A wraparound mortgage is one of the more creative — and sometimes misunderstood — forms of seller financing. If you hold a wrap note and are considering selling it, or if you are thinking about creating one, this guide explains how wraparounds work, what risks are involved, and how to convert a wrap note to cash.
What Is a Wraparound Mortgage?
A wraparound mortgage (also called a "wrap" or "all-inclusive trust deed/AITD" in California) is a type of seller financing where the new loan wraps around an existing underlying mortgage. Instead of paying off the original loan at closing, the seller keeps the existing mortgage in place and creates a new, larger note that encompasses it.
Here is how the cash flows work:
- The buyer makes one monthly payment to the seller on the wrap note.
- The seller receives that payment and uses part of it to make the payment on the underlying mortgage.
- The difference between the two payments is the seller's cash flow.
Example
A seller has a property worth $300,000 with an existing mortgage balance of $150,000 at 4% interest ($716/month). The seller sells the property for $280,000 with a $30,000 down payment and creates a wrap note for $250,000 at 8% ($1,834/month).
- Buyer pays seller: $1,834/month
- Seller pays underlying mortgage: $716/month
- Seller's net cash flow: $1,118/month
- Seller also earns the 4% rate spread on the underlying $150,000 balance
This structure lets the seller profit from the interest rate differential while providing the buyer with financing they might not get from a bank.
When Are Wraparounds Used?
Wrap mortgages are typically used when:
- The seller has a low-rate mortgage they want to keep: If the existing mortgage is at 3-4%, paying it off and replacing it with new financing at 7-8% would be costly. A wrap lets the seller keep the favorable rate.
- The buyer cannot qualify for traditional financing: Self-employed buyers, those with recent credit events, or buyers in non-standard situations often turn to seller financing, including wraps.
- The seller wants to maximize returns: The rate spread on the underlying loan creates additional profit that a standard seller-financed note would not generate.
- Speed of closing matters: Wraps avoid the need to go through bank underwriting, allowing faster closings.
The Due-on-Sale Clause: The Main Risk
The biggest risk with wraparound mortgages is the due-on-sale clause in the underlying loan. Nearly all conventional mortgages contain a clause that allows the lender to demand full repayment if the property is transferred to a new owner.
Key points about due-on-sale risk:
- The clause exists in most loans: Virtually all conventional mortgages originated after 1982 (when the Garn-St. Germain Act was passed) contain a due-on-sale clause.
- Enforcement is inconsistent: Many lenders do not actively monitor or enforce the clause as long as payments are current. However, there is no guarantee.
- If triggered: The lender can demand the full remaining balance be paid immediately. If it cannot be paid, the lender can foreclose on the underlying mortgage.
- This affects pricing: When selling a wrap note, the buyer factors due-on-sale risk into the offer. Higher risk = lower offer.
Wraparound vs. Standard Seller Financing
| Feature | Standard Seller Financing | Wraparound |
|---|---|---|
| Underlying loan | Paid off at closing | Stays in place |
| Seller cash flow | Full payment amount | Spread between wrap and underlying |
| Due-on-sale risk | None (loan is paid off) | Yes — underlying lender may call the loan |
| Complexity | Simpler | More complex (two loans to manage) |
| Rate arbitrage | No | Yes — profit from rate spread |
| Note value on secondary market | Higher (simpler structure) | Lower (due-on-sale risk and complexity) |
AITD: The California Version
In California and other deed of trust states, the wraparound is called an All-Inclusive Trust Deed (AITD). The mechanics are identical — the new deed of trust wraps around the existing one — but the documentation uses deed of trust terminology rather than mortgage language. AITDs are particularly common in California due to the state's long history with creative financing.
How to Sell a Wraparound Note
Selling a wrap note follows the same general process as selling any mortgage note, with one additional layer of complexity:
- Provide both sets of details: The buyer needs information about both the wrap note and the underlying loan — balances, rates, payment status, and lender information.
- Underlying loan verification: The note buyer will verify the underlying mortgage is current and in good standing. A recent statement from the underlying servicer is helpful.
- Cash offer: Within 24 hours, you receive a written offer that reflects the wrap structure, rate spread, equity position, and due-on-sale risk.
- Closing: The buyer of the wrap note assumes the obligation to continue making payments on the underlying mortgage. All of this is handled through the closing agent.
What Affects Wrap Note Pricing?
- Rate spread: Larger gap between wrap rate and underlying rate = more cash flow = better offer.
- Equity: Property value minus all liens. Strong equity protects against due-on-sale risk.
- Underlying loan status: Current, fixed-rate underlying loans with large remaining balances are preferred.
- Payment history on both loans: Clean payment records on both the wrap and the underlying loan.
- Due-on-sale exposure: Smaller underlying balances = less risk if the clause is triggered.
Sell Your Wraparound Note
Note Buyers of America purchases wraparound mortgage notes and all-inclusive trust deeds nationwide. We understand the unique structure and risks of wrap notes and provide fair pricing that accounts for the rate spread, equity position, and due-on-sale exposure. Call 800-467-2943 or submit your details online for a free cash offer within 24 hours.