Selling a Wraparound Mortgage in Texas Explained

Wraparound mortgages occupy a unique and sometimes misunderstood corner of the Texas real estate market. If you hold a wraparound note — also called a wrap, an all-inclusive trust deed, or an AITD — you are sitting on a financial instrument that is more complex than a standard promissory note but is absolutely sellable to the right buyer. The key is understanding what makes wraps different, how buyers evaluate them, and what specific steps you need to take to position your wrap for a successful sale.

Wraps have been a staple of creative financing in Texas for decades, particularly in the land and residential markets where seller financing is common. They allow sellers to create a new note at a higher interest rate that "wraps around" an existing underlying loan, generating a spread between what the buyer pays and what the seller owes on the original mortgage. It is an elegant structure when executed properly, but it introduces layers of complexity that affect every aspect of the note selling process.

This guide explains everything you need to know about selling a wraparound mortgage in Texas. Whether you created the wrap yourself as part of a creative financing deal or you inherited one, you will understand the process, the pricing dynamics, and the specific considerations that make wrap transactions different from selling a standard first or second lien note.

What Is a Wraparound Mortgage and How Does It Work?

A wraparound mortgage is a form of seller financing where the seller creates a new note that includes — or wraps around — an existing underlying loan that the seller continues to pay. The buyer makes a single payment to the seller on the wraparound note. The seller then uses a portion of that payment to make the payment on the underlying loan and keeps the difference as profit.

The Structure in Practice

Here is a concrete example to illustrate how a wrap works. Imagine you owned a property with an existing mortgage balance of $150,000 at 4.5 percent interest with a monthly payment of $760. You sold the property for $250,000 with the buyer putting $50,000 down. Instead of paying off your existing $150,000 mortgage, you created a wraparound note for $200,000 at 8 percent interest with a monthly payment of $1,468.

Each month, the buyer pays you $1,468. You take $760 of that and make the payment on the underlying $150,000 mortgage. The remaining $708 is your spread — profit generated by the difference between the interest rate on the wrap and the interest rate on the underlying loan. You also earn interest on the portion of the wrap that exceeds the underlying loan balance, which in this case is $50,000.

This structure is attractive to sellers because it generates income above and beyond what the underlying loan costs. It is attractive to buyers because it allows them to acquire property with seller financing when they might not qualify for conventional lending, often at terms that are still favorable compared to hard money or other alternative financing sources.

The Legal Framework in Texas

Texas has specific regulations governing wraparound transactions, primarily under the Texas Property Code and the Dodd-Frank Act. Since November 2023, Texas law requires that wraparound transactions on residential properties be disclosed to the buyer and that the seller maintain certain fiduciary responsibilities regarding the underlying loan payments. Sellers of wraps are required to continue making payments on the underlying loan and to notify the buyer if they fail to do so.

These regulations were designed to protect buyers from scenarios where the wrap seller stops making payments on the underlying loan, triggering foreclosure by the first lien holder even though the buyer is current on their wrap payments. For note sellers, the key implication is that buyers of wrap notes will pay close attention to the regulatory compliance of the original transaction.

How a Wrap Differs From a Second Lien

People sometimes confuse wraps with second liens, but they are fundamentally different structures. A second lien is a separate, subordinate note and deed of trust recorded behind an existing first lien. The borrower makes two separate payments — one to the first lien holder and one to the second lien holder.

A wraparound creates a single note that encompasses both the underlying loan and the additional financing. The borrower makes one payment to the wrap holder, who is responsible for making the underlying loan payment. The wrap note's balance includes the underlying loan balance plus the additional amount financed. This all-in-one structure creates a different risk and cash flow profile that buyers must evaluate differently.

Can You Sell a Wraparound Mortgage Note in Texas?

Yes. Wraparound mortgage notes can be sold on the secondary market, but the pool of buyers is more specialized than for standard first lien notes. Not every note buyer has the expertise or willingness to deal with the complexity of a wrap transaction, so finding a buyer who understands wraps is essential.

