The Quick Read: A seller-carried down payment can work alongside a hard money first lien only when the hard money lender consents in writing, the seller’s note sits junior with a signed subordination, combined leverage fits the lender’s limits, and you have a clear plan to pay off both loans at the exit. The seller note does not replace your own cash in most files. It fills part of the gap between the first loan and the price.
- Get the hard money lender’s written position on junior liens before you negotiate the seller note.
- The seller’s note must be recorded and expressly subordinate to the hard money first.
- Hard money leverage is measured against cost and after-repair value, so a seller note can push combined leverage past what the lender allows.
- Both loans must be repaid at the exit, so the refinance has to cover the seller note too.
- A seller credit for closing costs is a different thing from a seller-carried note.
How Does a Seller-Carried Down Payment Work With Hard Money?
The structure is a three-part stack. The hard money lender takes the first lien and funds most of the purchase. The seller carries a note for part of the price, recorded behind the first lien. You bring your own cash for the rest.
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.
CREUniversity describes the classic version. The hard money lender takes first position, and its proceeds go to the seller at closing. The seller receives a note and mortgage for the balance, subordinate to the hard money loan. The same source advises that the combined payments on both loans should not exceed fair market rent.
Three terms matter here:
- Seller-carried note: the seller acts as a lender for part of the price and gets a promissory note and a recorded lien in return.
- Junior lien: a lien that gets paid after the first lien if the property is sold or foreclosed.
- Combined leverage: the total of all liens on the property, measured against its cost or value.
This is a business-purpose structure. It is built for non-owner-occupied investment property, and it is a private contract between you, the seller, and the first lender. The documents decide what is allowed, not a single rule.
Will the Hard Money Lender Let You Do This?
Only if the loan documents allow it. Many hard money lenders prohibit any other lienholder outright. Others allow a junior lien but want you to have real cash in the deal.
OfferMarket makes the same point from the practitioner side. The first-lien lender has to approve any subordinate financing, and combined leverage still has to fit its limits. It also warns that hiding the seller note from the first lender can be treated as misrepresentation.
From the broker side, the pattern is consistent. A lender that holds its loans for its own portfolio tends to be more flexible. A lender that sells its loans to investors tends to be less flexible, because a junior lien can break that sale. Ask about junior liens first, in writing, before you sign anything with the seller.
The order of liens matters as well. A seller note behind a hard money first is far easier to place than the reverse. Most hard money lenders insist on first position, so a hard money second behind a seller first is rare and expensive.
What Leverage Limits Does the Stack Still Have to Fit?
The seller note does not erase the lender’s leverage caps. Across the wholesale network where Lendmire places hard money files, leverage is based on cost and after-repair value. Programs vary by lender, property, and experience.
| Deal type | Typical first-lien ceiling |
|---|---|
| Fix-and-flip, 5+ completed projects | 93% of project cost |
| Fix-and-flip, 2+ completed projects | 90% of project cost |
| Fix-and-flip, fewer than 2 | 85% of project cost |
| Bridge purchase, no rehab | Up to 80% of purchase price |
| Refinance, cash-out or rate/term | Up to 65% of value |
Every flip tier is also capped at 75% of after-repair value. Up to 100% of the rehab budget can fund in draws against completed work. That is a rehab-budget figure, not a purchase leverage figure.
There is no true 100% purchase program. A seller note plus a hard money first can look like zero down on paper, but the lender still wants your own capital in the deal. Credit minimums also still apply: around a 620 score, with added conditions below 660. The top leverage tier is reserved for experienced investors.
What Does the Stack Look Like in Numbers?
The three scenarios below are modeled assumptions, not market data. They show how the pieces fit and where the arithmetic breaks. Each is a bridge purchase with no rehab.
| Scenario | First lien | Seller note | Your cash |
|---|---|---|---|
| A: fits a first-lien-only test | 70% of price | 10% | 20% |
| B: fits a combined cap of 80% | 65% of price | 15% | 20% |
| C: stack too large | 80% of price | 10% | 10% |
Scenario A works when the lender measures leverage on its own loan only. The seller note adds to total debt but not to the lender’s ceiling. Scenario B works when the lender caps combined leverage, so the seller note takes the place of some first-lien dollars.
Scenario C is where deals stall. The first loan alone is at the 80% purchase ceiling, and the seller note pushes combined leverage past it. The usual fixes are a smaller seller note, more of your cash, or a different lender.
Ask each lender one question: does the cap apply to our loan, or to the whole stack? The answer changes the structure.
