Wrap-Around Mortgage

Legal information, not legal advice. Verify against the cited primary sources before acting. Wrap and due-on-sale law varies by jurisdiction and is frequently amended. Last verified: 2026-06-08.

• What it is: A wrap-around is a seller-financed sale — usually a contract for deed / installment land contract, sometimes an all-inclusive deed of trust (AITD) or a wrap note + deed — in which the seller’s existing underlying mortgage is left in place and “wrapped.” The buyer makes one blended payment to the seller on the full wrap balance (the unpaid underlying loan plus the seller’s additional equity, often at a higher rate); the seller continues to service the underlying loan out of those payments. The underlying lender is not paid off and frequently not notified. Economically the seller earns the spread between the wrap rate and the underlying rate and keeps the favorable existing financing alive. A close cousin is the “subject-to” purchase (buyer takes title subject to the unpaid loan without a new wrap note); the legal exposures below are largely the same.

• Why it matters for contract-for-deed: A wrap is the single most common way a CFD intersects with a third-party secured creditor, and it stacks three distinct legal exposures on top of the ordinary forfeiture/foreclosure analysis (forfeiture-vs-foreclosure): (1) the underlying lender’s due-on-sale right to accelerate (garn-st-germain-due-on-sale); (2) state wrap-specific disclosure / anti-over-encumbrance / lienholder-consent statutes; and (3) the buyer’s exposure to losing the property to the senior lender’s foreclosure even while paying the seller on time. Because the buyer holds only an equitable junior interest behind a mortgage the seller still owes (equitable-conversion), a wrap is where CFD deals most often blow up — and where regulators and plaintiffs’ lawyers concentrate.

• How a compliant wrap is built (the universal mechanics): Whatever the state, a defensible wrap needs the same moving parts, and the strictest states make several of them mandatory: (a) written disclosure of the underlying lien (holder, balance, rate, terms) and the foreclosure risk to the buyer; (b) lienholder consent or non-enforcement of the due-on-sale clause, in writing; (c) a cap so the wrap/underlying lien does not exceed the buyer’s remaining balance (no over-encumbrance); (d) a payment conduit the buyer can police — a right to be notified of and cure the seller’s default on the underlying loan and apply it against the wrap; and (e) recording of the buyer’s interest to protect priority against the seller’s later creditors. The jurisdiction map below shows which of these a given state merely recommends versus commands by statute.

• The federal floor — due-on-sale applies to every wrap: Under garn-st-germain-due-on-sale (12 U.S.C. § 1701j-3), a due-on-sale clause in an institutional mortgage is enforceable “[n]otwithstanding any provision of the … laws (including the judicial decisions) of any State to the contrary” (§ 1701j-3(b)(1)), and the implementing rule defines the triggering transfer to include wraps by name. 12 C.F.R. § 191.2 (successor to former § 591.2) defines a “[s]ale or transfer” as “the conveyance of real property … whether legal or equitable … by outright sale, deed, installment sale contract, land contract, contract for deed, leasehold interest with a term greater than three years, lease-option contract or any other method,” and defines “[a]ssumed” to “include[] transfers of real property subject to a real property loan by assumptions, installment land sales contracts, wraparound loans, contracts for deed, transfers subject to the mortgage or similar lien, and other like transfers.” A wrap/CFD sale is therefore squarely a triggering transfer, and the Garn-St. Germain residential exemptions (§ 1701j-3(d)(1)–(9): death, divorce, family, junior liens, short leases, settlor-beneficiary inter vivos trust) do not cover an arm’s-length sale-on-terms to a buyer who takes occupancy. Marketing a wrap or a land-trust conduit as “due-on-sale-proof” misstates the statute. The acceleration right is the lender’s option and can be exercised whenever the lender learns of the transfer — many do not monitor while payments stay current, but that is a business reality, not a safe harbor.

