Wraparound Mortgage

How Subject To Financing and Wraparound Mortgages Work in Practice

Subject to financing and wraparound mortgages are both forms of "creative" or nontraditional financing that build on an existing mortgage rather than replacing it with a brand new loan.

Subject to financing means the buyer purchases the property subject to the existing mortgage that stays in the sellers name. The buyer takes title to the property and starts making payments on the sellers existing loan, usually according to the original terms. The lender does not formally approve or underwrite the buyer, and there is typically no new first-position loan created.

Wraparound mortgages are a related, but distinct, structure. In a wraparound:

• The seller keeps the original mortgage in place.
• The seller creates a new, larger loan to the buyer that wraps around the existing mortgage balance.
• The buyer makes one monthly payment to the seller on this new note.
• The seller uses part of that payment to continue paying the original underlying mortgage and keeps the difference, if any, as spread or profit.

For example, if the seller owes $180,000 at 4% interest and sells the property for $250,000, the seller might create a wraparound note for the buyer for $230,000 at 6%. The buyer pays the seller as agreed, and the seller uses those funds to pay the underlying 4% mortgage and retains the margin between the two loans.

How wraparounds relate to subject to financing

• Both structures rely on an existing mortgage that stays in place instead of being paid off at closing.
• Subject to financing typically involves the buyer stepping directly into the sellers payment stream on the existing loan, without a new junior note from the seller.
• A wraparound usually introduces a new seller-financed note in addition to the old mortgage, with the original mortgage effectively wrapped inside the new obligation.

The practical impact is that subject to financing is often simpler and tied directly to the existing loan terms, while a wraparound gives the parties more flexibility on price, interest rate, and repayment structure, but also more moving pieces and more risk if something goes wrong.

Key Benefits, Risks, and When a Wraparound Makes Sense

A wraparound mortgage can be useful when traditional financing is difficult or when the parties want to preserve an attractive existing loan. At the same time, it introduces real risk for both sides that needs to be weighed carefully.

Potential benefits for buyers

• Access to financing without a conventional loan application, which can help in situations where credit, documentation, or timing are challenging.
• The ability to benefit indirectly from an existing low-interest first mortgage that might be more favorable than current market rates.
• Opportunity to negotiate flexible terms with the seller, such as lower upfront cash, interest-only periods, or customized repayment schedules.

Potential benefits for sellers

• Expanded pool of potential buyers who cannot easily obtain traditional financing.
• Possible interest rate spread between the existing mortgage and the wraparound note, which can create ongoing income in addition to the sale price.
• Ability to sell without paying off a favorable underlying loan, which may avoid prepayment penalties or the loss of a below-market rate.

Core risks and what makes wraparounds different from a standard sale

• Payment risk on the underlying loan: The original lender still views the seller as the borrower. If the buyer pays the seller but the seller fails to pay the underlying mortgage, the lender can still pursue foreclosure.
• Due-on-sale clause exposure: Many mortgages include a clause allowing the lender to call the loan due if the property is transferred. A wraparound can trigger that clause, which means the lender could demand immediate payoff.
• Title and documentation complexity: The buyer needs clarity on who is responsible for each payment, whether payments are being tracked, and how default will be handled.

In general, a wraparound mortgage makes the most sense when there is a strong, trusting relationship between buyer and seller, a clear written agreement, and a compelling reason to preserve the existing mortgage rather than replacing it with a new one.

Practical Tips, Protections, and Red Flags to Watch For

Because wraparound mortgages and subject to arrangements are more complex than a standard loan, both buyers and sellers should treat them with care.

Protections buyers should consider

• Use a written agreement that spells out payment amounts, due dates, late charges, and what happens if either party defaults.
• Arrange for payments to be handled through a neutral third-party escrow or loan servicing company that collects the buyers payment and sends the underlying mortgage payment directly to the lender.
• Review the existing mortgage documents to understand the interest rate, balance, term, and any due-on-sale or prepayment clauses.
• Order a title search so you can see every lien, mortgage, and recorded interest affecting the property.

Protections sellers should consider

• Carefully evaluate the buyers ability to make the required payments, even if there is no formal underwriting by the original lender.
• Require a meaningful down payment so the buyer has financial commitment to the transaction.
• Structure the wraparound note so that the payment you receive is enough to comfortably cover the underlying mortgage payment and any reserves.
• Specify clear remedies if the buyer misses payments, such as default notices, cure periods, and rights to accelerate the debt.

Common red flags

• Unwillingness to share the underlying loan documents or recent mortgage statements.
• Vague or overly informal agreements that leave out key details such as interest rate, term, and default provisions.
• Promises that a wraparound guarantees no risk or that the lender will never enforce a due-on-sale clause.

Handled thoughtfully, subject to financing and wraparound mortgages can solve specific problems for both buyers and sellers, but they need to be approached with clear documentation, realistic expectations, and sound professional advice.