What If the Seller Still Has a Mortgage?
Then the seller’s own lender becomes a third party. Federal law lets a lender call a loan when the property is transferred without its consent. A seller note carried behind a new first lien may trigger that clause. If the seller owes more than your hard money loan would pay off, the seller cannot clear their lien at closing, and the carry may not be possible.
Some investors use a wraparound structure, where the seller keeps an underlying first and wraps a new note around it. A hard money first usually does not fit with that. The hard money lender wants to be first in line.
When the seller owns the property free and clear, the deal is much simpler. The seller’s only lien is the new note behind your hard money first.
How Do You Close It? The Step-by-Step Sequence
Follow this order. Each step protects the one after it.
1. Get the lender’s position on junior liens in writing. Do this before you negotiate the seller note. It saves you from agreeing to terms the first lender will reject.
2. Size the stack. Decide the first lien, the seller note, and your own cash. Test it against the lender’s leverage rule, whether first-lien-only or combined.
3. Agree the seller note terms. Cover the amount, payment structure, maturity, and whether payments are deferred. The note should mature after the hard money loan, not before.
4. Draft the note and mortgage or deed of trust. A real estate attorney should document it. MyREIPro’s overview of the subordination strategy walks through negotiating, documenting, and recording the second lien.
5. Sign a written subordination agreement. Subordination means a lienholder agrees to sit second in line behind another lien. It is not automatic. It needs a signed document.
6. Disclose the whole stack. Title, the hard money lender, and any future refinance lender should all see it. Undisclosed seller financing can sink the file or cause default.
7. Record in the right order. The hard money first records ahead of the seller’s note. Title and escrow handle the settlement statement and recording.
8. Fund and plan the exit. Before you close, know who pays off which loan and with what.
Hard money terms typically run 6 to 18 months, interest-only, with no prepayment penalty. That short runway is why the exit plan belongs in step one, not step eight.
What Should the Seller Note Say?
The first lender will read the seller note closely. It will look at four things.
- Maturity: the seller note should not come due before the hard money loan does. A shorter seller note creates a second deadline you cannot meet.
- Payments: many investors defer seller payments during the hard money term. Payments on both loans eat cash flow, and the first lender will want to see that you can carry them.
- Subordination terms: the lender will want the seller barred from foreclosing or accelerating without notice to the first lender. These protections are usually spelled out in the subordination agreement.
- Disclosure: the note terms must be fully disclosed and consistent with what the settlement statement shows.
Because the seller note is a loan, the seller has a reason to ask for more than a plain price. Expect them to ask about your credit, your plan, and your track record. A seller who has seen a failed flip will often ask for a higher interest return or a larger cash commitment from you.
Where the General Rule Breaks
The basic rule is that the first lender must consent and the stack must fit. These cases bend it.
Reverse order. If the seller will not go junior, you need a hard money lender willing to sit second behind the seller’s note. That is rare and priced to match the risk. For most investors, the practical answer is a different deal structure.
100% financing stacks. A seller-carried first plus a hard money second for the down payment is usually declined. The junior lender takes the most risk and has the least protection.
Seller credits. A seller credit lowers your closing costs or prepaids. It is not a loan, and it does not fund equity. Do not treat it as a down payment substitute.
Hard money that is later refinanced into DSCR. This is where stacks most often fail. A DSCR lender generally treats borrowed or seller-carried funds as unacceptable for the down payment on a purchase. A refinance lender usually wants first position and a clean title. A seller note that stays in place behind the new first lien is often rejected. For a refinance, the seller note typically has to be paid off at closing.
Business-purpose rules. Federal seller-financing rules for residential loans apply to consumer loans secured by a dwelling, not to loans for investment property. Barnes Walker notes that those rules do not reach investment property. If a buyer will live in the property, different exclusions apply, which NAR’s seller financing page covers. Keep this deal business-purpose and in an appropriate entity or personal name for the lender’s program, and let your attorney confirm.
What Does the Exit Look Like?
The exit is where this structure succeeds or fails. When the hard money loan matures, you have to repay the first lien and deal with the seller note. There are three common paths.
- Sell the property. Both liens are paid from the proceeds at closing.
- Refinance and pay off the seller note. The new loan covers the first lien and the seller note together.
- Refinance and keep the seller note. This needs the seller to agree to subordinate again, and the new lender to accept a junior lien.
