Wraparound Mortgage: How It Works (with Example)

A wraparound mortgage is a form of seller financing in which the seller carries a new note to the buyer that wraps around a mortgage the seller still owes. The buyer makes payments to the seller on the larger wrap note, and the seller keeps paying the existing senior loan out of those payments, profiting on the interest-rate spread between the two. The seller's original mortgage is not paid off at closing; it stays in the seller's name, and the senior lender is still owed. Because the senior loan survives the sale, a wraparound carries risks a standard owner-financed sale does not, and several states regulate it specifically. In Texas, wraps are governed by Finance Code Chapter 159, enacted by SB 43.

In a wrap, the seller's old mortgage never goes away. The buyer pays the seller, and the seller keeps paying the bank, on the spread.

The short version

A wraparound is seller financing where the seller writes a new note that wraps the existing senior loan; the buyer pays the seller, and the seller keeps paying the bank.
The seller profits on the interest-rate spread between the wrap note and the senior loan.
The senior loan stays in the seller's name, and its due-on-sale clause is not waived by the wrap.
In Texas, residential wraps are regulated under Finance Code Chapter 159 (SB 43), and origination must run through a licensed RMLO. Moat reviews wraps case-by-case.

This is educational information, not legal, financial, or tax advice. Consult a licensed professional about your specific situation.

What is a wraparound mortgage?

A wraparound mortgage, sometimes called a wrap, is a junior loan that wraps around the balance of a senior mortgage the seller has not paid off. The seller sells the property and carries a new note to the buyer for a face amount that covers the unpaid balance of the seller's existing loan plus the seller's equity.

The buyer takes title subject to the existing lien and signs the wrap note and a deed of trust securing it. From that point the buyer pays the seller, and the seller continues to pay the underlying lender. The structure is a type of owner financing; the difference from a clean seller-financed sale is that the underlying mortgage remains in place rather than being retired at closing.

How does a wraparound mortgage work?

The buyer makes a single monthly payment to the seller on the wrap note. The seller, now acting as the lender of record on the wrap, uses part of that payment to keep the senior loan current and retains the remainder. The seller earns on the difference between the rate charged on the larger wrap balance and the rate owed on the smaller senior balance.

Because two notes are alive at once, the payment flow has to be exact. If the seller collects the wrap payment but fails to remit the senior payment, the senior lender can move to foreclose even though the buyer is current. That is why wraps are commonly handled by a neutral third-party servicer that splits each incoming payment and disburses to the senior lender, instead of leaving the seller to manage it by hand.

A worked wraparound mortgage example

Consider a Texas home sold for $250,000. The seller still owes $180,000 on an existing first mortgage at 5% interest, amortizing over a remaining 30 years, with a monthly principal-and-interest payment of about $966. The buyer puts nothing toward retiring that loan; instead the seller carries a wraparound note for the full $250,000 at 8% interest over 30 years. The buyer's monthly principal-and-interest payment to the seller is about $1,834.

Each month the buyer pays the seller $1,834. The seller forwards about $966 to the senior lender to keep the first mortgage current and keeps the roughly $868 difference. That spread, about $10,400 a year, is the seller's return on a $70,000 equity position plus the rate spread between the 8% wrap and the 5% senior.

The $180,000 senior loan stays in the seller's name throughout, so the buyer's claim to clear title depends on the seller continuing to pay it. Taxes and insurance are layered on top of the principal-and-interest figures and are commonly escrowed and disbursed monthly so nothing lapses.

What are the risks of a wraparound mortgage?

A wraparound carries three main risks:

Due-on-sale. Most mortgages let the lender call the full balance due when the property is sold or transferred, and a wraparound is a transfer. The federal Garn-St. Germain Act (12 U.S.C. §1701j-3) lists exceptions, but a wraparound sale to an unrelated buyer is not one of them, so the senior lender can accelerate the loan.
Payment dependency. The buyer's title security rests on the seller actually remitting the senior payment, as described above. If the seller pockets the wrap payment and lets the senior loan lapse, the buyer can lose the property even while paying on time.
Documentation. Because two loans coexist, the wrap note, the deed of trust, the disclosures, and the payment records all have to be precise.

