The Quick Read: You get the DSCR lender to approve a recorded second lien behind its first mortgage, then document a seller note that fills part of the gap between that first loan and the price, which works most cleanly when the seller owns the property with no mortgage.
- Ask the lender before you write the offer. Policies on junior liens and seller notes vary from lender to lender, and the answer decides everything else.
- Lenders judge the whole stack. A first mortgage that sits at a typical 75%–80% LTV on an investment-property purchase is read together with the seller note on top of it.
- Plan for the seller note’s payment to count against your rent coverage. Some programs count it and some do not, so test both versions.
- A free-and-clear seller removes payoff and consent problems. It does not remove the DSCR lender’s right to approve or refuse the second.
- Disclose the note to everyone. A hidden second lien is a misrepresentation risk, not a clever workaround. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
Key Terms Defined
Seller carry means the seller finances part of the price. You sign a note to the seller instead of paying that portion in cash at closing.
Free and clear means the seller owns the property with no mortgage or other lien against it.
Second lien (junior lien) is a recorded claim that ranks behind the first mortgage. If the property is sold or foreclosed, the first lender is paid first.
Subordination is a written agreement that keeps one lien behind another. Lien position follows recording order, not loan size.
Combined LTV (CLTV) is the first loan plus every junior lien, divided by the property’s value.
PITIA is principal, interest, taxes, insurance, and any association dues. DSCR coverage compares the property’s rent to that monthly total.
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Rate source: Freddie Mac 30-yr average via FRED® — Federal Reserve Bank of St. Louis · effective Oct 15, 2026
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Program parameters update from Lendmire’s centralized guideline source. Taxes and insurance are editable estimates.
As of Oct 15, 2026 · General Freddie Mac market benchmark, not a Lendmire loan offer. Rent, nightly rate, occupancy, taxes, and insurance are editable estimates. Short-term rental figures are estimates only and vary significantly by season, property type, management approach, and local short-term-rental rules — confirm local regulations before relying on them. Qualifying income for short-term rentals varies by program — some use appraisal market rent, others use documented STR history or projections — and is confirmed in underwriting. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
Why Is a Free-and-Clear Seller the Cleanest Case?
A seller with no mortgage has nothing to pay off, nothing to rank against, and no existing lender to ask for permission. The title is clean, so the DSCR lender’s first mortgage goes on in first position. The seller’s note goes on right behind it.
Compare that to a seller who still owes money. Their payoff has to come out of the proceeds, and their lender may have a say. Many lenders also want first position with nothing behind it, so the structure gets messy fast.
Here is what a clean title does not change. Your DSCR lender still decides whether a junior lien is allowed at all. It still sets the combined leverage ceiling. It still checks that rent supports the payments.
Across the wholesale network we place files with, most purchase programs sit at 75%–80% LTV on investment properties. A few high-leverage programs reach higher with strong credit, roughly a 700+ score. Whether any of them tolerate a seller note on top is a file-level answer, not a universal one. That is why step one below is a question, not a contract. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
The seller’s equity is also what funds the carry. A seller who owns outright can take most of the price in cash from your first mortgage and leave a smaller piece as a note. Some sellers like that split because they get most of their money at closing and still earn interest on the rest.
How Do You Add the Seller Carry, Step by Step?
Work the steps in this order, because each one depends on the answer to the step before it.
1. Ask the lender about junior liens before you make an offer. Ask three things. Is a seller second allowed? What is the combined LTV ceiling? Is there a cap on the size of the seller note? A broker who sees many lenders’ guidelines can often tell you which programs say yes before you spend money on an appraisal.
2. Confirm the seller is truly free and clear. Order title work early. It should show no mortgage, no judgment, and no tax lien. If something turns up, either it gets paid at closing or the structure changes.
3. Anchor the deal to a real price. The contract price must be supported by the appraisal. Lenders watch for a price inflated by a seller second that is later forgiven. The lender will order its own valuation, and for rentals that usually includes a rent schedule, so do not count on the price alone.
4. Draft the note and the junior security instrument. The note states the amount, term, payment type, and payoff terms. A recorded deed of trust or mortgage secures it. It must say plainly that it sits behind the first mortgage.
5. Test both payments against rent. Run coverage twice, once on the first mortgage alone and once with the seller note included. The next section shows why.
6. Check your own file against the program. Credit still matters. A 620 floor exists in parts of the network, most programs want about 660, and 700+ opens the strongest leverage. Reserves still apply too, commonly about 6 months of PITIA and more on loans above $1,500,000. The seller note does not waive any of that.
7. Close with simultaneous recording. The title company records the first mortgage, then the seller’s junior lien. The settlement statement shows the carry as a note, so nothing is off the books.
