Wrap-Around Mortgage: A Good Option for Buyers with Bad Credit

There is a seemingly never-ending assortment of mortgages that can be options for borrowers in a variety of situations. One with which you may not be familiar, however, the wrap-around mortgage, is an especially creative and attractive mortgage option for some people. It might be an especially good option for borrowers who do not have very good credit.

A wrap-around mortgage is designed to be taken out by the buyer of a home when the seller still owes money on his or her original mortgage. To put it as simply as possible, a wrap-around mortgage is a scenario in which repayment of the seller’s original mortgage becomes the responsibility of the buyer, thus circumventing the need for a new loan.

A wrap-around mortgage is an example of “seller-financing”, or a loan deal by which the seller finances part of the purchase instead of a more traditional lender like a bank. It works as follows:

• A homeowner who owes an outstanding balance on his or her mortgage wants to sell the home.

• The homeowner (seller) does not mind being paid for the house via monthly payments over a number a years instead of in one lump sum.

• Each month after the purchase, the buyer (new homeowner) pays the seller the amount equal to the monthly payment on the original mortgage. The seller then uses that money to make the actual monthly payments.

• The buyer also makes additional monthly payments to the seller that go towards the purchase price of the home. For example, if $100,000 is owed on the mortgage and the seller charges the buyer $125,000 to purchase the home, then the buyer would make monthly payments to the seller to pay off the outstanding $25,000 in addition to the payments that go to paying down the mortgage.

The main advantage of a wrap-around mortgage for the seller is that he or she is able to make money off of the agreement by charging the buyer a higher interest rate than is attached to the original mortgage.

The agreement dually is beneficial for many buyers, particularly for those who find themselves with bad credit. This is because buyers do not have to be able to secure a loan in order to obtain a wrap-around mortgage, and they also do have to pay for closing costs. Wrap-arounds are especially useful for buyers interested in commercial property who do not have sufficient credit scores to get such large business loans.


The main cost associated with these benefits, for both the buyer and the seller in a wrap-around mortgage, is the somewhat complicated process and diligence required for a successful agreement. The buyer and the seller of the home must come up with their own plan, usually with the assistance of a real estate lawyer. Among the many details that must be worked out, and the options that need to be considered, are the following:

• The seller must decide upon an interest rate to charge the buyer that makes such a deal worth his or her effort – usually it is just a bit higher than lenders’ rates to reward the seller for his or her flexibility and patience with repayment.

• The buyer and seller must agree on a suitable down payment. FYI, the term wrap-around mortgage is defined as the amount of the purchase price on the home minus the amount of the down payment.

• The buyer should obtain a copy of the original mortgage agreement.

• Wrap-around mortgages work most smoothly when the original mortgage was at a fixed-rate, but they can work with an adjustable-rate mortgage as well.

• If a real estate lawyer is not hired to help with the transaction, then the buyer will have to open an escrow with the title company.

• The buyer should receive a copy of the year-to-date statement on the original mortgage every year so that he or she can be certain that the loan actually is being paid off.

• The seller is required to keep a careful record of the buyer’s payments, including how much of each payment is going to particular costs.

Before embarking on a wrap-around mortgage agreement either as a seller or a buyer, you need to be sure that everything is in order legally. In fact, this type of deal is not even legal in all states.

Some individual lenders do not allow wrap-around mortgages on their loans at all, while others will enforce a due-on-sale clause in the case of a wrap-around. No matter what you think the situation is, you should be very frank with the original lender prior to negotiating a wrap-around so that you do not end up owing the whole balance of the loan at a less-than-opportune time.