What Is a Wrap Mortgage? (Complete Guide for Buyers and Investors)

A wrap mortgage — also called an all-inclusive deed of trust (AITD) in Texas — is a type of seller financing where the seller creates a new loan for the buyer that "wraps around" their existing mortgage. The seller keeps their original loan in place, the buyer makes payments to the seller on the new wrap loan, and the seller continues paying their original lender from those payments.

How a Wrap Mortgage Works

Here is a simple example:

• Seller has a $200,000 mortgage at 3.5% interest
• Buyer agrees to purchase for $350,000 with $50,000 down
• Seller creates a wrap loan of $300,000 at 6% interest
• Buyer pays seller monthly on the $300,000 wrap loan
• Seller continues paying their original lender on the $200,000 underlying mortgage
• The seller earns the 2.5% spread between what they collect and what they owe

The underlying mortgage is never paid off at closing — it stays in place throughout the transaction.

Why Wrap Mortgages Are Used

• Access to favorable rates — when the seller has a below-market mortgage, the wrap rate is often lower than current market rates, saving the buyer money
• Flexible qualification — no bank underwriting, so buyers who cannot qualify conventionally can still purchase
• Faster closing — no appraisal or underwriting delay

The Risks Every Buyer Must Understand

Due-on-Sale Clause

Most conventional mortgages include a due-on-sale clause that allows the lender to demand full repayment when the property is sold. A wrap mortgage technically triggers this clause. In practice, lenders do not always enforce it — but the risk is real. If the lender discovers the sale and calls the loan, both buyer and seller face a crisis.

Seller Performance Risk

In a wrap, you are relying on the seller to take your payments and pass them on to their lender. If the seller stops paying their mortgage — even while collecting your payments — you could face foreclosure. Using a third-party loan servicer to handle payment distribution is the standard protection against this risk.

Legal Complexity

Wrap mortgages involve layered legal agreements. A real estate attorney should review all documents before you sign.

Protecting Yourself as a Buyer

• Use a title company — get full title insurance and understand all existing liens
• Use a third-party loan servicer — never pay the seller directly without a servicing arrangement
• Verify the seller is current on their mortgage before closing
• Have a realistic refinance plan before the balloon date

Frequently Asked Questions

What is a wrap mortgage?

A wrap mortgage is a new loan that includes an existing mortgage plus additional seller financing — the new loan "wraps around" the original one still in place.

Are wrap mortgages legal?

Yes, they are legal in Texas, but they typically trigger the due-on-sale clause in the underlying mortgage, which creates legal and financial risk that must be understood before proceeding.

Who pays the original lender in a wrap?

The seller is responsible for continuing to pay their original mortgage from the payments they receive from the buyer. A third-party servicer is strongly recommended to manage this flow.