These risks are why wraparound and subject-to deals are structured with counsel and serviced carefully.

How does Texas regulate wraparound mortgages under SB 43?

Texas regulates residential wraparound financing under Finance Code Chapter 159, enacted by SB 43 and effective January 1, 2022. The chapter sets out specific written disclosures a wrap lender must give the buyer before closing, including information about the underlying lien.

It also ties residential wrap origination to licensing. Owner-financed residential origination in Texas must run through a licensed RMLO under the Texas Finance Code and the SAFE Act, and Chapter 159 layers wrap-specific disclosure duties on top of that. The chapter governs the disclosure and origination side; it does not waive the senior lender's due-on-sale rights, which sit in the underlying loan contract and federal law.

For the broader state framework, see the Texas seller-finance regulations guide, and for who may originate, the Texas RMLO requirements guide.

How is a wraparound different from a contract for deed?

Both are forms of owner financing, but the title mechanics differ. In a wraparound, the buyer takes legal title at closing and signs a deed of trust, while the seller's underlying mortgage remains in place behind the wrap.

In a contract for deed, the seller keeps legal title until the buyer pays in full, and the buyer holds equitable title and possession. Texas regulates that structure under Tex. Property Code §5.061, and default on it does not run through the §51.002 non-judicial foreclosure process used for a deed of trust.

The contract for deed guide covers that structure, and the complete owner-finance servicing guide compares the deed-of-trust and contract-for-deed paths in detail.

How common is seller financing in Texas?

Texas accounts for 24.7% of all U.S. seller-financed notes, the #1 state, roughly three times Florida (NoteInvestor / Advanced Seller Data Services, 2025). Wraparound and subject-to structures are a smaller, more specialized slice of that market, used where a below-market senior loan makes the rate spread attractive and where the parties accept the due-on-sale risk. The size of the Texas seller-finance market is why the state built a dedicated wrap regime in Chapter 159 rather than leaving the structure unregulated.

Can a wraparound mortgage be serviced, and does Moat service it?

A wraparound can be serviced, and a neutral third party is the safer way to run one, for the payment-split reason described above: the servicer disburses to the senior lender on schedule rather than leaving it to the seller.

For a standard Texas owner-financed note, servicing runs $35/month for a non-escrowed note and $40/month for an escrowed note, with a one-time $150 setup. The full schedule is published on the Texas note servicing fee schedule, with no contract and 30-day notice to terminate.

Wraparound mortgage, answered

What is a wraparound mortgage?

A wraparound mortgage is a form of seller financing in which the seller carries a new note to the buyer that wraps around an existing mortgage the seller still owes. The buyer pays the seller on the larger wrap note, and the seller keeps paying the underlying senior loan out of those payments. The seller profits on the interest-rate spread between the wrap note and the senior loan. The existing mortgage stays in the seller's name and is not paid off at closing.

How does a wraparound mortgage work?

In a wraparound mortgage, the seller finances the buyer with a new note for a balance that includes the unpaid amount of the seller's existing mortgage plus the seller's equity. The buyer makes one monthly payment to the seller on the wrap note. The seller uses part of that payment to keep the underlying senior loan current and keeps the difference. The senior lender is still owed and its due-on-sale clause is not waived by the wrap.

Are wraparound mortgages legal in Texas?

Yes. Wraparound mortgages are legal in Texas and are regulated under Texas Finance Code Chapter 159, enacted by SB 43. The regime sets disclosure and origination requirements for residential wraps, and residential wrap origination must run through a licensed RMLO. The underlying lender's due-on-sale clause is a separate risk the wrap does not remove.

Does Moat service wraparound mortgages?

Moat does not routinely service wraparound or subject-to notes; these are reviewed case-by-case under Texas SB 43 and Finance Code Chapter 159. Moat is a licensed Texas mortgage servicer, bonded, NMLS 1419346, and services only notes secured by Texas property. If your note is secured by property outside Texas, use the request-your-state page so we can point you to a servicer in your state.

Have a Texas note to service? Moat services notes secured by Texas property only. Schedule a consultation and we'll review your loan documents and quote the boarding. If your note is secured by property outside Texas, tell us where on the request your state page and we'll point you to a servicer there.