What Is a WrapAround Mortgage?

A wraparound mortgage is a type of seller financing where:

1. The buyer makes payments to the seller, rather than a bank.

2. The seller continues making payments on their existing mortgage.

3. The buyer's loan "wraps around" the seller's existing mortgage at a higher interest rate, allowing the seller to profit from the spread.

For example:

• The seller still owes $150,000 at 4% interest on their mortgage.

• They sell the home to a buyer for $200,000 at 7% interest.

• The buyer pays the seller, who then pays their original mortgage.

• The seller profits from the interest difference (3%).

Marcel Deitich and Jan Deitrich are mortgage professionals with decades of experience. They are your home purchase and refinance experts.

Dangers of a WRAP Mortgage for a Home Seller

1. Seller Still Owes on the Original Mortgage

• The seller is still legally responsible for the existing mortgage.

• If the buyer stops making payments, the seller must still pay the original lender or risk foreclosure.

2. Due-on-Sale Clause Risk

• Most traditional mortgages include a due-on-sale clause, meaning the lender can demand full repayment if the home is transferred to a new owner without paying off the original mortgage.

• If the lender finds out about the WRAP, they could call the loan due, leaving the seller in a financial bind.

3. Credit Risk

• If the buyer defaults, the seller’s credit score is at risk since the original mortgage is still in the seller’s name.

• The seller may not have an easy legal path to evict or foreclose on the buyer.

4. Legal Restrictions & Compliance Issues

• Some states have strict regulations or ban WRAP mortgages altogether.

• Contracts must be properly structured to avoid legal disputes.

5. Potential for Foreclosure

• If the buyer fails to make payments, the seller may have to go through costly foreclosure proceedings to regain the property.

• If the seller stops making the original mortgage payments, the bank may foreclose on the home even if the buyer has been paying.

Specifics to about WRAP Mortgages in Texas?

Yes! Texas has specific laws that make WRAP mortgages more regulated and difficult to use safely.

1. Texas Property Code Chapter 159 – Regulation of Wrap Mortgage Loans

• As of January 1, 2022, House Bill 3115 introduced strict licensing and compliance requirements for WRAP transactions in Texas.

• A wrap mortgage loan in Texas must be serviced by a licensed mortgage servicer (unless an exemption applies).

• Failure to comply can result in legal penalties and damages.

2. Seller Must Disclose the Existing Loan

• Sellers must provide full disclosure of the existing mortgage terms to the buyer.

• Texas law requires that the seller explain any risks associated with the WRAP.

3. Risk of Non-Judicial Foreclosure

• Texas is a non-judicial foreclosure state, meaning lenders can foreclose quickly if the original mortgage is not paid.

• This means the seller could lose the home in as little as 30 days if the bank calls the loan due.

4. Homestead Property Restrictions

• If the home is the seller’s homestead, Texas law prohibits a WRAP transaction unless certain criteria are met.

• The seller cannot use a WRAP to evade homestead protections.

Should a Home Seller in Texas Use a WRAP Mortgage?

A WRAP mortgage can be extremely risky, and sellers should be very cautious before agreeing to one. If considering a WRAP: ✅ Consult a real estate attorney to ensure compliance with Texas laws.
✅ Get everything in writing to protect yourself legally.
✅ Use a licensed loan servicer to handle payments properly.
✅ Consider other financing alternatives, such as lease options or seller financing with a balloon note with the help of a Real Estate Attorney.

Final Verdict: WRAP Mortgages Can Be Dangerous for Sellers

While WRAP mortgages can work in certain situations, they pose significant risks to the seller. In Texas, due to strict legal regulations, WRAP mortgages require proper structuring and legal oversight to avoid foreclosure, credit damage, or legal penalties.

Marcel Deitrich

Texas Loan Haus
972.672.3246
[email protected]
NMLS# 231135