Many investors refinance out of hard money into long-term DSCR investor loans once the property is stabilized and rented, and Lendmire brokers that path. A DSCR refinance is built on rental income. DSCR is the ratio of monthly rent to the full monthly housing obligation: principal, interest, taxes, insurance, and any HOA dues. A coverage of 1.00 is where select programs start, and stronger ratios open better terms.
On most files, a cash-out refinance of a standard rental tops out around 75% of value. Any seller note you still owe counts against that. That is why the refinance has to be planned before the purchase, not after.
One caution on the math. Clearing 1.00 coverage does not mean positive cash flow. Repairs, vacancy, management, utilities, and capex sit outside the DSCR calculation. A seller note payment you still owe sits outside it as well. Tax treatment varies, so consult a qualified professional.
Why Do These Deals Stall?
| Problem | Usual cause | Fix |
|---|---|---|
| Lender declines the stack | Combined leverage too high | Shrink the seller note, add cash |
| Seller refuses to go junior | Seller wants first position | Find another lender or deal |
| Refinance lender rejects it | Seller note left in place | Pay off at refinance or renegotiate |
| File pulled late | Seller note not disclosed | Disclose to everyone up front |
| Seller cannot deliver clear title | Existing mortgage exceeds payoff | Check payoff before contract |
Document Checklist
- Signed purchase contract that discloses the seller carry
- Hard money lender’s written consent to a junior lien
- Seller promissory note and recorded mortgage or deed of trust
- Subordination agreement signed by the seller
- Settlement statement showing every loan and cash contribution
- Proof of your own funds
- A written exit plan with the refinance or sale assumptions
Should You Use a Seller Carry at All?
The honest answer is that it depends on the deal. A seller carry can reduce the cash you bring and lets you buy something you could not otherwise afford. The tradeoff is more debt, more documents, and a harder exit.
It tends to work best when the seller owns free and clear, the stack fits the lender’s limits with room to spare, and the property will support a refinance that clears both loans. It works worst when the numbers only close with the seller note stretched to its limit.
If the structure forces everything to line up perfectly, the better play is often a smaller deal or more of your own capital. For the long-term side, the complete DSCR loans guide shows what a rental refinance looks for.
Key Terms Defined
Subordination agreement: a signed document in which one lienholder agrees to be paid after another lienholder.
Loan-to-cost: the loan amount as a percentage of the total project cost, including purchase and rehab.
After-repair value: the estimated value of the property once the planned work is finished.
Seller credit: money the seller gives you at closing to offset costs, which is not a loan and carries no lien.
Due-on-sale clause: a loan term that lets a lender demand repayment when the property is transferred without its consent.
Frequently Asked Questions
Can the seller’s note count as my down payment?
Sometimes it counts toward the gap between the first loan and the price, but most hard money programs still want your own cash in the deal. Whether the note counts toward combined leverage depends on the lender. Ask for the answer in writing. For a later DSCR refinance, borrowed or seller-carried funds generally do not qualify as down payment on a purchase.
Does the hard money lender have to approve the seller note?
Yes, in practice. The first lender controls which liens can sit behind it, and many prohibit them. Hiding the note from the lender can be treated as misrepresentation. Get consent before you sign with the seller.
Can the seller be in first position instead?
It is possible, but a hard money second behind a seller first is rare. Most hard money lenders insist on first position. If the seller wants to stay first, expect the lender to decline or charge a premium for the added risk.
What if the seller still has a mortgage on the property?
The seller’s lender may have a due-on-sale clause that blocks the transfer. If the seller’s payoff exceeds the hard money loan, they cannot clear their lien at closing. Check the payoff before you go under contract.
What happens to the seller note at refinance?
Either it is paid off from the new loan, or the seller agrees to stay in place and subordinate again. Most long-term lenders want first position and prefer to see the seller note paid off. Plan for the payoff.
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 that arranges financing through select lenders in its wholesale network across 41 markets, including Washington, D.C. Programs vary by lender, property, and experience, and nothing here is a commitment to lend.
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. CREUniversity: Subordination and Substitution of Collateral
2. OfferMarket: Hard Money Loan for Down Payment
3. MyREIPro: The Subordination Seller Financing Strategy
4. Barnes Walker: Seller Financing Restrictions Under the Dodd-Frank Act
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How a First-Time Flipper Can Qualify for a Lower Hard Money Down Payment · 2-4 Unit vs. 5-to-10-Unit Hard Money Loan for a Multi-Project Flipper · Seller Carry vs Down Payment for a W-2 Investor Scaling Up With DSCR
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.