Wraparound Mortgage: Tips and Warnings

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A wraparound mortgage comes with some risks and benefits. If borrower Sam has a $50,000 mortgage on his home and sells the home to John for $100,000, who puts $5,000 down, Johnny owes $95,000 on the home. The $95,000 mortgage "wraps around" the $50,000 mortgage because the new lender continues to make payments on the original $50,000, while Johnny makes payments to the lender for the $95,000. This kind of mortgage helps a seller sell his home when his buyer cannot qualify for traditional financing methods.

A wrap around mortgage is one type of seller financing for which, in most cases, the lender is the seller. Not all mortgages are eligible to be wrapped. In most cases, the mortgage must be assumable, which means another person or lender can take possession of it without starting another loan. Currently, only FHA and VA loans are assumable without prior permission from the lender.

A "due on sale" clause making the entire balance of the mortgage due when a home is sold makes it difficult to wrap around. It is important to recognize that if the new lender does not make payments on the original loan to the original lender, the home can still be foreclosed on, even though the new homeowner makes payments to his lender.