A wrap mortgage disclosure plays a crucial role in seller-financed real estate transactions, known as wrap-around mortgages. In these deals, the seller retains their existing mortgage and lends the buyer a new loan that “wraps” around the original. The buyer makes payments to the seller, who then continues paying their lender. This arrangement creates potential risks, especially concerning the underlying mortgage’s terms.

The wrap mortgage disclosure provides full transparency by clearly outlining two key components: (1) the seller’s current mortgage details — including the lender, outstanding balance, interest rate, monthly payments, and remaining term; and (2) the new financing terms offered to the buyer, such as the total loan amount, interest rate, monthly payment, and loan term. This disclosure enables buyers to compare the two loans, understand the “spread” or profit the seller might earn, and grasp the financial commitment they are undertaking.

One of the most significant risks disclosed is the due-on-sale clause—a common provision in modern mortgage agreements. This clause allows the original lender to demand full repayment of the loan if the property ownership changes. If enforced, it can trigger foreclosure, even if the buyer has made all payments to the seller. Therefore, disclosure of this clause is not only a legal requirement in many states (for example, Texas Property Code Sec. 5.016) but a critical warning to buyers.

Buyers considering wrap-around mortgages should treat the wrap mortgage disclosure as an essential document. Beyond reviewing it carefully, hiring a qualified real estate attorney is vital to assess risks and draft safeguards, such as escrow arrangements that protect payments. If the seller hesitates or refuses to provide the disclosure, it is a major warning sign to walk away.

For more context on related topics, see our articles on Wraparound Mortgage and Mortgage Acceleration Clause.

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