Wrap-Around Loan

Wrap-Around Loan: What It Is and How It Works

Key takeaways

• A wrap-around loan is a form of seller financing where the buyer makes payments to the seller, and the seller continues to pay an existing mortgage.
• The wrap “wraps” the seller’s remaining mortgage balance plus any additional amount financed into a single new loan between buyer and seller.
• Sellers usually charge a higher interest rate than their original mortgage and earn the spread, but they assume full default and legal risks (including due-on-sale/alienation clauses).

What is a wrap-around loan?

A wrap-around loan is an owner-financed mortgage arrangement in which the seller keeps the original mortgage in place and creates a new loan for the buyer that includes the unpaid balance of that mortgage plus any additional financing. The buyer makes monthly payments to the seller under a promissory note; the seller, in turn, continues making the payments on the original mortgage.

Both title and deed typically transfer to the buyer, but the seller remains responsible to the original lender until that loan is paid off.

How it works

1. Seller has an outstanding first mortgage on the property (e.g., $80,000 at 4%).
2. Seller and buyer agree on a sale price and terms. The seller creates a wrap-around loan for the buyer that covers the seller’s mortgage balance plus the additional financed amount.
3. The buyer pays the seller (often a down payment plus monthly payments) at an agreed interest rate. The seller uses the received payments to keep paying the original mortgage and keeps any excess (the interest spread and principal on the additional financed portion).
4. Title usually transfers to the buyer; the seller remains obligated on the original loan.

Example

Joyce owes $80,000 on her mortgage at 4%. She agrees to sell her home for $120,000 to Brian. Brian puts 10% down ($12,000) and finances the remaining $108,000 with Joyce at 7%. Joyce continues paying her original mortgage at 4% on the $80,000, while collecting payments from Brian at 7% on $108,000. Joyce earns:
* The full 7% interest on the $28,000 difference between $108,000 and $80,000, and
* The 3% interest spread (7% − 4%) on the $80,000 remaining mortgage balance.

Benefits

• For buyers: Easier qualification than some traditional lender requirements, faster closings, and potentially lower closing costs.
• For sellers: Opportunity to sell when conventional buyers are scarce and to earn interest spread and cash flow over time.

Risks and downsides

• Seller risks:
• Full default risk if the buyer stops paying; seller must still make payments to the original lender.
• Many mortgages include a due-on-sale (alienation) clause allowing the lender to demand full repayment if the property is transferred, which can prevent or complicate wrap deals.
• Buyer risks:
• May pay a higher interest rate than a conventional mortgage.
• If the original lender enforces a due-on-sale clause or forecloses for seller’s default, the buyer can lose the property even though they are making payments to the seller.
• Legal and practical complexity: Proper documentation, clear escrow arrangements, and legal advice are important to protect both parties.

Who issues a wrap-around loan?

The property seller issues the wrap-around loan. The seller becomes the lender for the buyer, collecting payments and remaining responsible for the prior lender until the original mortgage is paid off or refinanced.

Seller financing (brief)

Seller financing more broadly refers to any arrangement where the seller extends credit to the buyer (via a promissory note) instead of the buyer obtaining a loan from a bank. Wrap-around loans are a specific type of seller financing that incorporate an existing mortgage into the new financing.

Bottom line

Wrap-around loans can be a useful tool to facilitate property sales when traditional financing is unavailable or undesirable for one party. They offer flexibility and potential profit for sellers and easier access for buyers, but they carry significant legal and financial risks—especially related to due-on-sale clauses and default. Both buyers and sellers should obtain competent legal and financial advice and document terms clearly before entering a wrap-around arrangement.