Wraparound Mortgage

What Is a Wraparound Mortgage?

A wraparound mortgage is a type of junior loan which wraps or includes, the current note due on the property. The wraparound loan will consist of the balance of the original loan plus an amount to cover the new purchase price for the property. These mortgages are a form of secondary financing. The seller of the property receives a secured promissory note, which is a legal IOU detailing the amount due. A wraparound mortgage is also known as a wrap loan, overriding mortgage, agreement for sale, or all-inclusive mortgage.

Key Takeaways

  • Wraparound mortgages are used to refinance a property and are junior loans that include the current note on the property, plus a new loan to cover the purchase price of the property. 
  • Wraparounds are a form of secondary and seller financing where the seller holds a secured promissory note
  • A wraparound tends to arise when an existing mortgage cannot be paid off.
  • With a wraparound mortgage, a lender collects a mortgage payment from the borrower to pay the original note and provide themselves with a profit margin.

How a Wraparound Mortgage Works

Frequently, a wraparound mortgage is a method of refinancing a property or financing the purchase of another property when an existing mortgage cannot be paid off. The total amount of a wraparound mortgage includes the previous mortgage's unpaid amount plus the additional funds required by the lender. The borrower makes the larger payments on the new wraparound loan, which the lender will use to pay the original note plus provide themselves a profit margin. Depending on the wording in the loan documents, the title may immediately transfer to the new owner or it may remain with the seller until the satisfaction of the loan.

A wraparound mortgage is a form of seller financing that does not involve a conventional bank mortgage, with the seller taking the place of the bank.

Since the wraparound is a junior mortgage, any superior, or senior, claims will have priority. In the event of default, the original mortgage would receive all proceeds from the liquidation of the property until it is all paid off.

Wraparound mortgages are a form of seller financing where instead of applying for a conventional bank mortgage, a buyer will sign a mortgage with the seller. The seller then takes the place of the bank and accepts payments from the new owner of the property. Most seller-financed loans will include a spread on the interest rate charged, giving the seller additional profit.

Wraparound Mortgage vs. Second Mortgage

Both wraparound mortgages and second mortgages are forms of seller financing. A second mortgage is a type of subordinate mortgage made while an original mortgage is still in effect. The interest rate charged for the second mortgage tends to be higher and the amount borrowed will be lower than that of the first mortgage.

A notable difference between wraparound and second mortgages is in what happens to the balance due from the original loan. A wraparound mortgage includes the original note rolled into the new mortgage payment. With a second mortgage, the original mortgage balance and the new price combine to form a new mortgage.

Example of a Wraparound Mortgage

For example, Mr. Smith owns a house that has a mortgage balance of $50,000 at 4% interest. Mr. Smith sells the home for $80,000 to Mrs. Jones who obtains a mortgage from either Mr. Smith or another lender at 6% interest. Mrs. Jones makes payments to Mr. Smith who uses those payments to pay his original 4% mortgage. 

Mr. Smith makes a profit on both the difference between the purchase price and the original owed mortgage and on the spread between the two interest rates. Depending on the loan paperwork, the home's ownership may transfer to Mrs. Jones. However, if she defaults on the mortgage, the lender or a senior claimant may foreclose and reclaim the property.

Article Sources
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  1. Washington and Lee Law Review. "Unwrapping the Wraparound Mortgage Foreclosure Process," Pages 1025-1027.

  2. National Archives, Code of Federal Regulations. "Title 26 § 15a.453-1 Installment Method Reporting for Sales of Real Property and Casual Sales of Personal Property."

  3. Consumer Financial Protection Bureau. "What Is a Second Mortgage Loan or 'Junior-Lien'?"

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