A wraparound loan, or wraparound transaction, is a specific type of owner finance real estate sale. It is primarily used when a buyer cannot secure traditional bank financing or when the seller has an existing, low-interest mortgage that they do not want to pay off immediately.
How a Wraparound Transaction Works
In a standard owner finance transaction, the seller owns the property free and clear (without a mortgage). The buyer gives the seller a promissory note and pays the seller back over time.
In a wraparound transaction, the seller still has an existing, underlying mortgage on the property. The process is as follows:
- The New Loan "Wraps": The seller creates a new mortgage for the buyer, and this new loan "wraps around" the seller's existing, old mortgage, which remains on the property.
- Subject To: The buyer receives the deed to the property subject to the original, existing lien.
- Payment Flow: The buyer makes monthly payments to the seller on the new, wraparound loan.
- Seller's Responsibility: The seller then takes a portion of those payments and continues to pay their own underlying mortgage to their original bank.
Once the buyer has paid off the seller's wraparound loan, the seller then uses those final funds to pay off their original bank loan, at which point the property is finally free of all liens.
A Type of Subject To Transaction
The wraparound loan is essentially a form of a subject to transaction. The buyer is taking the property subject to the original, existing senior lien, which stays in place. The purpose is to allow the sale to proceed without having to satisfy the original mortgage, which would typically be required if the buyer obtained a new loan from a bank.
Why Wraparounds are Popular in Certain Markets
Wraparound loans become particularly popular in real estate markets experiencing a correction or periods of high interest rates.
- If the seller's original mortgage has a very low interest rate, the seller can offer the buyer a slightly higher interest rate than their own, making a small profit on the spread, while still offering the buyer a more attractive rate than what a bank is offering.
- The transaction allows buyers who may not qualify for conventional bank financing to purchase property.
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