• The split across jurisdictions: Most states have no wrap-specific statute — wraps are permitted, due-on-sale risk is allocated by contract, and disclosure is “prudent” but not commanded (e.g., arizona, oklahoma, tennessee, mississippi, missouri, kentucky, and the bulk of the 56 jurisdictions). A smaller, important group regulates wraps directly: Texas combines a near-prohibition in its CFD statute (texas, Tex. Prop. Code § 5.085) with a dedicated wrap-mortgage-loan licensing and disclosure regime (Tex. Fin. Code ch. 159; Tex. Prop. Code § 5.016); North Carolina permits a wrap only on narrow conditions with a mandatory 14-point lien warning (north-carolina, G.S. 47H-6); Minnesota bars an investor seller from wrapping a due-on-sale mortgage without the lienholder’s binding agreement plus disclosure (minnesota, Minn. Stat. § 559A.04); Ohio caps the wrap at the contract balance and requires vendee consent to over-encumber (ohio, R.C. § 5313.02(B)); and California criminalizes both over-encumbering the property and diverting the buyer’s payments from the underlying loan (california, Cal. Civ. Code §§ 2985.2, 2985.3).

• Operator takeaway: Classify your state into one of three buckets before you wrap — (A) near-prohibited (Texas, where a non-consensual wrap CFD violates § 5.085 and is a DTPA act); (B) conditionally permitted with mandatory disclosure / consent / anti-over-encumbrance rules (NC, MN, OH, CA); or (C) unregulated but still exposed to due-on-sale and fraud/consumer-protection law (most states). In every bucket: get lienholder consent in writing, disclose the underlying lien and the foreclosure risk to the buyer, keep the wrap from over-encumbering, give the buyer a cure/notice conduit on the underlying loan, escrow a payoff reserve, and record the buyer’s interest. A wrap marketed as “due-on-sale-proof” is a misstatement of 12 U.S.C. § 1701j-3 and an enforcement and reputational exposure.

▸ For Sellers / Operators — The compliance-critical facts, in order: (1) Due-on-sale always applies — your wrap/CFD is a triggering transfer by name under 12 C.F.R. § 191.2; assume the senior lender can call the loan at any time and that no Garn-St. Germain exemption shelters a sale to your buyer. (2) Know your state’s bucket. In Texas, a wrap CFD over an existing mortgage is effectively prohibited unless you meet § 5.085’s stack (3-day disclosure, lienholder consent to accept buyer payments, lien ≤ buyer’s balance, 150%-cure right) and, if you wrap with a note/deed of trust rather than a CFD, you are a “wrap lender” who must hold the right license and deliver the Tex. Fin. Code § 159.101 disclosure 7 days before closing (incorporating the § 5.016 lien disclosure), with a buyer rescission right. In NC, the lien must fit one of G.S. 47H-6’s three narrow categories and you must give the 14-point bold lien warning. In MN, an investor seller needs the lienholder’s binding consent/non-enforcement agreement plus contract disclosure (§ 559A.04). In OH, do not over-encumber past the contract balance without vendee consent (§ 5313.02(B)). In CA, never divert the buyer’s payment from the underlying loan and never over-encumber — both are public offenses (§§ 2985.2, 2985.3). (3) Even in an unregulated state, nondisclosure of a wrapped senior lien is routinely actionable as common-law fraud or under the state UDAP/consumer- fraud act. Disclose, cap, consent, escrow, record.

▸ For Buyers — On a wrap you take equitable title behind a mortgage the seller still owes. If the seller pockets your payments or the senior lender calls the loan, the property can be foreclosed even though your payments are current. Insist on: written disclosure of every underlying lien and its balance; the right to be notified of and cure the seller’s default on that lien (and credit it against your balance); a payment/escrow conduit so your money reaches the senior lender; and recording of your interest. In TX, NC, MN, OH, and CA these are partly statutory rights, not just negotiating points.

Jurisdiction map

Positions are stated only where a retrieved primary source supports them. States not listed regulate wraps the way most do — permitted, due-on-sale exposed, disclosure prudent but not statutorily mandated — and are captured in the “unregulated but exposed” row by representative example; per-state §5 (Title, Recording & Wraps) modules carry the detail. The federal due-on-sale rule applies to every jurisdiction.

