The Quick Read: Underwriters treat a note the seller carries as debt secured against the property, not as your own cash, so the note lands in the combined leverage test rather than in the money you bring to closing. Most hard money lenders then limit it, subordinate it, or refuse it unless it is fully disclosed and documented.
- The seller note is a recorded second lien. It counts toward total leverage, not toward your cash contribution.
- On a bridge purchase without rehab, hard money typically funds up to 80% of purchase price. The rest is still yours to fund.
- Fix-and-flip files are sized on project cost and capped at 75% of after-repair value. A seller note does not raise either number.
- Hiding a seller second from the lender is the one move that turns a negotiation into a problem.
- Ask the lender about secondary financing before you sign the seller’s note. Sequence matters.
You found a seller who will carry paper. The next question is what your lender does with it. This guide walks through that treatment step by step, the structures that exist, and the cases where the usual rule bends.
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.
What a Seller-Financed Down Payment Actually Is
A seller-financed down payment means the seller lends you part of the price and takes a lien behind the first lender. You owe it back, so it is borrowed money. The lender sees a loan, not equity.
Hard money lenders size a loan as a share of purchase price, project cost, or after-repair value. They expect you to fund the gap with unborrowed money. Their reasoning is simple. If the property sells for less than you owe, the lender wants you to feel the loss before it does.
Hard money and 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. That is why each program sets its own rules about borrowed funds.
How Underwriting Counts the Note, Step by Step
The short version: the lender reads the contract, tests combined leverage, subtracts the note from your cash, and decides whether the lien position is acceptable. Each step can end the conversation.
1. The purchase contract. It must show the seller note: amount, interest terms, payment schedule, term, and lien position. The lender reads the contract and the settlement statement side by side.
2. Loan sizing. The lender caps its own loan first. On a bridge purchase without rehab, that cap is typically up to 80% of purchase price. On a flip it is a percentage of project cost, tiered by completed projects, and never more than 75% of after-repair value.
3. The combined test. Next comes combined loan-to-value, or CLTV: every lien on the property added together and divided by value. The seller second goes into this test as debt. Fannie Mae’s loan application uses the same logic when it asks whether any money for the purchase is borrowed.
4. The cash-in test. Underwriters ask what you put in from your own unborrowed funds. The seller note is excluded from that figure.
5. Lien position. A first-position hard money lender usually wants to be the only lien. If it tolerates a second, expect a requirement that the note be recorded behind its lien. Some lenders also require a subordination agreement and a review of balloon features, payment terms, and cross-default language.
6. Debt service. On a rental refinance, lenders that accept a seller second typically add its payment to the debt side of the coverage calculation. A commercial advisory example from Tactica shows the same idea: coverage counts principal and interest even when the note is interest-only.
What decides the outcome comes down to four things. First, the senior lender’s policy on secondary financing. Second, the CLTV cap. Third, whether the note is a true recorded lien or an informal side deal. Fourth, whether everything is disclosed on paper.
One Deal, Three Ways to Count It
Here is a modeled purchase with no rehab. Price is 100%. These are illustrative assumptions, not program terms. The first lender caps its loan at 80% of purchase price, and you want the seller to carry 10%.
Outcome one: the note stacks on top. First loan at 80%, seller note at 10%, your cash at 10%. Combined leverage hits 90%. Most hard money lenders stop this at the CLTV test, because your own money is half of what they required.
Outcome two: the note shares the cap. The lender allows a junior lien, but only inside its total. First loan drops to 70%, seller note takes 10%, and you still bring 20%. Combined leverage stays at 80%.
Outcome three: no seller note. First loan at 80%, your cash at 20%. Same leverage as outcome two.
Look at outcomes two and three. The seller note saved you nothing in cash. It replaced part of the lender’s money, and it added a second payment and a second creditor. Not ideal.
A seller note earns its keep in a different way. It helps when the seller will fund part of the price the lender would not, or when the structure lets you keep a larger reserve for the rehab. That only works if the lender agrees to the lien in advance.
How Different Seller Concessions Get Counted
The table shows the usual direction. It is a general pattern across lenders, not a program rule.
| Seller-side item | Usually counts as | Lender wants to see |
|---|---|---|
| Recorded second lien | Debt in CLTV | Note, lien, subordination |
| Unsecured seller note | Debt, often barred | Full disclosure, lender consent |
| Credit at closing | Price adjustment | Reflected on settlement statement |
| Price reduction | Lower basis, not cash | Revised contract |
| Deferred payments | Debt | Terms in writing |
| Seller “gift” | Generally not accepted | Usually refused outright |
A price cut changes the basis the lender sizes against. It does not put cash in your column. A closing credit is typically treated as a concession against the price. Agency-style rules cap those concessions on investment properties, but private programs set their own limits.
Where the General Rule Bends
Hidden second liens. This is the failure case. If a lender discovers an undisclosed seller second after funding, it can treat the omission as a misrepresentation. The remedy may include calling the loan. A signed closing certification that no other financing is tied to the sale makes concealment worse.
Sellers who own free and clear. Seller financing is cleanest when the seller has no existing mortgage. No underlying lender means no consent fight and no due-on-sale clause waiting to be triggered.
Wraparound notes. A wrap leaves the seller’s old mortgage in place and layers a new note over it. That runs into the due-on-sale clause. Federal law makes those clauses enforceable, so the underlying lender can call its loan when the property transfers. Hard money lenders rarely want to sit behind that risk.
