Quick Answer
In a wrap transaction, the buyer pays the seller or a servicer under the terms of the wrap. The seller or servicer then makes payments on the underlying mortgage. The flow of payments depends on the structure, and professional servicing is strongly recommended.
The Payment Flow Problem
Consider this scenario: Buyer sends $3,000 per month to the seller. The seller underlying mortgage payment is $1,800. The seller must forward the $1,800 to the existing lender. If the seller does not, the underlying lender does not get paid even though the buyer has been making payments.
This disconnect is the central operational risk in a wrap transaction. The buyer can be current on the wrap, but the underlying loan can go into default because the seller did not forward payments.
Better Payment System: Professional Servicing
A professional loan servicer provides a neutral third party to:
- Collect monthly payments from the buyer
- Disburse the underlying loan payment to the existing lender
- Remit the spread to the seller
- Manage tax and insurance escrows if applicable
- Provide regular statements to both buyer and seller
This removes the operational risk of relying on one party to manually forward payments.
This Isn Just About Trust
Even if both parties are honest and well-intentioned, life happens. The seller could become incapacitated, have a medical emergency, or simply forget. Professional servicing creates a system that does not depend on one person remembering to write a check every month.
Decide Servicing Before Closing
The servicing arrangement should be decided and documented before closing, not after. The closing documents should reflect who will service the loan, how payments will be collected and disbursed, and what happens if the servicing arrangement needs to change.