carries back

Wraparound mortgage

A wrap-around mortgage is a form of secondary financing in which a seller extends to a purchaser a junior mortgage which wraps around and exists in addition to one or more superior mortgages. Under a wrap, a seller accepts a promissory note from the buyer for the amount due on the underlying mortgage plus an amount up to the remaining purchase money balance.

The new purchaser makes monthly payments to the seller, who is then responsible for making the payments to the underlying mortgagee. Should the new purchaser default on those payments, the seller then has the right of foreclosure to recapture the subject property.

Because wraps are a form of seller-financing, they have the effect of lowering the barriers to ownership of real property; they also can expedite the process of purchasing a home. An example:

The seller, who has the original mortgage sells his home with the existing first mortgage in place and a second mortgage which he "carries back" from the buyer. The mortgage he takes from the buyer is for the amount of the first mortgage, plus a negotiated amount less than or up to the sales price minus the down payment and closing costs. The buyer pays the seller, who then continues to pay the first mortgage with the proceeds of the second. Once the second mortgage is satisfied, the seller is out, but this is rarely the case.

Typically, the seller also charges a "middle" on the first mortgage. For example, one has a first mortgage at 6% and sell the whole property with a rate of 8% on a wraparound mortgage. He/she make a 2% middle on the first mortgage amount, using other people's money to make money. So, it is in the best interests of a seller to keep the wrap, rather than allow the buyer to assume the first mortgage.

As title is actually transferred from seller to buyer, most wraparound mortgage transactions will violate the due-on-sale clause of the underlying mortgage, if such a clause is present.