A wrap-around mortgage, sometimes referred to as a “blanket mortgage” or “all inclusive deed of trust”,  is a type of loan that is typically used when interest rates have been low and then risen. Wrap-around mortgages are not made by banks and are only arranged between buyers and sellers. A seller in essence “carries” the financing. This is done “under the table.” The seller leaves his first mortgage alone and continues to make payments to his old lender and then creates a new “blanket” or “wrap-around mortgage” that the buyer makes monthly payments to him.

The wrap-around mortgage is written for the entire purchase price “minus” any down payment that the buyer makes. The down payment is usually negotiable, but even with a wrap-around mortgage, buyers must still make a down payment ranging between 5 and 20 percent.

Wrap-Around Mortgage Example

If a seller wants to sell his house for $200,000 and has a low interest first mortgage on the property of $125,000 and a buyer has a $20,000 down payment, the seller would write a “wrap-around” mortgage for $180,000 (the $200,000 purchase price minus the down payment of $20,000.) Under this arrangement, the buyer makes payments to the seller on a $180,000 mortgage (which is usually written at an interest rate below what banks charge), and the seller in turn continues to make his payments on the old first mortgage. This is all done without the old lender’s knowledge.

The transaction would look like this:

Assume a sale price of $200,000 and the sellers have an attractive, low-interest rate mortgage of $125,000 at 4.5 percent. Also, assume current rates have risen to 6 percent.

Property sells for:   $200,000

Buyer down payment: $  20,000
(This is completely negotiable between the seller and buyer)

(Current loan on property: $125,000 at 4.5 percent interest
with a payment of $ 760.03 per month)

But the seller carries a “wrap around” mortgage for $180,000 at
4.75 percent interest for the balance and buyers pays $938.97 per month: $180,000
(No bank loan is involved. This is all between the seller and buyer.

Total purchase price: $200,000

The advantage to the buyer is that he might not be able to qualify for a regular bank loan in the amount of $180,000. The interest rate charged by sellers on a wrap-around mortgage is also usually lower than the rate a bank would charge on a similar conventional loan. The seller also benefits because in a tight market, there might not be as many buyers able to qualify for a regular bank loan.

Risks of a Wrap-Around Mortgage

Under this type of arrangement, the buyer pays the seller but doesn’t control when the seller actually pays the mortgage on the old loan. One solution for a buyer is to request that each month the seller provide a copy of the cancelled check showing that the old payment was made. The buyer can also request a copy of the old loan, monthly statement which would show that each payment has been made by the seller.

Also, with a wrap-around mortgage the seller “grants” or transfers legal ownership to the buyer just like a bank would on a normal home loan but doesn’t initially record the wrap-around  mortgage or the transfer deed to the buyer so that the old lender is not notified of the sale. His only security that the buyer will make the payments is the new wrap-around mortgage that he holds. If the buyer fails to make payments, the seller would have to record the wrap-around mortgage and then foreclose just like a bank would.

Wrap-Around Mortgages Are Written to Avoid The Old Lender Due-On-Sale Clause.

One of the main reasons that wrap-around mortgages are used is so banks and lenders won’t enforce the due on sale clause that is included in most home loans. With this clause, in most circumstances, if a property is sold, the old loan must be paid in full. Where a buyer and seller want to keep the old loan in place, without it becoming due, the seller signs a transfer deed to the buyer and the buyer signs a wrap-around mortgage to secure the loan, but neither document is recorded at the county recorder. If they were recorded, the bank would effectively be notified of the sale and require that the old loan be due and payable.

Are Wrap-Around Loans Legal?

One argument against wrap-around loans is that sellers should notify the old lender in the event of any sale. By not doing so, and circumventing the system with a wrap-around mortgage, sellers might be considered acting unethically towards a bank. Legal counsel should review any wrap-around mortgage arrangements to verify its legality before such an arrangement is entered into.