The sellability of your wrap depends on several factors, the most important being the status and terms of the underlying loan, the equity position in the property, the borrower's payment history, the spread between the wrap rate and the underlying rate, and the legal compliance of the original transaction. A wrap that checks all of these boxes positively is a very attractive asset for a knowledgeable buyer.

How Buyers Evaluate Wraparound Notes: The Critical Factors

Buying a wrap note means the buyer is stepping into your shoes — they will receive the wrap payments from the borrower and become responsible for making the underlying loan payments. This unique structure creates specific evaluation criteria that differ from standard note purchases.

The Underlying Loan: Status, Terms, and Due-on-Sale Risk

The underlying loan is the single most important factor in a wrap evaluation because it represents a risk that does not exist in standard note transactions: the due-on-sale clause.

Virtually every institutional mortgage includes a due-on-sale clause that gives the lender the right to call the entire loan balance due if the property is transferred to a new owner. When you created the wrap and sold the property without paying off the underlying loan, the due-on-sale clause was technically triggered. Most lenders do not exercise this right as long as the payments are being made, but the risk exists and a buyer of your wrap note must account for it.

A buyer will want to know the current balance and monthly payment on the underlying loan, the interest rate and whether it is fixed or adjustable, the remaining term, whether the underlying lender is aware of the wrap or if it could trigger enforcement of the due-on-sale clause, and the payment history on the underlying loan. Any delinquency on the underlying loan is an extremely serious red flag because it means the property could be foreclosed by the first lien holder regardless of whether the wrap borrower is current on their payments. For a broader look at what drives note value, this guide on what determines note value in Texas covers the foundational principles.

The Interest Rate Spread

One of the unique value drivers of a wraparound note is the spread between the wrap interest rate and the underlying loan rate. If your wrap charges 9 percent and the underlying loan is at 4 percent, that 5-point spread generates significant income for the note holder beyond just the principal paydown. A wider spread makes the wrap more attractive to buyers because it generates more cash flow per dollar invested.

Conversely, if the spread is narrow — say a wrap at 6 percent over an underlying loan at 5 percent — the economics are less compelling and the note buyer is primarily relying on principal paydown for their return. Narrow-spread wraps are harder to sell and typically command lower prices.

Combined Equity Position

Just as with second lien notes, the equity position in the property is critical for wraps. The buyer needs to assess the property's current value against the total debt — in this case, the wrap note balance, which already includes the underlying loan. This is different from a standard LTV calculation because the wrap balance encompasses everything.

If the original wrap was for $200,000 on a property worth $250,000, the LTV was 80 percent. If the property has since appreciated to $300,000 and the wrap balance has amortized down to $185,000, the current LTV is approximately 62 percent. That improvement in the equity position directly supports a better price for the note seller.

Borrower Payment History

The borrower's payment track record on the wrap is evaluated the same way as for any other note type. Consistent, on-time payments over an extended period reduce the buyer's risk perception and support a higher purchase price. For wraps, the buyer also wants confirmation that you, as the wrap holder, have been making the underlying loan payments on time. Any gap in underlying loan payments — even if the wrap borrower was paying you — is a serious issue that must be addressed.

Regulatory Compliance

Given Texas's specific regulations around wraparound transactions, buyers will verify that the original wrap transaction complied with applicable laws. This includes proper disclosure to the buyer about the existence of the underlying loan, compliance with Dodd-Frank requirements if applicable, proper recording of the deed of trust, and adherence to any Texas Property Code requirements related to wraps. A wrap that was structured and documented properly is straightforward to sell. One that has compliance gaps may require remediation before a buyer will proceed.

Pricing Expectations for Wraparound Notes

Wraparound notes typically sell at discounts that fall between standard first liens and second liens. The exact discount depends heavily on the specific characteristics of the wrap, but some general guidelines apply.

Strong wraps with wide interest rate spreads, significant equity, long payment histories, and clean documentation might sell at discounts of 15 to 30 percent. Average wraps with moderate spreads, adequate equity, and decent payment histories might see discounts of 30 to 45 percent. Weak wraps with narrow spreads, thin equity, short histories, or compliance concerns could face discounts of 45 percent or more.

