How a wrap is structured
The seller keeps their original mortgage and creates a new promissory note to you for a larger amount — typically the agreed sale price minus your down payment. You make one monthly payment to the seller on the wrap note. The seller then continues making their own payment on the underlying loan out of what you send them, and pockets the difference.
The seller usually profits on the spread between the two loans. If their underlying loan is at 4% and they write your wrap at 7%, they earn the 3% difference on the wrapped balance — on top of any markup on the sale price. That spread is the reason a seller agrees to a wrap instead of demanding to be cashed out.
Wraparound vs. seller financing vs. subject-to
Plain seller financing assumes the seller owns the property free and clear — there is no underlying loan to work around. A wraparound is what you use when the seller still has a mortgage: it lets them carry financing without first paying that mortgage off.
Subject-to is the close cousin: in a subject-to deal you simply take over the seller’s existing payment with no new note created. A wrap adds a new, larger seller-held note on top of the existing loan — giving the seller a profit spread and a clearer paper trail, at the cost of more complexity. Choose the wrap when the seller wants ongoing income and a markup; choose subject-to when you just want the existing low payment.
The risks — and why you paper it carefully
The underlying mortgage almost certainly has a due-on-sale clause, and a wrap triggers it just as subject-to does. The lender can call the wrapped loan; build a refinance or payoff plan before you close. There is also performance risk in both directions: if the seller stops paying the underlying loan despite collecting your payment, the property can be foreclosed out from under you — so many wraps route payments through a neutral third-party servicer that pays the underlying lender directly.
Because two loans are stacked on one property, a wraparound has more ways to go wrong than a standard purchase. Always use a real-estate attorney and a servicing company, record the wrap note, and define who pays the underlying loan and how, in writing.
Pros and cons
Pros
- Lets a seller with an existing mortgage still carry financing
- No bank qualifying for the buyer — terms are negotiated
- Seller earns the rate spread plus any price markup
- Faster, cheaper close than originating a new bank loan
Cons
- Due-on-sale clause on the underlying loan can be triggered
- Buyer depends on the seller actually paying the underlying loan
- More complex and higher-risk than plain seller financing
- Requires careful legal documentation and ideally a servicer
Frequently asked questions
Is a wraparound mortgage legal?
Yes, wraparound mortgages are legal, but they implicate the underlying loan’s due-on-sale clause and, for owner-occupant buyers, federal lending rules. Between investors on an investment property the rules are lighter — but always close a wrap through an attorney and use a neutral servicer.
What is the difference between a wraparound and subject-to?
Subject-to means you take over the seller’s existing payment with no new loan created. A wraparound creates a new, larger seller-held note that wraps around that existing loan, giving the seller a profit on the rate spread. A wrap is essentially subject-to plus seller financing layered on top.
Who pays the underlying mortgage in a wrap?
The seller remains legally responsible for the underlying loan and pays it out of the payment you send them. To protect the buyer, many wraps use a third-party loan servicer that receives the buyer’s payment and pays the underlying lender directly, so the buyer can confirm the senior loan stays current.