California property glossary
Wraparound Mortgage
Also called wrap, all-inclusive deed of trust, AITD
Quick answer
A wraparound mortgage is a form of seller financing where a new loan "wraps around" and includes the balance of an existing underlying loan, with the buyer paying the seller and the seller continuing to pay the original lender.
Key facts
- Structure
- The seller carries a new note that 'wraps' the existing loan, which stays in place and in the seller's name
- Cash flow
- The buyer pays the seller; the seller continues paying the underlying lender
- Where the profit is
- The spread between the wrap rate and the underlying rate, plus any amortization difference
- Principal risk
- The underlying loan's due-on-sale clause remains enforceable
- Standard safeguard
- A neutral third-party servicer collecting and disbursing so the underlying loan is verifiably paid
What it means
The seller creates a new promissory note at a blended, often higher, rate for the full purchase balance, collects the buyer's payment, and forwards the underlying loan payment to the original lender, keeping the spread.
Like subject-to and carry-back deals, a wraparound leaves the original loan's due-on-sale clause exposed, since the underlying lender isn't a party to the new arrangement — a risk that should be disclosed and documented by an attorney, not assumed away.
A wraparound can let a seller collect interest income above their original loan rate while helping a buyer who can't qualify for full new financing, but it requires the seller to trust the buyer's ongoing payments and to keep making the underlying loan payment regardless. Sellers who want a clean, final exit typically compare this against a straightforward cash sale.
Why this matters when you are selling
A wrap is how a seller with a low-rate loan turns that rate into income rather than surrendering it at closing. In a high-rate market the spread can be substantial, and for a seller who does not need all the proceeds immediately, it converts a one-time sale into a stream. It also widens the buyer pool to people who cannot qualify conventionally, which matters for properties banks dislike — rural parcels, unpermitted additions, mixed-use, homes with condition issues.
The risk profile is the mirror image. The seller stays on the underlying note, so a buyer who stops paying leaves the seller owing a loan on a property they no longer own, and enforcing against the buyer means running a foreclosure of their own. Layer the due-on-sale exposure on top and a wrap becomes a structure that demands documentation discipline: a properly drafted all-inclusive deed of trust, a third-party servicer, verified insurance and tax payments, and a plan for what happens if the underlying lender accelerates.
Common mistakes
Letting the buyer pay the seller directly with no servicer.
Instead: Use a licensed third-party servicer. It produces the payment record that any later dispute, refinance, or tax filing will require.
Not verifying that taxes and insurance stay current.
Instead: Require proof annually, or escrow them through the servicer. A tax lien or lapsed policy on a wrapped property is the seller's problem too.
Using a generic promissory note template.
Instead: An all-inclusive deed of trust has to state clearly how payments are applied to the underlying loan and what happens on default or acceleration. This is drafting work for a real estate attorney.
Questions people ask
How is a wrap different from subject-to?
In subject-to, the buyer simply takes title and makes payments on the seller's existing loan. In a wrap, the seller creates a new, larger note at a new rate that encompasses the old loan, and collects on it. The seller keeps a financial interest and an income stream rather than exiting entirely.
What happens if the underlying lender calls the loan?
The underlying balance becomes due immediately. The practical resolutions are for the buyer to refinance, for the seller to pay it off, or for the property to be sold. This contingency should be addressed in the documents before it happens, not after.
Who handles the property taxes and insurance?
By agreement — but the seller's exposure means the seller should insist on verification either way. Impounding taxes and insurance through the servicer is the cleanest arrangement.
Bottom line
A wrap is the highest-yield way to keep a cheap loan working and the structure with the most moving parts. It is worth doing when the seller does not need all the cash, the documents are drafted by a real estate attorney, and a third-party servicer produces a verifiable payment record. Without those, the seller is financing a stranger on an unsecured handshake while remaining liable to the original lender.
Official sources
- California Department of Real Estate
Disclosure obligations where a licensee arranges seller financing.
- California Legislative Information
Civil Code §2956 et seq., the seller-financing disclosure statutes for residential 1–4 unit property.
Written and maintained by Sierra Property Buyers, a direct property buyer working across Northern California. Last reviewed July 2026. This page is general information about how California property transactions work — it is not legal, tax, or financial advice, and the specifics of any situation should be confirmed with an attorney, a CPA, or the relevant agency.
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