The due-on-sale risk is a factor that does not exist for standard notes and adds a layer of discount that is unique to wraps. A buyer must account for the possibility, however remote, that the underlying lender could call the loan, requiring a payoff that changes the economics of the deal. This risk is a permanent feature of wraps and cannot be eliminated, but it can be mitigated by a strong equity position and a long track record of uninterrupted underlying loan payments.

Preparing Your Wrap for Sale: Essential Steps

Selling a wrap requires more preparation than selling a standard note because there are more moving parts. Here is what you need to assemble before contacting buyers.

Document Package

Your document package for a wrap sale should include the wraparound promissory note, the wraparound deed of trust, the underlying loan note and deed of trust or copies thereof, current payment history on the wrap showing every payment received, current payment history on the underlying loan showing every payment made, current statements from the underlying lender showing the loan balance and status, proof of hazard insurance on the property, the original purchase agreement or closing statement from the wrap transaction, and any disclosures provided to the buyer at the time of the transaction.

This is a longer list than what is required for a standard note sale, and for good reason — the buyer needs to evaluate two layers of debt and the relationship between them. Having everything organized before you contact buyers dramatically speeds up the process. For general documentation guidance, this resource on documents needed to sell a note in Texas is a helpful starting point.

Verify the Underlying Loan Status

Before you approach buyers, confirm that the underlying loan is current, that there are no pending issues with the lender, and that you have a recent statement showing the balance and payment status. If there are any problems with the underlying loan, address them before attempting to sell the wrap. A buyer who discovers underlying loan issues during due diligence will either walk away or demand a steep price reduction.

Calculate Your Spread and Cash Flow

Prepare a clear breakdown of the monthly cash flow from the wrap: the total payment received from the borrower, the payment made on the underlying loan, and the net spread. Show this over the remaining term of both the wrap and the underlying loan. Buyers appreciate seeing the complete cash flow picture laid out clearly, and this level of preparation signals that you are a serious, organized seller.

The Selling Process for Wraparound Notes

The process follows the standard note selling framework with additional due diligence steps related to the wrap structure.

Get an Offer

Submit your wrap details to a qualified buyer. Because wraps are more complex, not every buyer will be comfortable evaluating one. Look for buyers with specific experience in wraparound transactions. Longhorn Note Buyers, with over four decades of note buying experience in Texas and more than $47 million in notes purchased, has the expertise to evaluate wraps accurately and provide fair offers. Expect an initial offer within 24 to 48 hours for most wrap notes.

Enhanced Due Diligence

Due diligence on a wrap includes everything from a standard note evaluation plus verification of the underlying loan status and balance, assessment of the due-on-sale risk, review of regulatory compliance, analysis of the interest rate spread and its sustainability, and verification that all underlying loan payments have been made on time. This enhanced process may take two to four weeks. Your responsiveness to document requests is the key factor in keeping things on track.

Closing and Transfer

Closing a wrap sale involves assigning the wraparound note and deed of trust to the buyer, but it also requires transferring the responsibility for making the underlying loan payments. The buyer steps into your position — they collect the wrap payments and make the underlying loan payments going forward. The underlying loan remains in your name unless the buyer specifically arranges to assume it or pay it off, which is sometimes part of the transaction.

The borrower is notified that the wrap has been transferred and receives new payment instructions. Their terms remain unchanged. The underlying lender is generally not notified of the transfer unless the buyer decides to contact them.

Special Considerations for Texas Wrap Sellers

Wraps on Land vs. Residential Property

Wraparound structures are used for both land and residential property transactions in Texas, but the regulatory framework differs. Residential wraps are subject to stricter disclosure and compliance requirements under state and federal law. Land wraps, while still subject to general contract law and recording requirements, may have fewer regulatory hurdles. If your wrap is on a residential property, making sure the original transaction complied with all applicable regulations is especially important for a successful sale.

