servicing arrangements are essential for both parties.