Quick Answer
A wraparound mortgage (wrap) is a creative finance structure in which the seller provides financing to the buyer that wraps around the seller's existing mortgage. The buyer makes payments to the seller, and the seller continues making payments on the underlying loan. The seller's existing loan is not paid off.
Important Legal Notice
Wraparound mortgages involve significant legal and financial risk. The due-on-sale clause in the underlying loan may be triggered, and the transaction must comply with applicable federal and state lending laws, including the Truth in Lending Act, Regulation Z, the SAFE Act, and Dodd-Frank Act requirements. This article provides general educational information and does not constitute legal advice. Consult qualified legal counsel before structuring any wrap transaction.
How Wraps Work in Texas
In a wrap transaction, the seller conveys title to the buyer. The buyer signs a new promissory note to the seller for an amount that covers both the remaining balance on the seller's existing loan plus additional financing. The seller continues making payments on the underlying loan. The buyer makes payments to the seller. For a complete overview, see our Complete Guide to Wraparound Mortgages.
Title Considerations
The title company must determine whether it can close a wrap transaction. Key considerations include whether the title insurer will issue coverage, how the wrap deed of trust is recorded, and how the existing lender's priority is handled. For more on how wraps close, read how a wrap transaction closes.
Due-on-Sale Risk
As with subject-to transactions, wraps carry due-on-sale risk. The lender on the underlying loan may accelerate the balance if it discovers the transfer. This risk should be disclosed and understood by all parties. See our article on the due-on-sale clause in creative finance transactions.
Texas-Specific Issues
Texas property law, including homestead protections, community property rules, and usury limits, can affect wrap transactions. Both parties should consult with Texas real estate attorneys experienced in creative finance. 1st Option Title works with attorneys nationwide to facilitate compliant wrap closings; closings outside Texas and Arizona are handled through our sister company, OFN Creative Closings.
FAQs
Are wraparound mortgages legal in Texas?
Wraparound mortgages are not specifically prohibited in Texas, but they raise legal and regulatory issues that must be carefully addressed. The due-on-sale clause in the underlying loan, lending regulations, and Texas property laws all apply.
Will a title company close a wrap in Texas?
Some title companies will handle wrap transactions; many will not. 1st Option Title has decades of experience with creative finance structures. Scott Horne, our founder, has handled approximately 10,000 creative-finance transactions in his career.