When the Underlying Loan Will Be Paid Off Soon

If the underlying loan is close to being paid off — within the next few years — your wrap becomes significantly more attractive. Once the underlying loan is gone, the due-on-sale risk disappears, the cash flow to the note holder increases dramatically because there is no more underlying payment to make, and the wrap effectively becomes a standard first lien note. If payoff of the underlying loan is imminent, consider whether waiting for that event would substantially increase your note's value before selling.

Wraps With Balloon Payments

Some wraps include balloon payment provisions that require the borrower to pay off the remaining balance by a certain date. If a balloon is approaching, buyers will evaluate whether the borrower is likely to be able to refinance or pay the balloon. This introduces refinancing risk that buyers will price into their offer. If the balloon is far in the future, it has less impact on current pricing. If it is within 12 to 24 months, it becomes a significant factor. For more about how balloon payments affect note value, this guide on selling a mortgage note in Texas provides useful context.

Why Longhorn Note Buyers for Your Wraparound Note

Wraparound notes require a buyer who understands the layered structure, can evaluate the due-on-sale risk, and has the operational capacity to manage the ongoing underlying loan payments after purchase. Longhorn Note Buyers brings over four decades of Texas note buying experience to the table, with a track record that includes wraps on residential property, land, ranches, and commercial buildings.

Longhorn's A+ BBB rating, 100 percent close rate on quoted deals, and commitment to transparent pricing make them a trusted choice for wrap sellers who need a buyer that understands the complexity of their note and can close without surprises. When Longhorn evaluates your wrap, they look at the complete picture — the spread, the underlying loan, the equity, the borrower, and the regulatory compliance — and give you a number that reflects the true value of the asset.

Ready to Sell Your Note?

If you hold a wraparound mortgage note in Texas and you are ready to explore your options, the first step is straightforward. Contact Longhorn Note Buyers today at (210) 828-3573 or visit longhornnotebuyers.com to get your free, no-obligation cash offer within 24 hours. Whether your wrap is on a home, a piece of land, or a commercial property, Longhorn has the expertise and capital to evaluate it fairly and close the deal efficiently.

Frequently Asked Questions

What happens to the underlying loan when I sell my wraparound note?

When you sell the wrap note, the buyer assumes the responsibility of making the underlying loan payments from the wrap borrower's monthly payments. The underlying loan typically remains in your name unless the buyer arranges to assume it or pay it off as part of the transaction. The details of how the underlying loan is handled should be clearly outlined in the purchase agreement between you and the note buyer.

What if the underlying lender finds out about the wrap and calls the loan due?

This is the due-on-sale risk that is inherent in every wrap transaction. If the underlying lender exercises the due-on-sale clause, the full balance of the underlying loan becomes due immediately. In practice, the wrap note buyer or the wrap borrower would need to refinance or pay off the underlying loan to prevent foreclosure. This risk is a factor in every wrap note's pricing. Buyers account for it by maintaining sufficient equity in the property to facilitate a refinance if necessary.

Can I sell a wrap if the underlying loan has an adjustable rate?

Yes, but the adjustable rate on the underlying loan introduces additional complexity and risk. If the underlying rate increases, it narrows the spread between the wrap rate and the underlying rate, reducing the note holder's cash flow. Buyers will analyze the worst-case rate adjustment scenario and price the note accordingly. A wrap over a fixed-rate underlying loan is simpler and generally commands a better price than one over an adjustable-rate loan.

Do I need the wrap borrower's permission to sell the note?

No. As the holder of the wraparound note, you have the legal right to sell or assign it without the borrower's consent. The borrower will be notified after the sale closes and given new payment instructions, but their permission is not required. Their loan terms, interest rate, and payment amount remain exactly the same after the transfer.

How does the spread between the wrap rate and the underlying rate affect the note's value?

The spread is a significant value driver for wrap notes. A wider spread means more cash flow for the note holder after paying the underlying loan, which makes the note more attractive to buyers. A 4 to 6 percentage point spread between the wrap rate and the underlying rate is generally considered strong. Spreads under 2 percentage points make the economics less compelling and typically result in lower purchase prices relative to the wrap balance.