Quick Answer
The underlying loan generally remains in place after a wrap transaction unless separately paid off, refinanced, or released. The original borrower (the seller) may remain personally responsible for that debt.
One of the most misunderstood aspects of a wraparound mortgage is what happens to the seller existing mortgage. The answer is not always simple, and the details matter.
Who Still Owes the Underlying Debt?
The seller signed the original promissory note and is the borrower on the underlying mortgage. Unless the lender has released the seller or the loan has been assumed by the buyer, the seller remains personally liable for the debt. A wrap transaction does not automatically transfer that liability to the buyer.
The Buyer Is Not Automatically the Borrower
The buyer makes payments under the wrap, but this alone does not make the buyer the borrower on the underlying loan. The underlying lender likely does not know the buyer exists. The buyer has not signed the underlying promissory note. The buyer is not on the underlying deed of trust.
This is fundamentally different from a loan assumption where the lender approves the buyer as the new borrower. See also Loan Assumption vs. Subject-To.
What Happens if the Underlying Payment Is Missed?
If the buyer stops paying under the wrap, or if the seller fails to forward payments, the underlying loan goes into default. The lender forecloses against the seller (the borrower of record). The buyer loses the property and any equity, and the seller faces foreclosure and credit damage.
What About a Later Sale or Refinance?
When the buyer eventually sells or refinances, the underlying loan may need to be paid off, or the new transaction must address it. The underlying lender payoff is generally required to deliver clean title to the next buyer.
For more on these dynamics, see How Does a Wrap Transaction Close? and Who Makes Payments in a Wrap Transaction?