Beware the Hidden Dangers of Subject-To and Wrap-Around Home Sales

Creative financing strategies like subject-to deals and wrap-around mortgages are getting more attention in today’s real estate market — especially when buyers struggle to qualify for traditional loans and sellers want to move a property without a big cash payout. But what looks like a clever shortcut can turn into a financial nightmare for the unwary.

In short: these arrangements can expose sellers (and buyers) to serious risk — including foreclosure, credit damage, and legal exposure — without the protections of a traditional sale.

Let’s unpack the issues.

What Are These Deals Anyway?

In a subject-to sale, a buyer takes ownership of a home but the seller’s mortgage stays in the seller’s name. The buyer agrees to make the payments, but the loan is not formally assumed with the lender.

A wrap-around mortgage is one type of seller financing where:

• The seller keeps the existing mortgage

• The seller creates a new “wrap” loan for the buyer that includes the old loan balance

• The buyer pays the seller, and the seller continues paying the original lender

These arrangements let a buyer with poor credit or financing problems get into a home, while the seller may benefit from monthly income and interest rate spread.

Sounds good — until it isn’t.

The #1 Legal Sword Hanging Over Your Head: The Due-on-Sale Clause

Most mortgage contracts in the U.S. contain what’s called a due-on-sale clause.

Here’s how it works in everyday language:

If the property changes hands but the original mortgage isn’t paid off, the lender has the right to demand full repayment immediately.

This means that as soon as the title changes — even if the buyer is making every payment — the bank could call the entire loan due. If the borrower (or buyer) can’t come up with the payoff, the lender can start foreclosure proceedings.

Banks don’t always enforce this right — historically they’ve been more permissive when interest rates are stable or falling — but every mortgage holder has that legal right. In periods of rising interest rates, lenders have more incentive to enforce due-on clauses to re-price the loan at current market rates.

In plain terms: you can lose the house even if payments are being made — just because of how the loan was transferred.

Misplaced Trust Can Be Devastating

Many sellers enter these deals thinking the buyer will make payments and everyone’s problem is solved. But the reality is messier:

Seller Risks

• The original loan stays in the seller’s name

• If the buyer stops paying, the seller must still make payments or risk default

• A foreclosure or delinquency on that mortgage can **damage the seller’s credit long-term

• The seller’s credit could be harmed even if the buyer makes payments to the seller — if the seller fails to forward those payments to the lender

Buyer Risks

• Buyer may pay months of wrap payments but have no guarantee the seller actually paid the bank

• Wrap mortgage payment history may not be reported to credit bureaus, so buyers don’t build credit

How Big Is the Risk in the Market Today?

We don’t have precise national data on subject-to or wrap-around defaults — they aren’t tracked the way traditional mortgages are — but the broader mortgage market shows how quickly things can turn south:

• In a recent month, 3.6 million U.S. homeowners were behind on mortgage payments — a level that nearly doubled from the previous month and was described as one of the largest single-month spikes ever recorded.

While this figure overlaps with traditional mortgages, it illustrates that delinquency risk remains a real and present danger — whether a buyer’s loan is conventional or creatively financed.

To put it in context: during the 2007 subprime housing crisis, about 16% of subprime loans were more than 90 days delinquent — more than triple the rate just two years earlier.

Economic trends like rising rates, unemployment spikes, or local job losses can quickly push even good buyers into distress.

Bottom Line: A Little Knowledge Isn’t Enough — You Need Protection

These deals sometimes work — but at a high risk:

✅ Buyers with poor credit might get into a home
✅ Sellers might capture monthly income and sell a hard-to-move property

❌ Sellers remain legally responsible for the mortgage
❌ Lender can call the loan due at any time
❌ Foreclosure can occur even if buyer pays on time
❌ Seller’s credit can be damaged, affecting future refinancing or credit

For most sellers, especially those with significant equity or employment plans, this risk outweighs the upside.

What You Should Do Before Signing Anything

1. Ask your lender whether a due-on-sale clause exists

2. Consult a real estate attorney familiar with your state laws

3. Consider requiring the buyer to pay the lender directly

4. Understand that simply changing the deed doesn’t change loan liability

In Plain English

Creative financing sounds appealing — but without strong legal safeguards and full lender cooperation, it’s like building a house of cards on a shaky foundation.

If you’re selling subject to or using a wrap-around mortgage, you’re not just selling a home — you’re betting your credit and financial future on someone else’s ability and willingness to pay.

And when a mortgage holder is involved, the law is always on their side — especially when billions of dollars of loans are at stake.

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