Wraparound Mortgage Explained: How a Wrap Deal Works

Say the seller still owes $150,000 on their original mortgage. They sell you the home for $200,000 and finance it: you put a little down and sign a new note to the seller for the balance. That new note wraps around — includes — the existing $150,000 loan. You make one payment each month to the seller on the full wrap, and the seller uses part of it to keep paying their original lender.

The original mortgage stays in place and in the seller's name; it is not paid off at closing. The seller profits from the spread — the difference between the interest rate you pay them and the rate they're paying their lender — plus any markup on the price. The deed typically transfers to you and the seller holds a lien for the wrap note.

Wraps shine when the seller's existing loan carries a low interest rate. The seller can offer you financing at a rate that's attractive compared to current market rates while still earning a spread over their own low rate. You get into the home without qualifying for a brand-new full mortgage, and the seller earns ongoing interest income.

It's most common in markets where rates have risen sharply, because the gap between an old locked-in rate and today's rates is exactly what makes the spread worth it for the seller and the deal worth it for the buyer.

Because the seller's original loan stays in place while title transfers, a wrap can trigger the lender's due-on-sale clause — the lender's right to demand the full balance when the property is sold without consent. As with subject-to deals, lenders don't always enforce it, but they legally can, and you should treat that as a live risk.

There's also a payment-flow risk that's unique to wraps: you pay the seller, and the seller is responsible for paying the underlying lender. If the seller pockets your payment and stops paying their mortgage, the original lender can foreclose — even though you've been paying on time. The standard protection is to route payments through a neutral third-party servicing company that pays the underlying mortgage directly and forwards the rest to the seller.

Verify the exact balance, rate, and terms of the underlying mortgage before you sign, and confirm the seller is current on it. Insist on a servicing arrangement so you can see that the underlying loan is actually being paid. Make sure the wrap note, the security instrument, and the title transfer are all documented and recorded.

Wraps stack a new loan on top of an old one with a due-on-sale clause in the background, so the documents need to be airtight. The Creative Marketplace is a marketplace that connects buyers and sellers — not a lender, broker, or law firm. Before you sign any creative-finance contract, have a title company or a real estate attorney review the documents and confirm clear title.