Three different transactions, one phrase
Same phrase, three different documents.
A seller who cannot tell these apart cannot evaluate an offer. The differences are not academic — they change who owes what, who holds title, and what happens if something goes wrong.
The three structures side by side
| Question | Assumption | Subject-to | Wraparound |
|---|---|---|---|
| Is the lender involved? | Yes — it approves | No | No |
| Who owes the original loan? | The new borrower | Still the seller | Still the seller |
| Can the seller be released? | Yes, if a release is issued | No | No |
| Who holds title after closing? | The buyer | The buyer | The buyer |
| Is there a new note? | No | No | Yes — seller to buyer |
| Who collects payments? | The servicer, from the buyer | The servicer, funded by the buyer | The seller, who then pays the servicer |
| Due-on-sale exposure | Resolved by approval | Present | Present |
| Main seller risk | Time and denial | Buyer default reported against the seller | Buyer default plus the seller’s duty to keep paying the underlying loan |
How a wraparound actually works
The seller conveys the property and simultaneously takes back a new note from the buyer, usually for a larger amount and often at a higher rate than the underlying loan. The buyer pays the seller on the wrap note. The seller continues paying the underlying mortgage. The difference between the two payments is the seller’s spread.
That structure creates a genuine benefit for the seller in some situations — income, a higher effective price, spreading a gain over time — and a genuine set of duties. The seller is now collecting payments, applying them, accounting for them, and remaining obligated to a lender regardless of whether the buyer pays on time.
What a seller taking back a wrap should understand
- You are a creditor now. Seller financing of residential property is regulated, and the rules vary by state and by how many transactions you do. Get advice before, not after.
- Servicing should be third-party. A licensed loan servicer handling collection, escrow, and accounting protects both sides and produces the records you will want if there is ever a dispute.
- Escrow for taxes and insurance. If the buyer pays those directly and stops, the first you hear about it may be a tax notice on a loan still in your name.
- The underlying loan does not care. If the buyer misses, you still owe. Reserves matter as much here as anywhere.
- State disclosure rules can be strict. In Texas, for instance, Property Code Chapter 5 contains provisions bearing on conveyances of encumbered residential property and on executory contracts.
Which one should you want?
If you can get an assumption approved and released, take it. It is the only structure that ends your exposure, and everything else on this page is a response to the fact that most loans are not assumable and most approvals take time.
Between subject-to and a wraparound, the honest answer is that it depends on whether you want the spread badly enough to accept the servicing role. A seller who wants to be finished thinking about the property should not take back a wrap. A seller who wants monthly income and is prepared to act like a lender might reasonably prefer it.
Whichever structure is proposed, the offer should name it. An offer that says “we take over the payments” without identifying which of these three it is has not been written down properly yet.
Common questions
What is a wraparound mortgage?
A financing structure where the seller conveys the property and takes back a new note from the buyer that wraps around the existing mortgage, which stays in place. The buyer pays the seller and the seller keeps paying the underlying lender.
Is a wraparound safer for the seller than subject-to?
It is different rather than uniformly safer. A wrap gives the seller a note, a lien position, and a spread, and it also gives the seller collection, accounting, and servicing duties while leaving the underlying loan in their name.
Does a wraparound avoid the due-on-sale clause?
No. Title still transfers, so the same due-on-sale analysis applies as in a subject-to purchase.
Do I need a servicer for a wraparound?
Using a third-party licensed servicer is widely recommended. It creates independent records of payments, escrow, and balances, which protects both parties and is often expected under state seller-financing rules.
General information, not advice. This page describes how these transactions commonly work. It is not legal, tax, or financial advice for your property, and it does not create any obligation on a lender. Review your own loan documents and the proposed agreement with independent professionals before signing.
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