Mortgage Wrap Transactions are known by a few different names including Wraparound transaction, Wrap-Around, Wrap, Wraps, etc. Please complete the form at the bottom of the page if you would like to buy or sell a home using a wrap.

What is a Mortgage Wrap Transaction?

A mortgage wrap transaction is simply the seller financing of a property that does not pay off the current mortgage lien. The property is conveyed and the existing mortgage lien stays in place with a second, junior lien held by the seller.

Is a Mortgage Wrap Transaction illegal?

A mortgage wrap transaction is not illegal. A mortgage wrap transaction is neither a breach of contract nor a “violation” of the due-on-sale clause. The traditional language used for the due-on-sale clause usually does not prohibit a transfer of property without the lender’s consent. The clause commonly indicates that if the borrower transfers the property without the lender’s permission then the lender may opt to declare the loan due. As discussed more fully below, the language is not prohibitory in nature.

Is a Mortgage Wrap Transaction the same as an assumption?

No. In an assumption, the buyer is authorized to assume the legal responsibility and obligations of the existing first-lien note. This may or may not be accomplished with the approval of the seller’s lender and paying an assumption fee. The assumption documents expressly state that the buyer is taking on the legal obligation of paying the first-lien note. In a mortgage wrap transaction, the first-lien note remains the exclusive responsibility of the seller. After a mortgage wrap transaction, there are two separate and independent sets of payment obligations. The buyer becomes obligated to the seller on the new wrapped note, which is secured by a mortgage wrap deed of trust; and the seller remains obligated on the first-lien/wrapped note until it is paid and released.

How is a Mortgage Wrap Transaction different from a lease/purchase option?

In a mortgage wrap transaction, the buyer is the legal owner of the property. In a Lease/Purchase Option, the seller remains the owner until the buyer executes his option to purchase the property. Additionally, in Texas, a Lease/Purchase Option longer than 180 days is governed by Title 2, Chapter 5, Sub-Chapter D of the Texas Property Code and the seller must comply with very strict and sometimes onerous terms.

What is a “Due on Sale” clause and how does it affect a Mortgage Wrap Transaction?

Most real estate loans will have a contract term in the loan documents in which the borrower agrees to not convey the collateralized property without either issuing payment in full for the amount due on the loan or obtaining authority from the lender to convey the property.

The language used in the Fannie Mae/Freddie Mac Uniform Deed of Trust is as follows: If all or any part of the Property or any interest in the Property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender’s prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument.

This is not prohibitory language. It says the lender may accelerate the note if it wants to. When an owner transfers a property without consent from the lender, the owner makes it possible for the lender, if the lender so chooses, to accelerate the note. It is not a breach of the deed of trust. It is not fraud.

Are the parties required to purchase title insurance in a Mortgage Wrap Transaction?

No. Title insurance is not legally required in a mortgage wrap transaction. Many, if not most, mortgage wrap transactions are closed in a lawyer’s office without title insurance, on the basis of an informal title search or a title report.

The purchase and issuance of title insurance is to be negotiated and agreed upon by the buyer and seller. If title insurance is issued, any claims in relation to the underlying mortgage on the property are excluded from coverage.

What is the Annual Percentage Rate (APR) for a mortgage wrap transaction promissory note?

The parties can negotiate and agree upon any APR that is not illegal under the applicable state and federal lending regulations.

What should the down payment amount be in a Mortgage Wrap Transaction?

The parties can negotiate and agree upon any down payment amount. The parties will need to provide sufficient funds to issue payments for real estate commissions, closing costs and any down payment amount desired by the seller.

Who provides Home Owner’s Insurance for the property purchased in a Mortgage Wrap Transaction?

The seller needs to maintain insurance on the property. If the seller terminates the insurance, the original lender will purchase insurance at a greatly higher price and pass this cost to the seller. Similarly, the buyer will want to maintain insurance on the property to protect against catastrophic loss.

