What Is an All-Inclusive Trust Deed (AITD)?

An All-Inclusive Trust Deed (AITD), often referred to as a wraparound mortgage, is a specialized real estate financing instrument. It represents a method of seller financing where the seller acts as the lender, offering a loan that incorporates an existing mortgage on the property. The AITD provides a framework for property transactions that might not otherwise occur through conventional lending channels.

Defining an All-Inclusive Trust Deed

An All-Inclusive Trust Deed is a form of seller financing where the seller extends a new loan to the buyer, which “wraps around” or includes the existing mortgage already secured by the property. This means the seller’s original loan remains in place, and the buyer makes payments to the seller for the full, combined amount. The AITD creates a single, larger debt instrument that encompasses both the underlying loan and any additional financing provided by the seller. The seller remains responsible for making payments on the original, underlying mortgage, even after the property has been sold to the buyer. The buyer, in turn, makes payments to the seller according to the terms of the AITD. This structure can facilitate property sales when traditional bank financing is challenging to obtain or when the seller wishes to retain the favorable interest rate or terms of their existing loan. Furthermore, an AITD can expand the pool of potential buyers, including those who may not qualify for conventional mortgages due to credit issues or insufficient down payment.

Structure and Parties Involved

The structure of an AITD primarily involves two key documents: the All-Inclusive Promissory Note and the All-Inclusive Deed of Trust. The All-Inclusive Promissory Note outlines the buyer’s promise to pay the seller the total loan amount, including both the existing underlying mortgage and any new funds advanced by the seller. The All-Inclusive Deed of Trust then secures this promissory note with the property itself, establishing the seller’s lien. These documents are distinct from the original mortgage documents held by the underlying lender.

Three primary parties are involved in an AITD arrangement. The buyer makes regular payments directly to the seller, who is also known as the “wrap lender.” The seller then assumes the responsibility of forwarding the appropriate portion of these payments to the original lender. The original lender, or “underlying lender,” holds the initial mortgage on the property and is not typically a direct party to the AITD agreement. The AITD’s terms, such as interest rate and payment amount, are usually structured so that the combined rate is higher than the underlying loan’s rate, creating an “interest override” or “spread” for the seller. This spread represents the additional profit the seller earns on the portion of the loan that wraps around the existing debt.

Payment and Servicing

Under an AITD, the buyer remits a single, comprehensive payment to the seller each period. The seller, having received this payment, is then obligated to make the required payments on the original, underlying mortgage to the initial lender. This direct transfer of funds from buyer to seller, and then from seller to the underlying lender, underscores the seller’s ongoing financial responsibility for the original loan.

Loan servicing for an AITD can be handled directly by the seller, or through a third-party loan servicing company. Utilizing a third-party servicer can provide benefits such as professional record-keeping, timely payment processing, and ensuring payments are consistently made to the underlying lender. These services can help mitigate the administrative burden on the seller and reduce the risk of missed payments to the original lender, which could have serious consequences. Third-party servicers typically:
Manage monthly payment accounting.
Process payments.
Monitor for delinquencies.
Handle annual reporting, including tax statements.

Legal and Financial Implications

A significant legal aspect of AITDs involves the “due-on-sale” clause, commonly found in existing mortgages. This clause permits the underlying lender to demand immediate repayment of the entire loan balance if the property is sold or transferred without their consent. While an AITD transfers title to the buyer, it does not typically involve the underlying lender’s approval, potentially triggering this clause. Although lenders do not always enforce due-on-sale clauses, particularly if the payments remain current, the risk of acceleration remains a consideration.

In the event of a default, the layered nature of an AITD can introduce complexities. If the buyer defaults on payments to the seller, the seller has the right to initiate foreclosure proceedings on the AITD. Conversely, if the seller fails to make payments on the underlying loan to the original lender, the original lender could foreclose on the property, potentially leaving the buyer in a vulnerable position despite their consistent payments to the seller. Proper recording of the AITD with the county recorder’s office is important to establish the buyer’s interest and the priority of the AITD. This recording provides public notice of the transaction and helps protect the buyer’s equitable interest in the property.