A wraparound mortgage is seller financing layered over a loan that stays in place. The seller writes the buyer a new note for the full purchase price, keeps paying the underlying mortgage out of what the buyer sends, and keeps the difference. It creates a financing structure where none was available — and it carries two certainties: the underlying lender was not asked, and the wrap note has an end date.
How the structure works
Seller owes $200,000 at 4%. Buyer purchases at $300,000, pays $30,000 down, and signs a wrap note to the seller for $270,000 at 7%. The buyer pays the seller on the $270,000; the seller keeps paying the underlying $200,000. The seller collects the spread on the wrapped amount plus interest on the $70,000 of their own equity. Title normally transfers to the buyer at closing, with the seller holding a lien for the wrap note.
Where the profit comes from, and who carries the risk
The seller’s return is arbitrage between the underlying rate and the wrap rate, across the full wrapped balance rather than just their equity. The risk is symmetrical and unpleasant for both sides: the seller stays liable on the underlying loan whether or not the buyer pays, while the buyer is dependent on the seller actually forwarding payments. A seller who pockets the money and stops paying the first lien can drive the property into foreclosure while the buyer is current. Use a licensed third-party servicer that splits the payment and remits to the underlying lender directly. This is not optional.
The due-on-sale question
A wrap conveys the property and leaves the underlying loan outstanding, so it is a triggering transfer under the standard due-on-sale clause. The underlying lender can accelerate. The same rate logic applies as elsewhere: the wraps most worth doing are the ones on low-rate underlying notes, and those are exactly the notes a lender in a high-rate market has the most reason to call. Both parties should read how due-on-sale actually works before signing.
The balloon is the defining feature
Wrap notes are written with a balloon, commonly three to seven years, because no seller wants to be a lender for thirty. On the balloon date the buyer owes the remaining wrap balance in full. There is no extension right unless the note grants one. This is the structural fact that determines whether a wrap was a good idea: it was, if the buyer refinanced comfortably before the date; it was not, if the balloon arrived during a tight credit window with no plan in place.
The exit: refinance before the balloon, not at it
The refinance pays off the wrap note, which pays off the underlying loan, and the whole structure unwinds into a single loan in the buyer’s name. For a tenanted rental this is ordinarily a DSCR refinance, qualifying on the property’s rent rather than the buyer’s tax returns. Start twelve months before the balloon date. Lender seasoning requirements, appraisal timing and title curative work on an unusual chain all take longer than people expect, and a buyer refinancing against a balloon deadline has no negotiating position at all.
Wraparound Mortgages for Investors FAQ
They are lawful in most states, and several — Texas among them — regulate them specifically, with disclosure requirements and penalties for non-compliance. State treatment varies enough that this is a question for a real estate attorney in the property’s state before drafting.
The seller does, from the buyer’s payment. Because that leaves the buyer exposed to the seller’s behaviour, the payment should run through a licensed third-party servicer that remits to the underlying lender directly and reports to both parties.
The underlying lender forecloses, and the buyer can lose the property despite having paid. This is the single largest risk in the structure and the reason third-party servicing is essential rather than advisable.
Three to seven years. The note may set any term the parties agree, but sellers rarely want a thirty-year position. Whatever the term, treat it as a hard deadline.
Yes, and that is the intended exit. A refinance pays the wrap and the underlying note together. On a rental, DSCR financing is the usual route because it underwrites the property’s income rather than yours. Begin roughly a year before the balloon.
Usually yes — title transfers at closing and the seller records a lien securing the wrap note. Some arrangements withhold title instead, which makes them closer to a land contract, with meaningfully different consequences on default.