8. Plan the exit before you sign. Decide now whether the note will be paid off at a later refinance or stay behind a new first mortgage. The exit section below explains how the seller’s lien moves up when the first loan is replaced, so settle that in the note terms before you sign.
How Does the Seller Note Change Your Coverage Ratio?
DSCR divides the property’s monthly rent by its monthly PITIA. Adding a second payment makes the bottom number bigger, so the ratio drops. That is the cost of putting less cash down.
Run the numbers on a modeled rental. Assume the first mortgage alone gives you coverage of about 1.30x. Add a seller note and the same rent, divided by both payments, lands near 1.10x. These are modeled assumptions for illustration, not market data.
| Test | What is divided into rent | Modeled coverage |
|---|---|---|
| First mortgage only | First lien PITIA | About 1.30x |
| First plus seller note | Both payments together | About 1.10x |
| Seller note, interest-only terms | First PITIA plus lighter note payment | Between the two |
Treatment varies by program. Some count the seller note payment in the debt service, and some test only the first mortgage. Plan on it being counted, and treat any other treatment as a bonus.
Coverage of 1.00 is where many select programs start. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. Stronger coverage generally opens better pricing and leverage.
One caution that applies to every file: clearing 1.00 is not the same as positive cash flow. Repairs, vacancy, management, utilities, and capital spending sit outside the calculation. A seller note adds one more payment you still have to make from real cash.
What Terms Belong in the Seller Note?
Treat each term as a decision, not a default. The senior lender cares about most of them.
| Term | Why the senior lender cares | Decision to make |
|---|---|---|
| Payment type | It changes the coverage math | Fully amortizing, interest-only, or deferred |
| Balloon or maturity | It creates a refinance event | Set a maturity that fits your plan |
| Prepayment | It affects your exit | Allow payoff without a penalty |
| Default and cure | It affects who can foreclose | Give the senior lien clear priority |
| Subordination language | It fixes lien order | State that the note stays behind the first |
| Borrower on the note | It sets who is liable | Match the borrowing entity on the first loan |
If the buyer is an LLC, the note usually names the same LLC, subject to lender program eligibility. A personal guarantee is a negotiation point, so settle it with the seller early.
Deferred payments are tempting because they protect coverage. They also change what the lender sees, so they need the lender’s explicit approval before you rely on them.
Seller Carry, Seller Credit, or a Price Cut?
People blur these three. They are not the same thing.
A seller carry is a loan. You owe the seller money, a lien is recorded, and payments continue after closing. A seller credit is a reduction in what you pay at closing, usually for costs or repairs, and nothing is owed afterward. A price reduction lowers the contract price outright. Lendmire’s piece seller carry vs. price cut for a free-and-clear seller’s DSCR buyer goes deeper on that tradeoff.
Lenders treat them differently. A credit or a price cut leaves no second payment and no second lien. A carry leaves both. If the lender will not accept a note, a credit or price cut gets you part of the same benefit with less friction. Credit limits are a program question, so ask before you count on one.
DSCR vs. conventional financing
There are two common ways to finance an investment property, and they qualify you differently — here’s how investors weigh them.
Why investors choose it
- Qualifies on the property’s rental income — no personal tax returns, W-2s, or pay stubs needed to document income.
- No personal debt-to-income ceiling to clear, so existing mortgages and obligations don’t cap your borrowing the same way.
- Can be closed in an LLC, keeping the property inside a business entity.
- Built for scaling — not held to the limit on number of financed properties that conventional financing applies.
- Underwriting centers on the deal: generally qualifies when the rent covers the payment, a 1.00x coverage ratio being a common baseline (confirmed in underwriting).
- Designed specifically for investment property, including long-term and, where the program allows, short-term rentals.
Where it’s strong
- Often the lowest ongoing financing cost for a buyer who fully qualifies on personal income — a fit for a first property or a cost-first purchase.
Trade-offs for investors
- Requires full personal income documentation and must fit within a debt-to-income limit — salary, existing debts, and other mortgages all count.
- Typically held in your personal name rather than a business entity.
- Caps how many financed properties you can carry, which can become a ceiling as a portfolio grows.
- Evaluates you as a borrower as much as the property, which usually means more paperwork.
How investors usually choose: a first or single property often optimizes for the lowest financing cost; portfolio builders often optimize for leverage, vesting in an LLC, and scaling past conventional caps. The right answer depends on your goals, the property, and current guidelines — both paths run through select lenders in Lendmire’s wholesale network, with eligibility and terms confirmed in underwriting.
Where Does the General Rule Break?
Business-purpose context. DSCR loans are designed for non-owner-occupied investment properties. Because they are business-purpose investor loans, they are reviewed differently from a standard owner-occupied mortgage.
