The Quick Read: A wrap leaves the seller’s older loan in front, so the first question the lender asks is whether the new loan can sit in first lien position on the property, and if not, what must be paid off or subordinated in writing so that it can. After that answer, the lender checks the underlying loan, the project spread, your reserves, and the exit.
- Most hard money lenders want first position. A wrap that stays in place usually blocks that, so the deal either pays off the whole stack or needs a written subordination.
- The lender sizes the loan against the property’s value after repairs. The note does not change what the house is worth.
- The seller’s underlying loan has a due-on-sale clause. The bank may call it, even if every payment is current.
- A first flip is not disqualified by a wrap, but it narrows your lender pool.
- The exit has to retire every layer: the hard money loan, the underlying loan, and the wrap balance.
What Is a Wrap Note?
A wrap is a seller-financed junior loan that “wraps” around the seller’s existing mortgage. The buyer signs a note to the seller for the old balance plus whatever is left of the purchase price. The seller keeps paying the original lender and keeps the difference.
What this loan actually costs to carry.
Hard money is sized against the project and priced by time. Enter the deal and see how much the program will lend, the cash required at closing, the carry while you hold it, and what is left at the exit.
Leverage tiers on the current program: 85% with fewer than 2, 90% with 2 or more, 93% with 5 or more completed projects — every tier capped at 75% of after-repair value. Loan amounts up to $5,000,000, larger by exception; terms of 6 to 18 months, interest-only, no prepayment penalty. The rehab portion funds in draws against completed work, not at closing.
Program parameters shown update from Lendmire’s centralized guideline source. Rate, points, and months are editable assumptions, not quoted terms.
Cost cap sets the loan · positive spread
Illustrative estimate only — not a quote, Loan Estimate, approval, or commitment to lend. Rate, points, and months are editable assumptions. Hard money is business-purpose financing for real estate investors, not a consumer mortgage. Leverage on the current program tops out at 93% of project cost for investors with a documented track record, capped at 75% of after-repair value, with rehab funding up to 100% of the documented budget released in draws; actual terms vary by lender, borrower experience, property, and exit. Lendmire is a mortgage broker, not a lender.
A New York State tax department memo describes it well. A wrap involves two or more separate loans on one property. The underlying principal is counted inside the wrap’s principal, but the lenders and obligations stay separate.
The picture is simple. The bank holds the first loan. The seller holds the wrap behind it. You pay the seller, and the seller pays the bank.
A wrap is not just a second mortgage. A second mortgage sits behind the first and stands alone. A wrap includes the first loan inside its balance.
Three Roles a Wrap Can Play in a Flip
“Wrap note on a first flip” means different things depending on where the wrap sits in your deal. The lender’s questions change with each role.
| Role | What it is | What the lender asks for |
|---|---|---|
| Entry wrap | Seller finances your purchase | Payoff or subordination plan |
| Exit wrap | You resell on a wrap | Payoff of hard money at sale |
| Existing collateral | Wrap already recorded | Lien order and underlying proof |
Most first-timers land in the first row. You bought with seller financing, the seller’s loan is still in place, and now you want rehab money. That is the file this article follows.
How the Lender Reads the File, Step by Step
This is the order a hard money desk typically works through. It reflects how files tend to move across a wholesale network, not a published standard.
1. Which side of the wrap are you on? A buyer through a wrap needs to hand over the underlying note, the underlying mortgage or deed of trust, and the wrap note. A seller on a wrap exit needs to show how the hard money loan will be paid off from the wrap.
2. Where does the loan sit? Lien position is set by recording order at the county, not by who feels senior. The lender checks that the wrap is properly recorded and looks for any subordination agreement, which is a written agreement between lienholders confirming which lien stays first.
3. How much total debt is on the house? The lender measures all loans stacked together against value. With a wrap, that means the underlying balance plus the wrap’s added amount.
4. Does the project hold up on its own? Hard money is asset-based. The lender compares total project cost to the after-repair value, or ARV, which is what the finished property should be worth.
5. Is the underlying loan current? Expect to provide a payoff or balance statement and a payment history. The lender wants proof the seller is actually paying the bank.
6. Is the property protected? That means insurance in your name and a title policy, not just a handshake and a signed note.
7. Does the exit retire everything? A sale or refinance has to pay off the hard money loan, the underlying loan, and the wrap in full.
A problem at step 2 stops most files. Steps 3 through 7 shape the terms.
