Wraparound Mortgages — What Home Sellers Need to Know

Bottom line up front: A wraparound mortgage — also called a "wrap" or an all-inclusive deed of trust in Texas — is a form of seller financing where the seller creates a new loan to the buyer that "wraps around" an existing underlying mortgage. The buyer makes one payment to the seller; the seller makes the underlying mortgage payment and keeps the difference in interest. Wraps can generate income for sellers and provide financing access for buyers who can't qualify conventionally. They also carry the same due-on-sale risks as subject-to transactions — and additional complexity. Texas has specific legal requirements for wraps that many sellers don't know about.

By Zareena Samidon | Samidon Realty Group | Colleyville, TX

Table of Contents

1. What a Wraparound Mortgage Actually Is
2. How the Numbers Work — The Spread
3. Legal Requirements for Wraparound Mortgages
4. The Risks Specific to Wrap Transactions
5. Subject-To vs. Wraparound vs. Seller Financing — What's the Difference?
6. When a Wrap Makes Financial Sense
7. Frequently Asked Questions

What a Wraparound Mortgage Actually Is {#what-it-is}

A wraparound mortgage is a seller-financed loan that includes the balance of an existing underlying mortgage. The seller sells the property to a buyer, creates a new promissory note at a new interest rate (typically higher than the underlying mortgage rate), and both parties close without paying off the original mortgage.

The structure:

1. Seller has a $180,000 existing mortgage at 3.5%
2. Seller sells to buyer for $310,000 on seller financing
3. Buyer puts $30,000 down; the $280,000 balance is a new "wrap" loan at 7%
4. Buyer pays seller $1,863/month on the $280,000 at 7%
5. Seller continues paying the underlying $180,000 at 3.5% = $809/month
6. Seller's spread: $1,863 received − $809 paid = $1,054/month net income

The seller is effectively making 7% on the full $280,000 but only paying 3.5% on $180,000 — earning the interest spread on both the seller's equity contribution ($100,000) and the wrapped underlying balance ($180,000).

The all-inclusive deed of trust (AITD): In Texas, the standard legal instrument for a wraparound is called an "all-inclusive deed of trust" — an AITD that secures the wraparound note against the property. Texas courts and real estate practitioners recognize this instrument.

How the Numbers Work — The Spread {#how-numbers-work}

The financial appeal of a wraparound for sellers is the interest rate spread — earning a higher rate on the underlying balance than you're paying.

Detailed wrap economics example (DFW, 2026):

Over a 5-year period (assuming no default):

Plus: the seller received $30,000 in down payment at closing. The total 5-year cash flow to the seller is approximately $92,940 — on a property with ~$80,000 in equity that would have otherwise been received as a lump sum in a traditional sale.

The tax dimension: As with any seller-financed installment sale, the interest income is taxable as ordinary income each year. The principal portion of payments received is subject to installment sale gain recognition. A CPA should model the complete tax picture.

Legal Requirements for Wraparound Mortgages {#texas-law}

Legal requirements for wraparound transactions vary by state. In Texas, specific statutory requirements under Texas Property Code Chapter 5, Subchapter D apply to residential wraps. Violations can give the buyer the right to cancel the contract and recover damages.

Required disclosures to the buyer in Texas:

Under Texas Property Code §5.078, in a wraparound transaction, the seller must disclose to the buyer:

• The existence and terms of the underlying mortgage
• The amount of the underlying mortgage balance
• The interest rate on the underlying mortgage
• Whether there is a due-on-sale clause on the underlying mortgage

Required provisions in the wrap agreement:

• The interest rate on the wrap must be specified clearly
• The monthly payment must be clearly stated
• The buyer's right to verify that payments on the underlying mortgage are being made
• What happens if the seller doesn't make the underlying payment (this is the buyer's biggest risk — not a seller risk in the same way)

The due-on-sale clause interaction:

Like a subject-to, a wraparound transaction transfers title to the buyer — which technically triggers any due-on-sale clause in the underlying mortgage. The practical risk analysis is the same as for subject-to transactions: lenders on performing loans rarely exercise the clause, but the legal right exists.

