What Is a Wraparound Mortgage?
Let me explain what a wraparound mortgage is directly to you. It's a type of junior loan that wraps around or includes the current note due on the property. This wraparound loan consists of the balance of the original loan plus an amount to cover the new purchase price for the property.
In this setup, the seller offers financing to you, the homebuyer, to purchase the property. You pay the seller a monthly payment at an agreed-upon interest rate, and the seller uses those proceeds to pay the original mortgage.
These mortgages are a form of secondary financing. The seller receives a secured promissory note, which is essentially a legal IOU detailing the amount due. You might also hear it called a wrap loan, overriding mortgage, agreement for sale, or all-inclusive mortgage.
Key Takeaways
Wraparound mortgages are a type of seller financing where you, the buyer, enter a mortgage agreement with the seller instead of borrowing from a bank. The seller accepts payments from you as the new property owner, charges you interest, and pays the original mortgage with the proceeds.
Wraparounds are a form of secondary and seller financing where the seller holds a secured promissory note. They tend to arise when an existing mortgage cannot be paid off.
How a Wraparound Mortgage Works
Frequently, a wraparound mortgage is a method for you to refinance a property or finance the purchase of another when an existing mortgage cannot be paid off. The total amount includes the previous mortgage's unpaid amount plus the additional funds required by the lender.
You make the larger payments on the new wraparound loan, which the lender uses to pay the original note plus provide themselves a profit margin. Depending on the loan documents, the title may immediately transfer to you or remain with the seller until the loan is satisfied.
A wraparound mortgage is a form of seller financing that doesn't involve a conventional bank mortgage, with the seller taking the place of the bank. Since it's 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 property liquidation until it's paid off.
In wraparound mortgages, instead of applying for a conventional bank mortgage, you sign a mortgage with the seller. The seller takes the bank's place and accepts your payments. Most seller-financed loans include a spread on the interest rate, giving the seller additional profit.
Wraparound Mortgage vs. Second Mortgage
A second mortgage is a type of subordinate mortgage made while an original mortgage is still in effect. The interest rate for the second mortgage is usually higher, and the amount borrowed is based on the home's equity and is lower than the first mortgage.
The key difference between wraparound and second mortgages is what happens to the balance from the original loan. A wraparound 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
Consider this example: Mr. Smith owns a house with a mortgage balance of $50,000 at 4% interest. He sells the home for $80,000 to Mrs. Jones, who obtains a mortgage from Mr. Smith or another lender at 6% interest. Mrs. Jones makes payments to Mr. Smith, who uses them to pay his original 4% mortgage.
Mr. Smith profits from the difference between the purchase price and the original owed mortgage, plus the spread between the two interest rates. Depending on the paperwork, the home's ownership may transfer to Mrs. Jones. However, if she defaults, the lender or a senior claimant may foreclose and reclaim the property.
Important Warnings and Differences
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, you can take steps like filing a report to the Consumer Financial Protection Bureau or the United States Department of Housing and Urban Development (HUD).
What is the difference between a wraparound and a conventional mortgage? A conventional mortgage is when the bank lends you money to buy a home from a seller, and you repay the lender. A wraparound is when the seller acts as the lender, and you enter a mortgage agreement with them to finance the purchase, with the seller applying your payments to the original loan.
What is seller financing? It's when you, the homebuyer, enter a loan agreement directly with the seller instead of a bank. The seller creates the mortgage and charges you interest while you make payments to them.
What is an assumable mortgage? It's a type of financing where you take over the seller's existing mortgage loan with the bank. Instead of getting a new loan, you assume the existing one and make the payments, which can be beneficial if it has a low interest rate.
The Bottom Line
With a wraparound mortgage, the seller keeps their existing mortgage and enters a mortgage agreement with you to finance the home purchase at an agreed amount, interest rate, and down payment. You pay the seller monthly, while they pay the bank or lender. Typically, the interest rate charged to you is higher than the original rate, so the seller pockets the difference. Wraparound mortgages are junior loans that include the current note on the property plus a new loan to finance the purchase.
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