Wraparound Mortgages and Seller Finance in Texas
Wraparound Mortgages and Seller Finance in Texas
Information, not legal advice. Laws change; check the current statute or rule and talk to a Texas attorney before you act.
A wraparound mortgage ("wrap") is seller financing on a house that still has an existing loan. The buyer signs a new note to the seller for the full price owed. The seller keeps paying the original loan out of the buyer's payments and keeps the difference. The original loan "wraps" inside the new one.
Wraps are common in creative-finance investing: an investor buys a house subject-to the existing loan, then sells it to an owner-occupant on a wrap. Texas regulates these loans more closely than most states. Since January 1, 2022, Finance Code chapter 159 (Senate Bill 43, 2021) sets disclosure, closing, licensing and trust-money rules for wrap lenders. Federal law adds loan-originator and ability-to-repay rules for seller financing in general.
What counts as a wrap in Texas
Chapter 159 defines a wrap mortgage loan as a residential mortgage loan made to finance the purchase of residential real estate where an earlier lien stays on the property and the buyer's obligation includes paying that earlier debt plus the new financing (Fin. Code §159.001). The "wrap lender" includes an owner who contracts with someone else to make the loan on the owner's behalf.
The chapter generally doesn't apply to a sale of a vacant residential lot in some situations (Fin. Code §159.002), and there are exemptions (below).
The core Texas requirements
| Rule | What it says | Source |
|---|---|---|
| Who may originate | A person may not originate or make a wrap loan unless licensed or registered to originate residential mortgage loans under the Finance Code, or exempt | Fin. Code §159.051 |
| Disclosure | At least 7 days before the wrap loan agreement is signed, in at least 12-point type: the Prop. Code §5.016 information about the existing lien plus an insurance notice | Fin. Code §159.101 |
| Rescission after disclosure | The borrower may rescind on or before the 7th day after receiving the disclosure, with refunds of earnest money, down payment and related amounts | §159.101 |
| No disclosure before closing | The borrower may rescind; if a disclosure is given after closing, the borrower has until the 21st day after receiving it, and the lender must return principal and interest paid. The lender can avoid rescission by paying off the underlying debt and unpaid taxes within 30 days, plus $1,000 and reasonable attorney's fees | §159.104 |
| Spanish (or other language) | If negotiated mainly in another language, disclosures in that language | §159.102 |
| Closing | The wrap lien is void unless the loan and the conveyance are closed by an attorney or a title company | §159.105 |
| Money in trust | Payments from the borrower are held in trust; whoever collects them owes the borrower a fiduciary duty to pay the underlying debt and the taxes and insurance collected for | §§159.151-.152 |
| Borrower's right to deduct | For a wrap on a home the borrower will live in, the borrower may pay to cure the seller's default and deduct it from what is owed, without going to court | §§159.201-.202 |
| No waivers | Waiving or avoiding the chapter is prohibited | §159.107 |
| Enforcement | For wrap lenders that must register as residential mortgage loan servicers under Fin. Code ch. 158, the chapter adds inspection, subpoena and cease-and-desist powers; borrowers also have their own right of action | §§159.106, 159.251-.301 |
The Prop. Code §5.016 disclosure that ch. 159 builds on is a 12-point statement of the existing lien's lender, balance, rate, payment, account, whether the lienholder consented, insurance and taxes due.
The exemptions (count carefully)
Wrap lender exemption. An owner of residential real estate is exempt from much of ch. 159 if, in any 12 consecutive months, it does not make (or contract to make) more than three wrap loans. Owners that are affiliated entities, such as an investor's several LLCs, are counted as one owner (Fin. Code §159.003). Check the statute for which sections still apply to exempt owners.
Loan originator license exemption. Texas's SAFE Act chapter (Fin. Code ch. 180) requires residential mortgage loan originators (RMLOs) to be licensed. An owner of residential real estate who makes no more than three residential mortgage loans in any 12 consecutive months is exempt, again counting affiliates together (§180.003(a)(5)). Company licensing under Fin. Code chs. 156 and 157 has its own owner exemptions; read the current text before relying on a count.
Investors who do more than an occasional wrap commonly have a licensed RMLO originate each loan. Closing at a title company or attorney's office is required for every wrap lien to be valid.
