Wraparound Mortgage
A wraparound mortgage allows sellers to finance a buyer’s loan while keeping the existing mortgage. Learn risks and advantages for both parties.
Definition
A wraparound mortgage is a form of seller financing in which the seller keeps their existing mortgage on the property and issues a new loan to the buyer that "wraps around" the original. The buyer makes payments to the seller based on the wraparound loan’s terms, and the seller uses those funds to pay the underlying mortgage. The difference between the wraparound loan’s rate and the original mortgage’s rate can generate profit for the seller. Wraparound mortgages can help buyers who can’t qualify for conventional financing and sellers seeking to attract more buyers. However, they carry risks, including due‑on‑sale clauses in the underlying mortgage and the possibility that the seller might not make payments, jeopardizing both parties.
Why It Matters
In a wraparound the seller keeps their existing mortgage and lends to the buyer on top of it, pocketing the spread between the two rates. The risk is structural: the buyer pays the seller, and if the seller fails to forward the money the original lender forecloses on a buyer who has paid every month. Almost every modern mortgage also has a due-on-sale clause the arrangement can trigger.
Examples
A seller with a 3.5 percent mortgage wraps it at 7 percent for a buyer who cannot qualify conventionally, earning the 3.5 point spread on the balance.
A buyer pays faithfully for two years, then learns the seller stopped paying the underlying loan and the property is in foreclosure.
A lender invokes its due-on-sale clause after a wraparound and calls the full balance due, forcing an urgent refinance.
Tips
Insist payments go through a neutral third-party servicer that pays the underlying loan directly. That single change removes the largest risk in the structure.
Read the existing note for a due-on-sale clause. Most have one, and proceeding anyway is a risk both sides should take with open eyes.
Record the wraparound so your interest is public. An unrecorded arrangement is close to unenforceable against later claims.
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