Wraparound mortgages: one loan wrapped around another
The seller keeps their 4% mortgage, finances you at 7%, and earns the spread — the all-inclusive trust deed as both an acquisition tool and an exit strategy, with the servicing discipline that keeps wraps from unraveling.
What is a wraparound mortgage? A seller-financed loan that "wraps" the seller's existing mortgage: you buy the property with a new, larger note payable to the seller; the seller keeps paying their original, smaller underlying loan; and they pocket the difference in both balance and rate. A seller with a $180k loan at 4% who wraps you at $240k and 7% earns 7% on the $60k of equity and a 3-point spread on the $180k they still owe — while you get financing no bank offered, on a timeline no bank matches. The wrap (formally an all-inclusive trust deed, AITD) is seller financing's power tool for properties that still carry debt — and its failure modes are exactly as mechanical as its benefits, which makes servicing discipline the entire game.
The structure, drawn once
Formally: the buyer takes title (deed transfers), signs a wrap note and all-inclusive trust deed to the seller, and the underlying loan remains untouched in the seller's name. Compare the neighbors in the creative-financing family: in subject-to the buyer pays the underlying loan directly and the seller carries no note; in a standard seller carryback the property was free and clear. The wrap is the hybrid for the two-thirds of houses that carry debt — and it's the structure where the seller keeps earning rather than merely escaping.
The risk ledger, both sides
Buyer's side. The middleman risk is the big one: your payments must actually service the underlying loan. The professional cure is structural, not trust-based — a neutral third-party servicer collects your payment, pays the underlying lender first, and remits the spread to the seller, with you receiving confirmation both happened. Add title insurance, a recorded deed (you own the property; never accept a wrap structured as a contract-for-deed unless you understand exactly what you're giving up), and a wrap note with a right to cure: if the seller defaults on the underlying loan, you may pay it directly and offset against the wrap. Both sides share the due-on-sale reality — the deed transfer gives the underlying lender the right to call; rarely exercised on performing loans, never waivable by wishing. Seller's side. Their credit still secures the underlying loan, so the buyer's default is their emergency: the cure is a properly-drafted wrap with foreclosure rights (they foreclose on the wrap, retake the property, and the underlying loan never missed a beat) plus a real down payment that makes walking away expensive.
The wrap as an exit strategy
The second life of the structure: investors sell on wraps. The subject-to buyer holding a 3% underlying loan resells to an owner-occupant at 7.5% on a wrap — collecting a down payment, a monthly spread on the entire balance, and appreciation in the strike price, while a servicer runs the plumbing. Land investors exit on wrapped terms for premium pricing. The compliance note is non-negotiable: selling to owner-occupants on financing triggers Dodd-Frank/SAFE Act rules — licensed loan originator involvement, ability-to-repay documentation — in most cases; investor-to-investor wraps stay lighter. One conversation with a lending attorney before your first wrap exit is the cost of doing this like a professional, as with every note you create.
Where wraps fit
Years 3–7, in both directions: as a buyer, the wrap unlocks owner-carry terms on debt-carrying properties — the pre-foreclosure and tired-landlord channels surface them weekly; as a seller, it converts your own dispositions into interest-earning paper with spread on money you still owe — the small investor's first taste of being the bank on both sides of the same building. The structure rewards exactly one virtue above all: plumbing discipline. Every wrap that ends badly ends at a missed underlying payment nobody was watching; every wrap that compounds quietly has a servicer's statement proving the chain held, month after month, for years.
Frequently asked questions
+How does a wraparound mortgage work?
The buyer takes title and signs a new, larger note to the seller (the wrap); the seller keeps paying their existing smaller mortgage and pockets the difference in rate and balance. Example: $180k underlying at 4%, wrapped at $240k and 7% — the seller earns 7% on their equity plus a 3-point spread on the balance they still owe, while the buyer gets fast, bank-free financing.
+Is a wraparound mortgage legal?
Yes in nearly all states (a few restrict or regulate them — Texas notably regulates wrap transactions with disclosure and servicing requirements). The deed transfer typically triggers the underlying loan's due-on-sale clause — a lender right, rarely exercised on performing loans, never guaranteed dormant. Sales to owner-occupants add Dodd-Frank originator and ability-to-repay compliance. Attorney-drafted documents are the floor, not a luxury.
+What happens if the seller doesn't pay the underlying mortgage?
The underlying lender can foreclose regardless of your perfect wrap payments — the buyer's core risk. The professional cures: a neutral third-party servicer that pays the underlying lender first from your payment, plus a right-to-cure clause letting you pay the lender directly and offset against the wrap if the seller defaults. Never run a wrap on trust and personal checks.
+Why would a seller agree to a wraparound mortgage?
Income and price: they earn interest on their full equity plus an arbitrage spread on the balance they still owe — often turning a $60k-equity position into $700+/month of paper income — while typically achieving full asking price and installment-sale tax treatment. It fits sellers who want yield and monthly income more than a lump-sum exit.
+What's the difference between a wrap and subject-to?
In subject-to, the buyer pays the existing loan directly and the seller carries no note — the seller's benefit is debt relief. In a wrap, the buyer pays the seller on a new larger note and the seller keeps paying the underlying loan — the seller's benefit is spread income. Wraps suit sellers with meaningful equity who want to be paid for it; subject-to suits sellers with little equity who want out.
The family: creative financing, seller financing, and subject-to. The paper it creates: note investing.