Position on wraps	Jurisdiction(s)	Controlling authority (primary source)
Near-prohibited (CFD path) + dedicated wrap-loan licensing/disclosure (note path) — a CFD seller “may not execute” the contract unless it owns in fee simple free of liens, except on a stringent pre-existing-purchase-money exception (3-day disclosure; lienholder consent to accept buyer payments on seller default; lien ≤ buyer’s remaining balance; buyer cure right deducting 150%); a wrap-mortgage-loan (note/AITD) requires a licensed wrap lender to deliver the § 5.016 disclosure 7 days pre-closing with a 7-day rescission right	texas	Tex. Prop. Code § 5.085; Tex. Fin. Code §§ 159.001, 159.051, 159.101; Tex. Prop. Code § 5.016
Conditionally permitted — mandatory lien warning + narrow lien categories — a CFD may encumber the property only if the lien fits one of three categories (buyer-consented improvement loan; lien placed by a licensed contractor/dealer/broker who keeps paying; or a non-licensee’s lien attached only to the sold property with continued payment); seller must deliver a 14-point boldface lien warning; violation → damages or rescission	north-carolina	N.C. Gen. Stat. § 47H-6(a)–(c)
Conditionally permitted — investor seller needs lienholder consent + disclosure — an investor seller may not enter a CFD subject to a due-on-sale mortgage unless it obtains the holder’s binding consent or non-enforcement agreement and discloses the mortgage and covenants to keep it current in the contract	minnesota	Minn. Stat. § 559A.04 subd. 1
Permitted but capped — anti-over-encumbrance + vendee consent — vendor may not hold or place a mortgage on the property in an amount greater than the balance due on the CFD without the vendee’s consent	ohio	Ohio Rev. Code § 5313.02(B)
Permitted but criminalized at the edges — it is a public offense for the seller (under a real-property sales contract or all-inclusive trust deed) to over-encumber the property beyond the contract terms without the parties’ written consent (§ 2985.2), or to divert an installment payment from the underlying obligation rather than applying it to the amount then due (§ 2985.3)	california	Cal. Civ. Code §§ 2985.2, 2985.3
Permitted, due-on-sale exposed, disclosure prudent — no wrap-specific CFD statute (representative; the majority position)	arizona · oklahoma · tennessee · mississippi · missouri · kentucky · alabama · colorado	State CFD statutes/common law impose no wrap-specific cap or disclosure; due-on-sale governed by 12 U.S.C. § 1701j-3 + 12 C.F.R. § 191.2; nondisclosure reachable under each state’s UDAP/consumer-fraud or common-law fraud doctrine
Federal floor — applies to ALL 56 jurisdictions — a wrap/CFD/land-contract conveyance is a transfer triggering an enforceable due-on-sale clause; state anti-due-on-sale law is preempted; no residential exemption shelters an arm’s-length sale to the buyer	all	12 U.S.C. § 1701j-3(b)(1), (d); 12 C.F.R. § 191.2 (“wraparound loans, contracts for deed” enumerated) — garn-st-germain-due-on-sale

How the regimes compare

• Texas — the strictest (two overlapping regimes). If the wrap is sold as a contract for deed, Tex. Prop. Code § 5.085(a) forbids executing it unless the seller owns in fee simple free of any liens; § 5.085(b) permits a pre-existing purchase-money lien only on a stack of conditions (disclosure ≥ 3 days before execution; the lien secures only that property and never exceeds the buyer’s contract balance; the lienholder consents and agrees to accept the buyer’s direct payments on seller default; and the contract grants a buyer cure right deducting 150% of amounts the buyer pays to cure). If instead the wrap is structured as a wrap note / all-inclusive deed of trust, Tex. Fin. Code ch. 159 treats the seller (or its arranger) as a “wrap lender” who must hold the requisite license/registration (§ 159.051) and deliver a written disclosure statement on or before the 7th day before the loan agreement (§ 159.101), incorporating the Tex. Prop. Code § 5.016 lien disclosure (lienholder, balance, rate, account, consent status, plus the warning the lienholder “could demand full payment … without [its] consent”), with a 7-day buyer rescission right. Sources: Tex. Prop. Code §§ 5.085, 5.016; Tex. Fin. Code §§ 159.001, 159.051, 159.101.

• North Carolina — narrow permission + a hard warning. G.S. 47H-6(a) bars a CFD on encumbered property unless the lien fits one of three enumerated categories, and 47H-6(b) commands a separate written disclosure in 14-point boldface capital letters: “THIS PROPERTY HAS EXISTING LIENS ON IT. IF THE SELLER FAILS TO MAKE TIMELY PAYMENTS TO THE LIEN HOLDER, THE LIEN HOLDER MAY FORECLOSE ON THE PROPERTY, EVEN IF YOU HAVE MADE ALL YOUR PAYMENTS.” Violation gives the buyer damages or rescission with return of payments (47H-6(c)). Source: N.C. Gen. Stat. § 47H-6.

