What Is Wraparound Mortgage?
In a wraparound, the seller doesn't pay off their existing mortgage. They sell the property and create a new deed of trust for the full purchase price (or the balance the buyer is financing). The buyer pays the seller. The seller uses part of that to pay the underlying loan and keeps the rest as profit. The wrap "wraps around" the existing lien. Critical risk: the underlying loan almost certainly has a due-on-sale clause. When the lender discovers the transfer, they can accelerate and demand full payoff. Wraparounds work when the underlying lender doesn't enforce due-on-sale—or when the seller can pay off quickly. They're a creative financing tool with significant legal risk. Often used in subject-to type structures.
A wraparound mortgage is seller-carryback financing where the seller's new mortgage "wraps around" the existing first mortgage. The buyer pays the seller; the seller continues paying the underlying lender. The seller earns the spread between the buyer's payment and the underlying payment.
At a Glance
- What it is: Seller financing that wraps around the existing mortgage
- Structure: Buyer pays seller; seller pays underlying lender
- Seller profit: Spread between buyer's rate and underlying rate
- Risk: Due-on-sale clause in underlying loan
- Use case: Creative financing when seller has low-rate existing loan
How It Works
The mechanics
Seller owes $150,000 on a 4% mortgage. Sale price: $280,000. Buyer puts $50,000 down, needs $230,000 financed. Seller creates a wraparound deed of trust for $230,000 at 7%. Buyer pays seller ~$1,530/month. Seller pays underlying lender ~$716/month. Seller keeps ~$814/month as interest income on the "wrapped" portion ($80,000 = $230k - $150k) plus the spread on the $150k.
The spread
The seller earns:
- Interest on the $80,000 "new" money at 7%
- The difference between 7% (what the buyer pays) and 4% (what the seller pays) on the $150,000—that's the "wrap" profit
Title and lien priority
The wraparound is typically recorded as a junior lien—or the seller uses a land contract / deed structure where they hold title until the wrap is paid. The underlying deed of trust remains in first position. If the buyer defaults, the seller forecloses on the wrap—but the underlying loan is still there. The buyer would need to pay off both in a foreclosure scenario. Structure varies by state; attorney guidance is essential.
Due-on-sale: the elephant in the room
Virtually all institutional mortgages have a due-on-sale clause. When the property transfers, the lender can accelerate and demand full payoff. The seller is violating the loan terms by transferring without payoff. If the lender finds out—through title transfer, insurance change, or mail—they can call the loan. The seller would need to pay off the $150,000. If they can't, the property could be foreclosed. Wraparounds are used when the seller believes the lender won't enforce—or when they have a plan to pay off quickly. It's a calculated risk.
Real-World Example
Carlos sells a rental house in Phoenix for $310,000. He owes $185,000 at 3.5% (from 2021). The buyer has $60,000 down and wants to wrap the rest. Carlos creates a wraparound for $250,000 at 7.5%. Buyer pays Carlos $1,748/month. Carlos pays the underlying lender $831/month. Carlos nets $917/month on the wrap.
The underlying lender (a large bank) rarely checks for title transfers on performing loans. Carlos and the buyer hope they won't notice. If the lender does accelerate, Carlos would need to pay off $185,000. He has the equity from the $60,000 down payment—but that's the buyer's money, not his. He'd need other funds. The risk is real. Some investors use wraparounds with portfolio lenders who are more lenient, or with underlying loans that are assumable (rare for conventional loans).
Pros & Cons
- Creative financing when buyer can't get bank loan
- Seller earns ongoing income and spread
- Buyer gets financing without bank approval
- Can preserve a low-rate underlying loan (if lender doesn't accelerate)
- One transaction instead of two (no refi by seller)
- Due-on-sale risk—lender can call the underlying loan
- Complex structure; requires experienced attorney
- Buyer's title position can be clouded
- If seller stops paying underlying loan, property goes to foreclosure
- Regulatory and legal risk in many jurisdictions
Watch Out
Due-on-sale enforcement: Lenders have become more aggressive in some markets. Don't assume "they never check." Have a backup plan: cash to pay off the underlying loan, or a refinance ready.
Seller reliability: The buyer depends on the seller to pay the underlying loan. If the seller dies, goes bankrupt, or simply stops paying, the underlying lender will foreclose. The buyer could lose the property despite making wrap payments. Escrow arrangements can help—buyer's payment goes to a third party who pays both the underlying lender and the seller.
State law: Wraparounds are restricted or prohibited in some states. Work with a real estate attorney who knows your jurisdiction.
Balloon timing: Many wraps have a balloon payment. The buyer must refinance or pay off at that date. If they can't, the seller may need to foreclose or renegotiate.
The Takeaway
A wraparound mortgage is advanced creative financing—seller financing that leaves the underlying loan in place. The due-on-sale risk is real and cannot be ignored. Use only with full legal counsel and a clear understanding of the consequences. For many investors, a standard seller-carryback (where the seller pays off their loan at closing) is simpler and safer.