Federal rules for seller financing
Loan originator rule (Regulation Z). Anyone who, for compensation, arranges or makes consumer mortgage credit is a "loan originator" unless an exclusion applies (12 C.F.R. §1026.36(a)). Two seller-finance exclusions:
- Three-property exclusion (§1026.36(a)(4)): any person, including an LLC, that seller-finances three or fewer properties in 12 months, owns each property, did not build the home in the ordinary course of business, and makes a loan that is fully amortizing (no balloon) with a good-faith determination that the buyer can reasonably repay, at a fixed rate or one that adjusts only after five or more years with reasonable caps.
- One-property exclusion (§1026.36(a)(5)): only a natural person, estate or trust, one property in 12 months, no negative amortization (a balloon is allowed), same rate conditions.
SAFE Act. The federal Secure and Fair Enforcement for Mortgage Licensing Act requires states to license individual loan originators and register them in the NMLS (12 U.S.C. §5101 et seq.). Texas does this through Fin. Code ch. 180.
Creditor status. A seller who makes enough dwelling-secured loans becomes a TILA "creditor," which brings full disclosures and the ability-to-repay rule (12 C.F.R. §§1026.2(a)(17), 1026.43). Count your deals.
Other risks to weigh
- Due-on-sale. A wrap sale is a transfer the underlying lender can use to accelerate (12 U.S.C. §1701j-3). If that happens, someone must refinance or pay off the underlying loan. See subject-to and due-on-sale.
- Interest rate limits. Texas usury law (Fin. Code chs. 302-305) caps rates and sets steep penalties. Set the rate with counsel.
- Insurance. The buyer, the seller and the underlying lender all need coverage that actually protects them. Ch. 159's required insurance notice exists because a seller's or lender's policy may not cover the buyer.
- Default. A wrap is secured by a deed of trust, so a default usually leads to a non-judicial foreclosure under Prop. Code §51.002, not an eviction.
How this shows up in Agentix Data
Agentix Data does not carry mortgage, deed-of-trust or wrap-loan records, so it can't show you which houses already have wraps. It shows the owner-side signals that lead to creative-finance purchases in the first place, such as tax delinquency and tax suits, posted foreclosure notices in Kaufman and Rockwall counties, Harris County foreclosure suits, probate and absentee ownership, linked to each parcel and refreshed daily.
Sources
- Texas Finance Code ch. 159 (wrap mortgage loan financing): https://statutes.capitol.texas.gov/Docs/FI/htm/FI.159.htm and https://texas.public.law/statutes/tex._fin._code_chapter_159
- Fin. Code §159.003 (exemptions): https://texas.public.law/statutes/tex._fin._code_section_159.003
- Fin. Code §159.101 and §159.104 (disclosure, rescission): https://texas.public.law/statutes/tex._fin._code_section_159.101 , https://texas.public.law/statutes/tex._fin._code_section_159.104
- Fin. Code §159.105 (lien void unless closed by attorney or title company): https://texas.public.law/statutes/tex._fin._code_section_159.105
- Texas Property Code §5.016: https://texas.public.law/statutes/tex._prop._code_section_5.016
- Fin. Code ch. 180 (Texas SAFE Act) and §180.003: https://statutes.capitol.texas.gov/Docs/FI/htm/FI.180.htm , https://texas.public.law/statutes/tex._fin._code_section_180.003
- Fin. Code chs. 156 and 157 (mortgage company and banker licensing): https://statutes.capitol.texas.gov/Docs/FI/htm/FI.156.htm , https://statutes.capitol.texas.gov/Docs/FI/htm/FI.157.htm
- 12 C.F.R. §1026.36 (loan originator rules, seller-financer exclusions): https://www.consumerfinance.gov/rules-policy/regulations/1026/36/
- 12 C.F.R. §1026.2 and §1026.43: https://www.consumerfinance.gov/rules-policy/regulations/1026/2/ , https://www.consumerfinance.gov/rules-policy/regulations/1026/43/
- SAFE Act, 12 U.S.C. §5101 et seq.: https://www.law.cornell.edu/uscode/text/12/chapter-51
- 12 U.S.C. §1701j-3: https://www.law.cornell.edu/uscode/text/12/1701j-3
- Texas Department of Savings and Mortgage Lending: https://www.sml.texas.gov/
General information, not legal or financial advice.