Wrap-Around Mortgage

Wrap-around mortgage is generally called as wrap, is a type of secondary financing for the purchase of the real property. The owner or seller extends to the purchaser a junior mortgage that wraps around and exits in addition to the superior mortgages that has already secured by the property.  Under the wrap-around mortgage, the seller accepts the secured note payable from the purchaser for the debt (amount due) on the existing mortgage and the amount up to the remaining purchase money balance. The new buyer makes monthly payments to the seller, and responsible for making the payments to the underlying mortgagee. If the new buyer fails to pay on those payments, the seller then has the right of foreclosure to summon up the subject property.

A seller may sell a real estate property and provide finance to the buyer for the difference between the sales price and the down payment, secured by a second lien note on the property; the note is “wrapped around” the existing mortgage. 

Under a wrap-around mortgage, the seller remains the primary obligator under existing mortgage.  Accordingly, the seller does not remove the debt from its book and continues to record interest and principal payments on the debt.  The note receivable, net of any interest discount, is reported as an asset on the seller’s balance sheet.

However, if the buyer assumes responsibility for a mortgage and the lender accepts the buyer as a new primary obligator, the arrangement is no considered a wrap-around mortgage; the seller is allowed to remove liability from its balance sheet. Is the seller remains secondarily liable should the buyer default, the asset needs to evaluate any accounting and reporting requirements under FIN 45, Guarantor’s Accounting and Disclosure Requirements For  Guarantees, Including Guarantees of Indebtness of Others.

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