Wraparound mortgage
A wraparound mortgage is seller financing that encompasses an existing loan. The seller keeps their original mortgage and creates a new, larger one that wraps around it.
The buyer pays the seller. The seller pays the original lender. The seller keeps the difference.
How the arithmetic works#
A seller owes $150,000 at 4 percent on an existing mortgage.
They sell for $220,000, taking $20,000 down and carrying a $200,000 wraparound at 7 percent.
They collect payments on $200,000 at 7 percent, and continue paying $150,000 at 4 percent. The spread on the $150,000 overlap, plus the interest on the $50,000 of genuine seller equity, is the seller's return.
The due-on-sale problem#
Nearly every conventional mortgage lets the lender demand the entire balance if the property transfers without consent.
A wraparound transfers the property. It triggers the clause.
Practitioners point out that lenders frequently do not act — historically true when existing loans carried rates at or above market. When outstanding loans carry rates well below current ones, the incentive reverses sharply, and a wraparound is precisely the structure built around a below-market loan.
The whole arrangement depends on a decision the lender is entitled to make at any time.
Both parties carry real risk#
The seller remains personally liable on the underlying mortgage. If the buyer stops paying, the seller must keep paying a loan on a property they no longer own, or face foreclosure and the credit damage.
The buyer depends on the seller actually forwarding the payments. A buyer current on every payment can lose the property because the seller pocketed the money and let the underlying loan default.
That second risk is the one buyers underestimate, and it is why any wraparound should route payments through a third-party servicing arrangement that pays the underlying lender directly rather than relying on the seller.
Against subject-to#
Related structures, different mechanics.
Subject-to: the buyer takes title and pays the existing lender directly. The loan stays in the seller's name; no new mortgage is created.
Wraparound: the seller creates a new larger mortgage and stays in the middle.
Both trigger the due-on-sale clause. Both leave the seller liable. The wraparound adds a payment-forwarding risk the subject-to does not have.
In Minnesota distressed property#
Where the seller is a homeowner in foreclosure, an arrangement of this kind can fall within Minn. Stat. ch. 325N, which regulates foreclosure purchasers and imposes cancellation rights that cannot be waived.
Any homeowner approached with one should speak to a HUD-approved housing counsellor before signing. The advice is free and is not attached to a transaction.