Seller-financing structure where a new obligation wraps around an existing underlying mortgage.
A wraparound mortgage is a seller-financing structure in which the buyer signs a new note to the seller for an amount that includes the balance of the seller’s existing mortgage plus any additional seller-financed amount.
The buyer pays the seller under the new obligation. The seller remains responsible for paying the underlying lender unless the existing loan is separately paid off, modified, or formally assumed. That two-level payment structure is the defining feature of a wraparound.
A wraparound places the buyer between a seller-creditor and an underlying lender the buyer may not pay directly. Even if the buyer makes every payment to the seller, the property can be exposed if the seller fails to forward the required underlying payment.
The existing mortgage may also contain a Due-on-Sale Clause allowing the lender to accelerate the balance after a transfer that is not protected or approved. Creating a wraparound does not erase that clause or convert the transaction into a permitted Loan Assumption.
Rate spread can add another incentive and risk. If the wraparound note rate is higher than the underlying rate, the seller may retain the difference while both loans perform. But the buyer still needs accurate allocation, payoff, servicing, and default records.
Borrowers encounter wraparound proposals during purchase negotiation when the seller still owes an existing mortgage and wants to extend new credit without paying that loan off at closing.
Before proceeding, the parties and their qualified advisers need to identify:
Because state law and loan documents control important rights, a wraparound requires careful legal, title, lending, and servicing review. It should not be improvised from a generic form.
| Step | Payment or obligation | Main risk |
|---|---|---|
| 1 | Buyer owes the new wraparound note to seller | Buyer must follow the new note’s terms |
| 2 | Buyer sends scheduled payment to seller or designated servicer | Payment must be documented and correctly allocated |
| 3 | Seller remains obligated on the underlying mortgage | Seller must keep the old loan current |
| 4 | Seller or servicer sends the underlying payment to that lender | Failure can threaten the property despite buyer performance |
| 5 | Remaining spread or principal is accounted for under the wrap documents | Inaccurate balances can disrupt payoff or enforcement |
A third-party servicer may help track both obligations and provide proof of the underlying payment, but servicing does not by itself cure an unauthorized transfer or defective documents.
Sam sells a home for $450,000 and still owes $260,000 on an existing mortgage. The buyer contributes $50,000 and signs a $400,000 wraparound note to Sam.
The buyer makes the new payment to a designated servicer. The servicer sends the required underlying mortgage payment and accounts for the rest under the wraparound documents. Sam remains obligated to the underlying lender; the buyer’s $400,000 note does not replace Sam’s $260,000 loan.
If the existing lender accelerates under a due-on-sale clause, or if the underlying loan becomes delinquent, the buyer and seller can face a crisis even when their new note has not reached maturity. The transaction therefore needs a credible plan for consent, payment verification, default, and payoff.
| Risk | Why it matters |
|---|---|
| Due-on-sale enforcement | Underlying lender may demand payoff after the transfer |
| Seller payment failure | Buyer’s payment may not reach the underlying lender |
| Buyer default | Seller remains responsible for the underlying loan while enforcing the new note |
| Insurance or escrow disruption | Transfer and payment changes can affect coverage or impounds |
| Balloon maturity | Buyer may need a large payoff or refinance by a fixed date |
| Unclear payoff accounting | Two obligations must be reconciled before a clean lien release |
Wraparound mortgage is a subset of Seller Financing. Ordinary seller financing may create one clean seller-held mortgage with no underlying loan left in place; a wraparound expressly operates around existing debt.
Loan Assumption transfers responsibility for an existing loan under lender and program requirements. A wraparound creates a separate buyer-to-seller debt while the seller generally remains liable on the underlying loan.
Taking title “subject to” a mortgage describes a transfer where the lien remains but the buyer does not necessarily assume personal liability for it. A wraparound adds a new seller-held payment obligation that includes the underlying balance.
Purchase-Money Mortgage is broader acquisition-financing language. A wraparound can be purchase-money financing, but most purchase mortgages are not wraparounds.