• Minnesota — consent gate for investor sellers. Minn. Stat. § 559A.04 subd. 1 forbids an investor seller from entering a CFD subject to a due-on-sale mortgage unless it has a “binding agreement with the mortgage holder whereby the holder either consents to the sale … by contract for deed or agrees not to exercise the holder’s rights under a due-on-sale clause,” and the contract discloses the mortgage, covenants to perform it, and represents that the binding agreement was procured. Source: Minn. Stat. § 559A.04 subd. 1.

• Ohio — anti-over-encumbrance cap. R.C. § 5313.02(B): “No vendor shall hold a mortgage on property sold by a land installment contract in an amount greater than the balance due under the contract,” and “[n]o vendor shall place a mortgage on the property in an amount greater than the balance due on the contract without the consent of the vendee.” The wrap is permitted but cannot leave the buyer behind a senior lien larger than what the buyer still owes. Source: Ohio Rev. Code § 5313.02(B).

• California — criminal backstops. A wrap commonly takes the all-inclusive deed of trust form here. Cal. Civ. Code § 2985.2 makes it a public offense for a seller under a real-property sales contract to encumber the property beyond the contract terms without the parties’ written consent; § 2985.3 makes it a public offense for the seller knowingly to receive a buyer’s installment payment and appropriate it to a use other than payment of the amount then due on the seller’s underlying obligation — i.e., to pocket the buyer’s money instead of servicing the wrapped loan. Sources: Cal. Civ. Code §§ 2985.2, 2985.3.

• The majority — permitted, exposed, undisclosed-at-your-peril. The bulk of jurisdictions have no CFD wrap statute. The wrap is lawful; the risk allocation is contractual; due-on-sale exposure is governed federally; and nondisclosure of a wrapped senior lien is left to common-law fraud and each state’s UDAP/consumer- fraud act. Operators should still build the full mechanics (disclosure, consent, cap, cure conduit, escrow, recording), because the absence of a statute is not the absence of liability. Sources: 12 U.S.C. § 1701j-3; 12 C.F.R. § 191.2; and each state’s §5 module.

Primary sources (retrieved 2026-06-08)

• 12 U.S.C. § 1701j-3 (Garn-St. Germain; preemption of due-on-sale prohibitions; residential exemptions § (d)) — enforceability “[n]otwithstanding any provision of the … laws … of any State.” https://www.law.cornell.edu/uscode/text/12/1701j-3
• 12 C.F.R. § 191.2 (OCC; recodifying former 12 C.F.R. § 591.2) — defines “[s]ale or transfer” and “[a]ssumed” to include “installment land sales contracts, wraparound loans, contracts for deed,” and land contracts as triggering transfers. https://www.law.cornell.edu/cfr/text/12/191.2
• Tex. Prop. Code § 5.085 — seller “may not execute an executory contract … if the seller does not own the property in fee simple free from any liens,” with the narrow pre-existing-purchase-money exception (3-day disclosure; lien ≤ buyer’s balance; lienholder consent to accept buyer payments; 150% cure deduction). https://texas.public.law/statutes/tex._prop._code_section_5.085
• Tex. Prop. Code § 5.016 — conveyance of residential property encumbered by a lien requires a written disclosure (lienholder, balance, rate, account, consent status, foreclosure warning) on or before the 7th day before the effective date / contract execution. https://texas.public.law/statutes/tex._prop._code_section_5.016
• Tex. Fin. Code § 159.001 — defines “wrap mortgage loan,” “wrap borrower,” “wrap lender.” https://texas.public.law/statutes/tex._fin._code_section_159.001
• Tex. Fin. Code § 159.101 — wrap lender must deliver the disclosure statement (incorporating Tex. Prop. Code § 5.016) “on or before the seventh day before” the wrap mortgage loan agreement; 7-day buyer rescission right. https://texas.public.law/statutes/tex._fin._code_section_159.101
• N.C. Gen. Stat. § 47H-6 — permissible-lien categories (a); mandatory 14-point boldface lien warning (b); buyer damages/rescission for violation (c). https://www.ncleg.gov/EnactedLegislation/Statutes/HTML/BySection/Chapter_47H/GS_47H-6.html
• Minn. Stat. § 559A.04 subd. 1 — investor seller needs a binding lienholder consent/non-enforcement agreement plus contract disclosure before wrapping a due-on-sale mortgage. https://www.revisor.mn.gov/statutes/cite/559A.04
• Ohio Rev. Code § 5313.02(B) — vendor may not hold or place a mortgage greater than the balance due on the contract; vendee consent required to over-encumber. https://codes.ohio.gov/ohio-revised-code/section-5313.02
• Cal. Civ. Code § 2985.2 — public offense for a seller under an unrecorded real-property sales contract to place encumbrances that, together with existing ones, exceed the amount then due under the contract, absent the parties’ written consent. https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CIV&sectionNum=2985.2.
• Cal. Civ. Code § 2985.3 — public offense to receive a buyer’s installment payment and appropriate it to a use other than the amount then due on the seller’s underlying obligation. https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CIV&sectionNum=2985.3.

