Wraparound Mortgages Explained (With Example)

A wraparound mortgage, or "wrap", is a form of seller financing used when the seller still has a mortgage on the property. Instead of paying that loan off at closing, the seller leaves it in place and gives the buyer a new, larger loan that "wraps around" the existing one. The buyer pays the seller, and the seller keeps paying the original lender. Wraps can be attractive, especially when the existing loan has a low rate, but they carry real legal and practical risks.

How the money flows

The buyer pays a down payment to the seller at closing.
The buyer signs a promissory note to the seller for the rest of the price (the wrap note), secured by a mortgage or deed of trust that is junior to the existing loan.
Each month the buyer pays the wrap payment to the seller or, better, to a third-party servicer.
From that payment, the original lender is paid. The seller keeps the difference, called the spread.

A worked example

A seller owes $120,000 on a mortgage at 4% with 22 years left. They sell the house for $250,000. The buyer puts $25,000 down, and the seller carries a $225,000 wrap note at 8% over 30 years.

Buyer's wrap payment: about $1,651 per month.
Seller's payment on the existing loan: about $684 per month.
Seller's monthly spread: about $967.

The seller has effectively lent $105,000 of their own equity ($225,000 wrap minus $120,000 still owed). Because they earn 8% on the full $225,000 but pay only 4% on the $120,000 portion, their return on that $105,000 is much higher than 8%. Our wraparound mortgage calculator puts the seller's yield at roughly 11% a year for these inputs. After year 22 the underlying loan is paid off and the seller keeps the entire payment.

Why people use wraps

Preserve a low rate. When the seller's loan carries a lower rate than today's market, a wrap passes some of that advantage through the deal.
Help buyers who cannot get bank financing. As with any seller financing.
Seller income and yield. The spread on the underlying loan boosts the seller's return.
Lower closing costs and speed. No new institutional loan is needed.

The big risk: the due-on-sale clause

Most residential mortgages contain a due-on-sale (alienation) clause that allows the lender to demand the full balance if the property is sold or transferred without its consent. A wrap transfers the property while leaving the loan in place, which can trigger this clause. Lenders do not always enforce it, but they can, and if they do, the loan must be paid off quickly, usually by refinancing. That can be a crisis for both parties. Some transfers are protected by federal law (for example certain transfers to relatives or into a living trust), but an ordinary sale to an unrelated buyer generally is not. Read more in our due-on-sale clause guide.

Other risks for buyers

The seller stops paying the underlying loan. The original lender can foreclose even if the buyer has paid every month. This is the most serious buyer risk.
Liens and judgments against the seller can attach to the property if title is not properly transferred and recorded.
Insurance gaps. The property must stay insured in a way that protects the buyer, the seller and the original lender.

Other risks for sellers

The buyer stops paying, but the seller still owes the original lender every month.
Regulation. Some states regulate wraps directly, and federal lending rules may apply to financing owner-occupied homes.
Liability remains. The seller stays personally liable on the original loan until it is paid off.

Reducing the risks

Use a third-party servicer that receives the buyer's payment, pays the underlying lender first and gives both parties records. This addresses the "seller doesn't pay" risk.
Record everything: the deed, the wrap mortgage or deed of trust, and any agreement on servicing.
Disclose the underlying loan and the due-on-sale risk to the buyer in writing.
Match terms. Make the wrap term at least as long as the underlying loan, or plan for a balloon that pays both off. The calculator warns you if the underlying loan outlasts the wrap.
Have a plan if the loan is called: the buyer's ability to refinance, reserves, or a contractual process.
Get legal advice in your state before signing.

Alternatives to a wrap

Loan assumption: if the seller's loan is assumable (many FHA, VA and USDA loans are), the buyer can take it over with lender approval, avoiding the due-on-sale problem.
Seller carryback: the buyer gets a new bank loan, the seller pays off their old loan and carries a smaller second note.
Seller pays off the loan at closing and finances the buyer with a standard seller-financed note.

Wraparound mortgages can be powerful when everyone understands the structure and the safeguards are in place. They are not a do-it-yourself project.

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Disclaimer: This guide is general educational information, not legal, tax or financial advice. Laws on seller financing, lending and real estate transfers vary by state and country and change over time. Consult a licensed real estate attorney and a tax professional before entering into any agreement.