The seller’s own status. Federal rules treat some seller financers differently. A one-property exclusion in 12 CFR 1026.36 covers a natural person, estate, or trust that finances one property in a 12-month period. A broader exclusion covers financers of three or fewer properties, as the Federal Reserve’s reproduction of the rule shows. The National Association of Realtors notes that the three-property route requires fully amortizing financing, with no balloon. These rules aim at consumer credit secured by a dwelling, and a business-purpose investor buyer generally sits outside them. The seller’s attorney should confirm that for the specific deal.
Contract for deed. Some sellers propose keeping title until the buyer pays off. That does not produce the recorded junior lien a DSCR lender expects. If the lender wants a recorded second, a contract for deed does not fit.
Property types. Seller carry does not fix an ineligible property. Manufactured homes (single- and double-wide), log homes, and barndominiums are not offered in our network’s DSCR programs, whatever the seller note says.
Short-term rentals. STR purchases top out at 75% LTV and want about 12 months of hosting history and a 640+ score. A seller note on an STR file adds a layer of review. Short-term rental rules can vary by city, county, HOA, and property type, so investors should confirm local rules before relying on projected rental income. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
Hidden seconds. Some investors consider closing without the note and adding it later. A second recorded after closing still counts toward combined leverage, and hiding it from the first lender is a misrepresentation risk. Do not do it.
What If the Lender Says No?
Do not force the structure. Work down this list instead:
1. Ask a different program. Policies differ widely, and a no from one program is not a no from all.
2. Ask for a seller credit or a price reduction in place of the note.
3. Increase the first mortgage within the program’s leverage and coverage limits.
4. Bring in a partner for part of the equity.
5. Put more cash down and skip the note.
A larger down payment lowers the payment and can lift coverage. It never erases leverage caps, credit floors, reserve rules, or property eligibility. The strongest files clear both tests: enough equity and enough rental coverage.
How Do You Plan the Exit?
The seller’s second moves up when the first mortgage is paid off. If you refinance the first, the new lender wants to be first. The seller must either be paid off or sign a subordination agreement, and the seller has no duty to sign.
You have two clean options. Negotiate a subordination promise into the note up front, or plan to pay the note off at refinance. A cash-out refinance on a standard rental tops out around 75% LTV across most of the network, with about 6 months of seasoning as the common expectation. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
For the seller, the risk is real. Their note sits behind a new senior lien, and a foreclosure by the first lender can wipe out their position. A seller should vet the buyer and talk to an attorney.
The complete DSCR loans guide covers how coverage, leverage, and reserves fit together if you want the wider picture.
Frequently Asked Questions
Does the seller note count toward my down payment?
It depends on the program. Because the note is a real recorded lien and not a gift, some lenders treat it as financing instead of your cash. Ask the lender how it classifies the note before you build your budget around it.
Can a free-and-clear seller carry a note behind a new DSCR first?
Often, yes, when the lender allows junior liens. The clean title helps because there is no payoff and no prior lender to coordinate with. Approval still rests with the DSCR lender.
Do I need title insurance if the seller carries part of the price?
The deal is still a sale of real property, and the first lender will typically require its own title coverage. Ask your title company how the seller’s lien position is documented.
Is a seller carry a real lien or a side agreement?
It is a real lien. A properly drafted note and a recorded deed of trust or mortgage fix the seller’s position behind the first mortgage. An unrecorded arrangement is exactly what lenders are trying to avoid.
What happens if the seller forgives the note after closing?
That is the pattern lenders watch for, because it can mean the price was inflated. Keep the price tied to the appraisal and keep every note documented and disclosed.
Next Step
If you are buying or refinancing a rental property and want to see how the numbers work, Lendmire can help you compare DSCR loan options based on the property income, credit profile, leverage, and investor goals. Lendmire is a broker arranging DSCR financing through select lenders in its wholesale network across 41 markets, including Washington, D.C., and every file is reviewed individually.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage brokerage specializing in DSCR investor loans, helping arrange financing across 41 markets, including Washington, D.C., through wholesale and investor-lending channels. The model centers on property-level rental income reviewed by the lender rather than W-2 documentation, subject to lender guidelines, suiting entity-owned and multi-property investors. Lendmire holds Scotsman Guide Top Mortgage Workplace recognition for 2025 and 2026.
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References
2. Federal Reserve, Regulation Z section 1026.36
3. National Association of Realtors, Impact of the Loan Originator Final Rule on Seller Financing
This article is part of Lendmire’s DSCR loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How to Prepare a DSCR Portfolio Loan for Rentals in Three States · Five-Year vs Ten-Year DSCR Loan for an LLC-Held Portfolio · Multi-State DSCR Loan vs. a DSCR Loan per State for an LLC
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.