What Is a Wrap Mortgage? (How It Works and When to Use It)

A wrap mortgage — also called an all-inclusive deed of trust (AITD) in Texas — is a creative financing structure that allows a buyer to purchase a property while the seller's existing mortgage remains in place. The seller "wraps" a new loan around their existing one, collecting payments from the buyer and continuing to service the underlying mortgage themselves.

How a Wrap Mortgage Works

Here is the basic structure:

1. The seller has an existing mortgage — say, $200,000 at 4% interest
2. The buyer agrees to purchase the property for $350,000
3. The buyer puts down $50,000
4. The seller creates a new "wrap" loan for $300,000 at, say, 6.5% interest
5. The buyer makes monthly payments to the seller on the $300,000 wrap loan
6. The seller continues making payments on their original $200,000 mortgage
7. The spread between what the buyer pays (6.5% on $300K) and what the seller owes (4% on $200K) is the seller's profit

The key is that the underlying mortgage is never paid off at closing — it remains in place, and the seller is responsible for continuing to service it from the buyer's payments.

Why Buyers Use Wraps

• Access to below-market rates — if the seller's existing mortgage has a low interest rate, the wrap loan rate will likely be below current market rates, saving the buyer money
• Flexible qualification — no bank underwriting, so buyers who cannot qualify conventionally can still purchase
• Faster closing — no bank appraisal or underwriting process
• Smaller down payment — often more flexible than conventional lending requirements

Why Sellers Use Wraps

• Earn a rate spread — collecting 6.5% while paying 4% on the underlying loan is profitable
• Spread capital gains — installment sale treatment can reduce immediate tax exposure
• Generate passive income — monthly payment stream without managing a rental
• Sell a property that might not qualify for conventional financing

The Due-On-Sale Risk: The Elephant in the Room

Most conventional mortgages include a due-on-sale clause — a provision that allows the lender to demand full repayment of the loan if the property is sold or transferred. A wrap mortgage, in most cases, technically triggers the due-on-sale clause because the property is being sold without the lender's consent.

In practice, lenders do not always enforce due-on-sale clauses — particularly when interest rates are higher than the subject loan rate, because calling the loan would cost them a below-market asset. But the risk is real. If the lender discovers the transfer and calls the loan, both the buyer and seller face a crisis:

• The seller must pay off their mortgage immediately or face foreclosure
• The buyer may lose the property if the seller cannot cover the payoff

This is the primary risk in a wrap transaction, and it must be understood clearly by both parties before proceeding.

Protecting Yourself as a Buyer in a Wrap

• Use a title company — get a title commitment and understand the existing liens
• Verify the underlying loan balance and payment status — confirm the seller is current on their mortgage
• Use a servicing company — have a third-party loan servicer collect your payments and disburse them to the seller's mortgage; this protects you from a seller who collects your payments but stops paying their mortgage
• Record the deed of trust — your interest in the property should be publicly recorded
• Plan your exit — have a realistic plan to refinance into conventional financing before or at the balloon date

Modeling a Wrap in Transaction IQ

A wrap mortgage involves multiple layers of financing. Transaction IQ's Deal Calculator includes a Wrap mode that lets you model the full transaction — the buyer's payment, the seller's spread, the underlying mortgage balance, and the projected balloon position — so you can evaluate the deal with clarity before you commit.

Frequently Asked Questions

What is a wrap mortgage?

A wrap mortgage is a loan that includes an existing mortgage plus additional seller financing layered on top of it — the new loan "wraps around" the original one.

Is a wrap mortgage risky?

It can be. The primary risk is the due-on-sale clause — the original lender could demand full repayment if they discover the property was sold without their consent. Proper structuring and professional guidance are essential.

Who pays the original lender in a wrap?

The seller continues making payments on their original mortgage from the payments they collect from the buyer. This is why using a third-party loan servicer is strongly recommended.