Definition
A wraparound mortgage 'wraps around' an existing loan—the seller finances new funds on top of the old loan. The buyer pays the seller; the seller pays the original lender. It benefits sellers but carries due-on-sale clause risks for borrowers.
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Wraparound mortgages are complex seller-financed arrangements. The seller provides a new mortgage that includes the existing loan balance plus additional financing, at a rate higher than the underlying mortgage. The buyer makes payments to the seller, who pays the original mortgage from those funds. This arrangement benefits sellers wanting to stay invested in the property and buyers unable to qualify for new financing. However, wraparounds carry risks: if the original mortgage has a due-on-sale clause, it could trigger acceleration; if the seller defaults on the underlying mortgage, the buyer's equity is jeopardized.
Pro Tip
Wraparound mortgages are risky; verify the underlying mortgage doesn't have a due-on-sale clause that could be triggered.
Example
A property has a $150,000 mortgage at 3% from 2015. A seller finances $350,000 in total wraparound at 6%, receiving $2,100 monthly but paying $900 to the original lender, keeping $1,200.