Wraparound Mortgages

Q: What is a Wraparound Mortgage?

A: A wraparound mortgage is a form of seller financing where a buyer takes over a seller’s existing mortgage payments. The buyer does not assume the mortgage, but rather takes subject to the seller’s deed of trust and obtains additional financing from the seller for the remaining purchase price. The new loan "wraps around" the original loan, which remains in first position with the buyer paying the seller, who continues to pay the original lender. Generally, the buyer pays a higher interest rate on the wraparound loan, allowing the seller to earn a profit based on the interest rate difference. From the buyer’s perspective, the risk is that they pay the seller, but the seller does not pay the lender in first position, leading to foreclosure.

For title insurance purposes, if you find a wraparound mortgage in the chain of title, it is evidence that there are two deeds of trust that must be addressed; you need to make sure that BOTH the original deed of trust and the wraparound deed of trust are released. If you are asked to insure a wraparound mortgage, you can do so based on the amount of new money being loaned. However, the wraparound deed of trust is in second position, so there should be an exception for the original lender deed of trust. For transfer tax purposes, the tax is due on any new money above the principal amount on the original lender deed of trust. See VA Code Sec. 58.1-803 and 58.1-809. 

If you are also issuing an owner’s policy, given the risks to the purchaser, the deed itself should spell out that the original loan is being taken subject to, and the purchaser should also sign the deed. You would take exception to the original DOT that remains in first position. Moreover, we recommend that you have both the buyer and the seller sign an affidavit demonstrating that they understand the risks involved.