It should be understood that if a loss occurs and a claim is made by the seller, the insurer may refuse to pay the claim and assert that the seller no longer has an insurable interest. Worse, this could potentially be construed as insurance fraud. Therefore the buyer should procure his own casualty and contents insurance. While having two policies in place may seem inefficient and wasteful, it is the most secure method of obtaining insurance coverage.

All buyers and sellers in a Mortgage Wrap Transaction are encouraged to speak with a home owner’s/casualty insurance broker for guidance in this area.

When does the loan end in a Mortgage Wrap Transaction?

The wrap loan will end either by its terms or when the property is sold or refinanced. Upon the sale or refinance, the underlying/original mortgage is paid off and the remaining dollars go to the wrap lender.

Who owns the property after a Mortgage Wrap Transaction?

The seller will execute a warranty deed conveying the property to the buyer. This warranty deed is filed in the property records for the county in which the property resides. The buyer is the legal owner of the property with the seller maintaining similar rights of redemption as a traditional mortgage lender.

Who pays the taxes on the property after a Mortgage Wrap Transaction?

The buyer is legally responsible for all taxes once the warranty deed is filed indicating the buyer is the legal owner of the property. The buyer also receives the tax advantage of being able to write off interest payments on the loan. The property taxes can be paid via a servicing company.

Who gets the interest deduction in a Mortgage Wrap Transaction?

The seller continues to be able to deduct interest paid on the wrapped loan. Nothing has changed there. As to interest on the wrapped note, interest received by the seller must be reported as income, and interest paid by the buyer is deductible. More details must be obtained from your tax advisor.

What happens if the buyer defaults on the loan associated with a Mortgage Wrap Transaction?

If the buyer fails to issue payments under the terms of the mortgage wrap promissory note after the transaction is closed, the seller will need to pursue non-judicial foreclosure under the terms of the deed of trust and the applicable foreclosure laws. The seller remains responsible for the existing mortgage until it is paid off in full.

Texas laws regarding foreclosure are very favorable to the lender. Property Code Sec. 51.002 requires that a homeowner be given at least a 20 day notice of default and intent to accelerate the note if the default is not timely cured. If the deed of trust is on a FNMA form, then a 30 day notice and opportunity to cure is required.

Then, the default notice must be followed by a second letter stating that since the default was not cured, the note is accelerated and the property is being posted for foreclosure. This second notice must be given at least 21 days before the first Tuesday of the month in which the foreclosure will be held. Thus a Texas foreclosure can take as few as 41 days to complete a foreclosure. If the deed of trust is on a FNMA form, the foreclosure can take as few as 51 days.

The Seller can also seek and obtain a deficiency judgment if the sales price at foreclosure is insufficient to discharge the wrap note plus accrued interest and fees. The seller thus has the same ability to enforce his note and lien as does any other lender.

What are the advantages of a Mortgage Wrap Transaction?

In a situation where a buyer cannot obtain traditional financing, a mortgage wrap transaction allows them to achieve the benefits of home ownership. The seller is also able to garner more interest and potential buyers by offering their property for sale as “seller financing”

What are the disadvantages of a Mortgage Wrap Transaction?

The seller has to wait until the wrap note balloons in order to receive the full proceeds of the sale. Additionally, the underlying wrapped loan will remain on the seller’s credit reporting. Also, the underlying loan is almost always locked in place and cannot be refinanced or modified by the seller for the duration of the wrap.

Who drafts the documents for a Mortgage Wrap Transaction?

A properly drafted mortgage wrap transaction will include a warranty deed, deed of trust, promissory note, a wrap agreement/contract and several disclosure documents. These are complex documents that are customized for each particular transaction. Only a qualified real estate attorney experienced in preparing mortgage wrap transaction documents should be used to draft these papers. There are no adequate forms available from the Texas State Bar or TREC. Additionally, the TREC earnest money contract should include an attorney-prepared wrap addendum.

Information in this article was obtained from several different sources and was approved for general informational purposes only and is not offered as legal advice upon which anyone may rely. You should obtain legal counsel relating to your individual needs before engaging in any action that has legal consequences.