What is a 'wraparound mortgage'?

A wraparound mortgage is a creative financing arrangement where the buyer takes ownership but the seller continues to be liable on the underlying first mortgage. Structure: (1) Seller owns property with an existing first mortgage of, say, $200,000 at 4% interest; (2) Seller sells to buyer for $350,000 with a wraparound mortgage of $300,000 at 5%; (3) Buyer makes payments to seller on the $300,000 wraparound at 5%; (4) Seller continues making payments to the original lender on the $200,000 first mortgage at 4%; (5) Seller pockets the spread (interest on the difference). Used when: existing mortgage has a below-market rate; existing mortgage prohibits assumption; buyer cannot qualify for conventional financing. Risks: (1) Due-on-sale clause — most modern mortgages have a clause that lets the lender call the loan if the property is sold, which the wraparound may trigger; (2) If seller stops paying the underlying mortgage, the lender forecloses and buyer loses the property despite making payments; (3) Complex legal and tax issues. Less common today because of due-on-sale clauses and stricter lending; still occasionally used in commercial transactions and seller financing.