Wrap

From CaseyPedia

A "wrap" (or "wrap-around mortgage") is a transaction in which the lender assumes responsibility for an existing mortgage.

"Casey" has a $100,000 first mortgage loan. He sells his home to "Fred" for $150,000. Fred pays $20,000 down and borrows $130,000 on a new mortgage. This mortgage "wraps" the existing $100,000 mortgage, with the new lender, Casey, making the payments on the old mortgage, from the proceeds he gets from Fred.

Why a wrap?

Well, wraps are a type of seller financing; in wraps, the lender is typically the seller. For people who want to get into a house, and the seller wants to move it but conventional loans are either too expensive or the buyer does not qualify, a wrap can work out to both parties satisfaction.

The new Lender may be able to benefit if they can leverage a lower interest rate on an existing mortgage into a higher yield for themselves. OF course, why is that? Risk!

The difference between a wrap and a traditional second mortgage is that in a wrap, the original mortgage is not retired, it is just serviced by a new party. This means that technically, only assumable (FHA/VA) loans are wrappable. That means existing borrowers can transfer their obligation to a qualified house purchaser. Most non FHA/VA fixed-rate loans include a "due on sale" clause. This states that the mortgage be repaid if the property is sold or otherwise is not used in the way the original contract specifies, i.e. say the owner sublets it. Anyone who wraps a mortgage with a 'due on sale clause' is technically breaking the lender's contract right then, whether the original lender takes action, or not.

In Casey's as well as many other wraps, payments from the new buyer don't go directly to the seller, but are paid to a third party, who then forwards it to the initial lender. The seller (Casey), remains liable for the original loan! Casey can't always know if the payment was made or not. Eventually, he will likely hear from the original (very unhappy) lender if something goes wrong.