Meta

• needs_verification:
  • Tex. Fin. Code § 159.051 exact license/registration categories and exemptions for a “wrap lender” — the section title (License or Registration Required) is confirmed on the official chapter index, but the operative licensing thresholds and the residential-homestead-seller exemptions were not retrieved verbatim this run; confirm against statutes.capitol.texas.gov before advising on who must be licensed.
  • Cal. Civ. Code § 2985.51 / 2985.4 and the broader all-inclusive-deed-of-trust disclosure provisions (the affirmative AITD disclosure form, as distinct from the §§ 2985.2–2985.3 criminal backstops) — not retrieved this run; the civil disclosure mechanics for California AITDs should be confirmed before relying on them.
  • Classification of the remaining jurisdictions beyond TX, NC, MN, OH, CA and the representative “unregulated” examples — each requires its own retrieved statute or case to be placed as “regulated” vs. “permitted-but-exposed.” The §5 modules of the per-state pages note the absence of a wrap statute, but a few (e.g., Idaho’s Property Condition Disclosure interplay, Illinois consumer-fraud treatment of undisclosed wraps) may warrant their own row on later passes.
  • Whether any state recognizes a judicial anti-due-on-sale defense surviving Garn-St. Germain preemption (e.g., window-period loans, 12 U.S.C. § 1701j-3(c)) — flagged for the federal page; rarely material given loan age.
• open_questions:
  • In states that cap the wrap (OH) versus those that condition it on consent (MN, TX) versus those that criminalize misconduct (CA), what is the buyer’s practical remedy when the senior lender actually forecloses — rescission/return of payments, damages, equitable subrogation, or a race to cure? Normalize on each state page.
  • Does a land trust / “subject-to” structure ever change the wrap analysis under any state statute (as opposed to the federal due-on-sale analysis, where it does not)? Track per state.
• cross_links: garn-st-germain-due-on-sale · forfeiture-vs-foreclosure · equitable-conversion · dodd-frank-seller-financing · texas · north-carolina · minnesota · ohio · california · arizona · oklahoma · tennessee · mississippi · missouri · kentucky · alabama · colorado
• changelog:
  • 2026-06-08 — Page created. Defined the wrap-around / AITD / subject-to structure and its three stacked exposures (due-on-sale, state wrap statutes, buyer senior-lien risk). Built the cross-jurisdiction map distinguishing near-prohibited (TX), conditionally permitted (NC, MN, OH, CA), and unregulated-but-exposed (majority) regimes, each from a primary source retrieved this run: 12 U.S.C. § 1701j-3; 12 C.F.R. § 191.2 (wraparound loans/contracts for deed enumerated); Tex. Prop. Code §§ 5.085, 5.016; Tex. Fin. Code §§ 159.001, 159.051, 159.101; N.C. Gen. Stat. § 47H-6; Minn. Stat. § 559A.04; Ohio Rev. Code § 5313.02(B); Cal. Civ. Code §§ 2985.2, 2985.3. Flagged Tex. Fin. Code § 159.051 licensing detail, California AITD civil-disclosure provisions, and the remaining jurisdictions under needs_verification.

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Disclaimer. This page is legal information, not legal advice, and may be out of date. Wrap-around and due-on-sale law is frequently amended and turns on the structure of each deal and the terms of the underlying loan. Confirm the current statute and that any cited authority is still good law before structuring, selling, or buying on a wrap, and consult a licensed attorney in the relevant jurisdiction.