Quick Answer
In a wraparound mortgage, the buyer purchases with seller financing while the seller existing mortgage remains. The buyer makes payments under the wrap, and the underlying loan continues being paid by the seller or a servicer.
Full Example
Property: $500,000. Existing mortgage: $250,000 at 3.5%. Down payment: $75,000. Seller finances $425,000 at 6%. The $250,000 loan stays. Buyer pays on $425,000. Seller continues paying the $250,000 loan.
The buyer payment is on a larger principal at a different rate. The seller collects the spread but retains the risk that the buyer stops paying while the underlying loan must still be paid.
Follow the Money
- Buyer makes one monthly payment for the full wrap amount
- Payment goes to a servicer
- Servicer forwards the underlying loan portion to existing lender
- Servicer remits the remainder to the seller
Who Pays the Existing Lender?
The seller or servicer continues paying the underlying lender. The lender likely does not know about the wrap. See What Happens to the Underlying Loan in a Wrap?
What Happens at Closing
Open title, examine liens, review underlying financing, document new terms, evaluate priority, prepare documents, review compliance, sign and fund, record, begin servicing. See How Does a Wrap Transaction Close?
What Could Go Wrong?
- Buyer stops paying but seller still owes underlying lender
- Lender accelerates under due-on-sale
- Seller fails to forward payments
- Taxes or insurance lapse
These risks mean wraps require careful structuring, proper docs, professional servicing, and experienced professionals.
WATCH: Scott Horne on Wraparound Mortgages
Scott Horne discusses why a seller might offer a wraparound mortgage.
FAQs
Does the buyer need to qualify?
The seller sets qualification criteria. The buyer should realistically assess their ability to pay.
Can a wrap be recorded?
Yes, a wrap deed of trust is typically recorded to perfect the seller security interest.