Why the Underlying Loan Is the Real Risk
Most large mortgages carry a due-on-sale clause. It lets the bank demand full repayment if the property transfers without its consent. Federal law makes these clauses enforceable, as 12 U.S.C. § 1701j-3 sets out.
A wrap can trigger that clause. Banks rarely hunt for performing loans, but the right exists and enforcing it is the bank’s choice. A lender that funds your rehab is betting the bank stays quiet.
The statute lists situations where a bank cannot enforce the clause on small residential properties. An arm’s-length sale to an unrelated buyer, which is what a typical wrap is, does not appear among them.
There is a second risk. The seller stays obligated on the underlying loan. If the seller stops paying, the bank can foreclose even though you paid every month. That is why a lender wants a clean payment trail.
Worked Example: One First Flip, Percentages Only
Say you bought a one-to-four-unit property through a wrap and now want a hard money loan to rehab it. These are modeled assumptions, not market data.
- Purchase price: 50% of the after-repair value.
- Rehab budget: 20% of the after-repair value.
- Project cost: 70% of the after-repair value.
- Seller’s underlying loan: 40% of the after-repair value.
The network’s first-flip tier for investors with fewer than two completed projects reaches 85% of project cost, capped at 75% of ARV. That tier varies by lender, property, and experience. Here, 85% of project cost works out to 59.5% of ARV, well under the 75% cap, so cost is the limit.
The new loan would need to pay off the whole stack first: the underlying 40% and the wrap’s extra 10%. That leaves roughly 9.5% of ARV toward a 20% rehab. You cover the gap from your own cash.
Now flip the picture. If the wrap stays in place, the lender is no longer first. Most would stop right there, which is why the payoff route matters. Subordination is the alternative, and it needs the wrap holder to agree in writing.
Structures That Exist, and One That Usually Fails
Hard money first, seller second. The seller’s old loan is paid off, the hard money loan sits first, and the seller carries a smaller second behind it. This is a different structure from a classic wrap, but it is the one that tends to get funded.
Seller-carry first, hard money second. This is the version first-timers ask for most, and it rarely works. Many hard money lenders will not take a junior position behind a seller loan.
The three-loan stack. An underlying loan, a wrap, and a hard money loan behind them both. Few lenders touch it, and the ones that do reduce leverage.
Refinance of an existing wrap. If you already hold a wrap and want to refinance, the hard money loan takes first position by paying off both the underlying loan and the wrap. Hard money refinances for non-owner-occupied one-to-four-unit property reach up to 65% of value in the network, varying by lender, property, and experience.
Where the General Rule Breaks
Exit wrap to an owner-occupant. If you resell on a wrap to someone who will live in the home, federal seller-financing rules can apply to you. The National Association of Realtors covers the exclusions for sellers who finance only a few properties. They come with conditions, and a flipper doing several exit wraps a year can lose them. Talk to counsel before you offer one.
A wrap to an investor. A business-purpose sale is treated differently from an owner-occupant sale, and the rules above lean on occupancy. Investor-to-investor wraps still carry the due-on-sale and payment-routing risks.
A balloon wrap and a refinance exit. A wrap that comes due in a lump sum before your project is stable can squeeze the exit. The refinance lender has to pay off the underlying loan and the wrap together. A balloon date that lands mid-rehab is a red flag.
State rules. Recording taxes, foreclosure process, and seller-financing rules vary by state. The New York memo is one example of how the wrap holder’s equity is measured. Have a local attorney review the documents.
Red Flags and Green Flags
| Green flag | Red flag |
|---|---|
| Wrap recorded at the county | Unrecorded or side-letter wrap |
| Seller pays through a third-party servicer | Seller collects by personal check |
| Payoff statement on the underlying loan | No proof the seller pays the bank |
| Wrap holder agrees to subordinate | Wrap holder refuses to move |
| Insurance in the buyer’s name | Seller’s policy still active |
A servicer is a company that collects your payment, pays the bank, and logs both. It gives the lender a ledger to verify and protects you if the seller falls behind.
What a First-Timer Can Do to Strengthen the File
First-time flippers qualify at the lower leverage tiers. The network’s minimum credit score is 620, with additional conditions below 660, and underwriting stays asset-based. The lender wants a property, a plan, and an exit.
- Show reserves. Thin reserves are a common reason first files stall. Size yours against the underlying payment, since you may need to carry it if the wrap holder stops.
- Bring a contractor. A qualified general contractor or a construction-experienced partner reduces perceived completion risk.