Dodd-Frank application:

Wraparound transactions are a form of seller financing and subject to the same Dodd-Frank residential mortgage provisions that govern seller financing generally. Three or fewer transactions per year generally qualify for exemption from licensing requirements, but specific documentation and disclosure requirements still apply. Consult a Texas real estate attorney.

The Risks Specific to Wrap Transactions {#wrap-risks}

A wraparound has all the risks of a standard subject-to transaction (discussed in the prior article) plus some additional ones:

Interest rate spread risk: The wrap is profitable because the seller earns 7.5% from the buyer while paying 3.25% on the underlying. If the underlying mortgage has a variable rate, that spread can narrow. If rates change significantly, the economics of the deal change.

Seller's payment obligation: In a wrap, you are contractually obligated to make the underlying mortgage payment — regardless of whether the buyer pays you. If your buyer is late on their payment to you, you must still pay the underlying mortgage on time or your credit suffers. You're the intermediary; you bear the gap risk.

Complexity of accounting: A wraparound involves two loan balances (the underlying and the wrap), two amortization schedules, interest allocation between them, and the interest spread calculation. A licensed loan servicer — not a DIY spreadsheet — is essential for proper record-keeping.

Title insurance complications: Some Texas title companies won't insure wraparound transactions, or will insure them with specific exceptions. Work with a title company experienced in creative finance transactions.

Subject-To vs. Wraparound vs. Seller Financing — What's the Difference? {#comparison}

These three terms describe related but distinct structures. Understanding the difference helps you choose the right approach.

When a Wrap Makes Financial Sense {#when-makes-sense}

A wraparound makes the most financial sense when:

You have a significantly below-market underlying mortgage rate. The wider the spread between your existing rate (e.g., 3.25%) and the wrap rate you can charge (e.g., 7.5%), the more income the structure generates. In 2026's rate environment, sellers with pre-2022 mortgages have 3–4% spreads available — historically attractive.

You want income rather than a lump sum. The monthly spread income is a meaningful cash flow — $800–$1,200/month in many DFW wrap scenarios — without you needing to manage the property.

You understand and accept the ongoing obligations. You must make the underlying payment every month, regardless of what the buyer does. You must maintain proper accounting. You must deal with a default if it occurs.

You work with an experienced real estate attorney and loan servicer. A well-structured, properly documented wrap with a reliable loan servicer handling payments is a very different transaction from an informal handshake arrangement. The former is manageable; the latter is a liability.

Frequently Asked Questions {#faq}

Is a wraparound mortgage legal in Texas?

Yes — in most states. In Texas, Property Code Chapter 5, Subchapter D specifically addresses wraparound transactions and establishes disclosure requirements. Other states have varying rules; consult a real estate attorney in your state.

What happens if my buyer doesn't pay me in a wrap?

You still owe the underlying mortgage payment. You must make it. Then you pursue your buyer for the missed payment under the terms of the wrap note — and if they default, you foreclose using the all-inclusive deed of trust. This is different from a standard seller-financed deal where you have no underlying obligation.

Can I do a wraparound if my underlying mortgage has already been sold to a different servicer?

The mortgage being sold to a different servicer doesn't change the due-on-sale risk or any of the wrap mechanics. The servicer simply receives the same payments through the same process. The change in servicer doesn't affect your obligations or the buyer's.

How does a wrap compare to a traditional sale in total dollars received?

On a properly structured wrap with a reliable buyer, total cash received over the loan term (down payment + monthly spread + final balloon/payoff) often exceeds what a traditional or cash sale would produce in a single lump sum — primarily because of the interest rate spread earned on the underlying balance over time. The comparison depends heavily on timing, rates, and whether any income tax savings from installment treatment are factored in. A CPA can model this for your specific situation.

Related: Seller Financing — How It Works · Should I Owner Finance My Home? · Subject-To Real Estate Texas · Creative Finance Hub