What is a Wraparound Mortgage?
A wraparound mortgage is owner-financing that allows a buyer or investor to buy a property without obtaining financing with their own credit.
This gives the buyer a secondary loan that “wraps” around the existing mortgage. The investor covers the payments on the mortgage and gets the deed to the property.
The Difference Between Subject-to and Wraparound Deals
A subject to real estate investment is when you get the deed to the property while keeping the existing loan in place. You take over the payments. Essentially, the seller becomes your lender, but you got the loan without using your own credit.
In a subject-to transaction the seller has no way of getting the home back if you default on the payments. While you know you are trustworthy and will make the payments, a seller who doesn’t know you might not have trust.
A wraparound is when the seller has the lien, which gives them security that they can recover ownership by foreclosing. This is much easier than going through a costly lawsuit like they would have to do in a subject-to deal.
A wraparound mortgage is always a junior lien that is underlying the first mortgage. The wrap note will include the seller’s unpaid equity and the unpaid balance on the existing loan.
When to use a Wraparound Mortgage Strategy
Giving a seller more security might close the deal, and if that is the case you can use a wraparound mortgage. However, it is not always necessary, nor is it a legal requirement. I honestly don’t even remember a time where I have used this method.
Ultimately, you know you are making the payments and plan to keep your commitment. If you know you will miss payments for some unforeseen circumstance, you can deed the property back to the seller, instead of making them take legal action. The key is being an honest investor and knowing what your intentions are.
To learn about subject-to-investing and how to become a six-figure (or million dollar) real estate investor without your own cash or credit, I invite you to download my Investor Kit.
Marko Rubel is a bestselling author, self-made millionaire, and master real estate investor. He immigrated to the U.S. from Croatia as a champion boxer in his 20s without speaking English and having little money. He has been named a real estate expert by the National Real Estate Investing Association that represents over 40,000 investors nationwide. After years of trial and error in wholesaling and rehabbing, he created his own strategies. He is now considered one of America’s leading real estate experts— helping others on their real estate investing journey.