Investors in Florida are always on the lookout for flexible, creative ways to finance real estate deals.
One creative option that continues to gain traction in investor circles is the wraparound mortgage. While lesser known than traditional bank loans or even standard seller financing, wraparound mortgages can offer significant advantages when structured and executed properly.
Understanding how wraparound mortgages work, when they make sense, and key legal considerations unique to Florida, is essential for any investor looking to take advantage of this strategic financing option.
What Is a Wraparound Mortgage?
A wraparound mortgage is a type of seller financing arrangement where the seller still owes money on their existing mortgage but agrees to “wrap” a new mortgage around that existing loan when selling the home.
This means that the buyer makes payments to the seller based on the full purchase price, and the seller continues to make payments on the original loan.
Here’s an example of how this works:
- The seller owes $150,000 on their current mortgage.
- The buyer agrees to purchase the property for $250,000.
- The buyer gives the seller a down payment and signs a promissory note to repay $250,000 at a specified interest rate.
- The seller keeps making payments on the original $150,000 mortgage and retains the interest (and sometimes principal) difference as a profit.
This structure allows sellers to retain their existing loan without needing to pay off their mortgage right away.
Why Would Investors Use a Wraparound Mortgage?
Wraparound mortgages a great option in a range of common scenarios:
- The buyer can’t qualify for traditional financing. Wraps provide a workaround for buyers who fall short of strict lending standards, whether due to credit scores, income verification, or debt-to-income ratios.
- The seller has a low-interest mortgage. Sellers with low-rate mortgages (e.g., 3%) can create wrap loans at higher rates (e.g., 8%) and pocket the spread.
- Preserving cash flow. Investors can avoid large upfront costs and still gain property control, enabling faster portfolio growth.
- Speed and simplicity. Wraparound deals often bypass extensive underwriting and documentation, allowing for faster closings.
- Flexible structuring. Wraps allow investors to creatively structure deals, including balloon payments, adjustable terms, and hybrid financing options.
On top of these reasons, sellers may benefit by getting access to a larger buyer pool and maintaining control over the financing process.
Florida Legal Considerations for Wraparound Mortgages
In Florida, wraparound mortgages are legal, but there are a few key considerations to keep in mind:
- Due-on-Sale Clauses: Many mortgages include a due-on-sale clause, which allows the lender to demand full loan repayment if the property changes ownership. Wraparound transactions may trigger this clause, creating potential risk.
- Disclosure Requirements: It’s essential that both parties understand the full scope of the agreement. A real estate attorney should draft or review the wraparound documents to ensure legal compliance.
- Seller Default Risks: Because the buyer pays the seller, and the seller pays the lender, the buyer is trusting the seller to stay current on payments. If the seller defaults, the buyer may face foreclosure even if they’ve paid on time.
- Clear Terms in Writing: The promissory note and mortgage must spell out all terms, including interest rate, payment schedule, penalties, and any balloon or prepayment terms.
- Title Insurance and Disclosures: Some title insurers may hesitate to issue policies for wraparound deals. It’s crucial to work with a title company familiar with creative financing in Florida.
Failing to properly account for these issues can lead to contract disputes and other legal challenges.
Key Benefits and Risks of Wraparound Mortgages
| Benefits | Risks |
| Easier approval for buyers | Possible enforcement of due-on-sale clause |
| Speedier closings | Dependence on seller to pay underlying mortgage |
| Income stream for sellers | Potential difficulties with title insurance |
| Flexible and creative deal structures | Legal complexity requiring attorney involvement |
| Greater buyer pool for sellers | Original lender may object to transaction |
Wraparound mortgages offer substantial upsides, but they come with serious risks that must be mitigated with proper planning.
Best Practices for Wraparound Mortgages in Florida
To reduce legal exposure and increase the chances of a successful transaction, both sellers and buyers should keep the following practices in mind:
Work with a Florida Real Estate Attorney
Getting expert legal guidance is essential to ensure a smooth transaction. Contracts should be custom-drafted or thoroughly reviewed to ensure compliance with Florida statutes.
Choose an Experienced Title Company
Not all title companies understand or handle wraparound mortgages. Work with one that has experience in creative closings.
Use an Escrow Service or Servicing Company
Having a neutral third party collect and distribute monthly payments helps protect both sides.
When using an escrow service or servicing company, make sure to plan for events such as early payoff, loan assumption, refinance options, or a change in the seller’s financial status.
Prioritize Transparency
Disclose the existence and terms of the original mortgage and ensure that both parties are on the same page before closing.
When Wraparound Mortgages Make Sense
Wraparound mortgages tend to work best when:
- The seller has significant equity and a low-rate mortgage.
- The buyer cannot obtain bank financing but is otherwise financially reliable.
- Both parties understand the benefits and potential risks.
- A legal and title team is in place from the beginning.
Wraps can be used in residential or investment property deals, and they may also play a role in creative exit strategies for investors.
Final Thoughts
Wraparound mortgages represent a flexible, strategic financing tool that can be a win-win for sellers and buyers in Florida real estate. However, their complexity makes them unsuitable for novice investors or do-it-yourself transactions. Both parties must work with professionals who understand the legal, financial, and title-related components involved.
At Marina Title, we assist investors, sellers, and buyers with complex real estate transactions, including wraparound mortgages. If you’re considering this creative financing strategy, let our experienced Florida-based team help ensure your deal is secure, compliant, and successful.
Call us today at 1-855-513-5880 or send us a message via our Secure Contact Form to learn more about our real estate and title services for buyers, sellers, and investors. We provide title, escrow, and closing services throughout the State of Florida.