The LLC-equity workaround. Some investors propose that the seller buy an interest in the buying LLC instead of lending. The seller stays on the underlying loan, and the structure looks like a disguised second lien. Expect lenders to see through it.
Seller-funded gifts. A true gift comes from a relative, not from the person selling you the property. A seller “gift” is just a price reduction by another name.
Cash held at title. Occasionally a lender will accept your down payment held by the title company while it funds in full, to protect its position. That is a lender-specific structure, not a general rule.
The exit. Hard money terms run 6 to 18 months, interest-only. Whatever exit you plan has to deal with the seller note. The permanent lender may require it paid off, subordinated, or accepted into its own CLTV test.
Where the Seller Note Meets Long-Term Rental Financing
Many investors refinance out of hard money into long-term DSCR financing once the property is stabilized, and Lendmire brokers that path. The CLTV question returns there, and the answer is stricter.
A DSCR loan compares the rent to the full monthly obligation (principal, interest, taxes, insurance, and any HOA dues). Most files in the wholesale network land at 75% to 80% LTV on an investment-property purchase, and cash-out tops out around 75% on most programs. A seller second counts as a lien against that cap. It never counts as your down payment.
Coverage is a second test. For select programs, 1.00 is where coverage starts. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. A seller note’s payment adds to the debt side, so it can pull the ratio down. Clearing the ratio is not the same as positive cash flow, because repairs, vacancy, and management sit outside the calculation.
Leverage caps, credit floors, and reserve rules still apply on top of the ratio. The strongest files clear both tests: enough equity and enough rental coverage. For the full picture, see the complete DSCR loans guide.
Why the Note Costs You More Than the Cash It Replaces
Reducing the cash you bring to closing sounds like a win. It is not free.
- You carry a second payment on top of the first loan’s interest-only payment.
- Combined leverage is higher, so refinance options narrow later.
- You now have a second counterparty who can foreclose behind the first lender.
- Your cash-on-cash flexibility shrinks, since more of the deal rests on debt.
Seller taxes matter too. A seller who sells for cash may face a large tax bill in one year, while an installment sale can spread it out. That is a reason some sellers say yes to carrying paper. Tax treatment varies; consult a qualified professional.
Seller financing has no fixed down payment rule, so terms are negotiated. But the lender’s rules on the senior loan control the deal.
Before You Sign the Seller’s Note
Run this sequence. The wrong order can kill a closing.
1. Ask the lender, in writing, whether it permits any secondary financing behind its lien.
2. Get its combined leverage cap and its minimum borrower cash requirement.
3. Draft the seller note only after the lender approves its terms and position.
4. Put the note in the contract and on the settlement statement.
5. Disclose it on the loan application, with the amount and payment terms.
6. Plan how the note is paid off or carried when you refinance.
Hard money terms always vary by lender, property, and experience. Fix-and-flip leverage runs from 85% of project cost with fewer than two completed projects up to 93% at five or more, and every tier is capped at 75% of after-repair value. Those are cost-based figures, never a purchase LTV. The top tier is reserved for experienced investors, and nothing here is a commitment to lend.
Key Terms Defined
CLTV (combined loan-to-value): The total of every lien on the property divided by its value.
Lien position: The order in which lenders get paid from a sale. First position is paid first.
Subordination: An agreement that moves one lender’s lien behind another’s.
Seller carryback: A note in which the seller finances part of the purchase price and records a lien.
Loan-to-cost: The loan as a share of purchase price plus rehab budget, instead of value alone.
After-repair value (ARV): The estimated value of the property once the work is finished.
Due-on-sale clause: A mortgage term that lets the lender demand payoff if the property is transferred.
Frequently Asked Questions
Can a seller note count as my down payment with a hard money lender?
Rarely. The note is borrowed money secured by a lien, so it counts as debt in the leverage test. Some lenders allow it if it is disclosed, sits behind their lien, and keeps combined leverage inside their cap. Even then, your own unborrowed cash requirement usually stays the same.
Does the hard money lender need to approve the seller second?
Yes. A first-position lender typically wants to be the only lien, and a second can breach the loan terms. Get written consent before you sign the note. Some lenders also require a subordination agreement.
Do I have to disclose the seller note on the loan application?
Yes. The standard application asks whether any part of the purchase money is borrowed, and a seller note qualifies. Leaving it off is a misrepresentation, and a lender that finds it later can call the loan.
What if the seller owns the property free and clear?
That is the cleanest setup, because there is no underlying mortgage to conflict with. You still need the lender’s approval of the second lien. A seller with an existing loan adds due-on-sale risk and another party to satisfy.
Does it change when I refinance into DSCR financing?
It does. DSCR lenders test CLTV across all liens and may add the note’s payment to the debt side of the coverage ratio. Plan to pay the note off or confirm the permanent lender will accept it before you rely on that exit.
What This Means for Your Next Deal
Treat a seller note as a negotiation tool, not a substitute for equity. Count your own cash first, confirm the lender’s position on secondary financing, and structure the paper only after that. 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.
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. Fannie Mae: Form 1003 (URLA) borrowed-funds question
2. Tactica RES: Purchasing Real Estate with Seller Financing
3. Fannie Mae Selling Guide: Interested Party Contributions
4. Cornell LII: 12 U.S.C. § 1701j-3 (due-on-sale)
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Does Every Hard Money Lender Ask the Same Minimum Down on a Flip? · Cash-Out Refinance vs Private Money for a Rental Down Payment · Hard Money for a Six-Unit Rehab vs. a 2-4 Unit Bridge Loan
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.