- Keep the scope simple. A smaller, cosmetic renovation is easier to fund than a gut rehab.
- Get the wrap holder on board early. A wrap holder willing to be paid off or to subordinate saves the file.
- Fix title and insurance first. Move the policy to your name and order title work before you ask for rehab money.
Exit: Paying Off the Whole Stack
The hard money loan is short-term. Across the network, terms run 6 to 18 months, interest-only, with no prepayment penalty, and loans reach up to $5,000,000 depending on the lender and property.
Your exit has to clear every layer. For a sale, the buyer’s funds pay off the hard money loan, the underlying loan, and the wrap. For a hold, many investors refinance into long-term DSCR investor loans once the property is stabilized, a path Lendmire brokers. DSCR, short for debt service coverage ratio, compares the property’s rent to its full monthly payment.
Most DSCR cash-out programs tend to top out around 75% LTV on standard rentals, with about six months of seasoning common, and 1.00 coverage is where many select programs start. Reserves commonly run around six months. Select lenders in the network also go below 1.00 coverage with leverage and terms adjusted. Clearing 1.00 is not the same as positive cash flow, since repairs, vacancy, and management sit outside the math. The complete DSCR loans guide covers the full picture.
A refinance lender will still have to pay off the underlying loan and the wrap. A balloon wrap can complicate that, and there is no standard way to price it, so ask early.
Tax treatment varies; consult a qualified professional.
Key Terms Defined
Wrap note: A seller-financed note that includes the balance of the seller’s existing mortgage inside its own balance.
Underlying loan: The seller’s original mortgage, which stays in place beneath the wrap.
Lien position: Your loan’s rank for repayment, set by recording order at the county.
Subordination agreement: A written agreement in which one lienholder agrees to move behind another.
Due-on-sale clause: A mortgage term that lets the bank demand full payment if the property transfers.
After-repair value (ARV): What the property should be worth once the rehab is finished.
Loan-to-cost: The share of total project cost the lender funds.
Frequently Asked Questions
Can I get a hard money loan if I bought through a wrap?
Sometimes. The lender needs first position, so the loan typically pays off the underlying loan and the wrap, or the wrap holder subordinates in writing. If the wrap stays in front, most lenders pass. Terms vary by lender, property, and experience.
Will a wrap hurt my first-flip leverage?
Not directly. A first flip with fewer than two completed projects reaches about 85% of project cost, capped at 75% of ARV, whether or not a wrap is involved. What changes is whether the lender can take first position. The upper tiers (90% and 93% of project cost) are reserved for investors with two or more and five or more completed projects.
Can the seller’s bank really call the loan?
Yes, the right exists and enforcement is the bank’s choice. A bank that sees steady payments is less likely to act, but a lender funding your rehab cannot count on that.
Should I resell on a wrap to an owner-occupant?
Be careful. Federal seller-financing rules can apply, and the exclusions come with conditions that repeat flippers may not meet. Ask an attorney before you offer one.
Does the wrap note change my appraisal?
No. The appraiser values the property, not the financing. A wrap price above market value does not raise what the lender will fund.
Next Step
If you are buying, rehabbing or refinancing an investment property on a short timeline and want to see how the numbers work, Lendmire can help you compare hard money options based on the project, the exit plan, leverage, and your goals. Lendmire is a broker arranging financing through select lenders in its wholesale network across 41 markets, including Washington, D.C. All terms are subject to lender guidelines and are not a commitment to lend.
A wrap can get a first flip started, but only a clean path to first position and a clean payoff at the exit will carry it to the finish.
About Lendmire
Lendmire is a non-QM mortgage brokerage (NMLS# 2371349) arranging DSCR investor loans in 41 markets, including Washington, D.C., through wholesale and investor-lending channels. DSCR loans are evaluated by the lender on rental income rather than personal income, subject to lender guidelines — a fit for LLC-owned portfolios, self-employed investors, and operators scaling beyond conventional loan caps. Recognized as a Scotsman Guide Top Mortgage Workplace in 2025 and 2026.
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References
1. New York State Department of Taxation and Finance, TSB-M-04(9)R
2. Cornell Legal Information Institute, 12 U.S.C. 1701j-3
3. National Association of Realtors, The SAFE Act and Seller Financing
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Gap Funding vs. a Money Partner for Your First DSCR Rental · Can a DSCR Lender Release a Detached Unit From the House? · Staying With a DSCR Lender That Sold Your Loan vs Using a Broker
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.