The Quick Read: A hard money lender treats a seller-carried note as debt that sits in the capital stack next to its own loan, and many lenders will not allow a recorded second lien behind them at all. Where it is allowed, the lender reads lien position, combined leverage, the note’s maturity and payment terms, and whether the note was disclosed and recorded.
- Lien position decides everything: a first-position lender is paid first, and the seller’s note is paid only from what is left.
- Combined leverage counts, not just the first loan. Hard money cost-based tiers apply to the lender’s loan, and the seller note eats into the equity the borrower must show.
- An unrecorded or hidden note is a disclosure problem, not a workaround.
- A balloon date that lands before the exit can sink the file.
- Many investors later refinance out of the hard money loan into long-term financing, so the seller note must be payable or subordinated at that point.
Two situations get called “a seller note on a hard money loan,” and they work differently. In the first, the seller carries part of the price and a new hard money or bridge lender takes first position at purchase. In the second, the seller note is already on the property and a later loan has to pay it off or live with it. This article covers both. Program figures below describe select lenders in Lendmire’s wholesale network and vary by lender, property, and experience. Nothing here is a commitment to lend.
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.
Key Terms Defined
Seller-carried note: a promissory note in which the seller finances part of the purchase price and the buyer repays the seller over time.
Lien position: the order in which recorded liens get paid from a foreclosure sale.
Subordination: a signed, recorded agreement in which one lienholder agrees to rank behind another.
CLTV (combined loan-to-value): all liens on the property added together, divided by the property’s value.
Balloon: a payment due at maturity that is larger than the regular payments, often the full remaining balance.
Estoppel or payoff statement: a written statement from the note holder confirming the balance, payment status, and any defaults.
Due-on-sale clause: a provision that lets a lender accelerate the loan if an interest in the property transfers without its consent.
Why Does the Lender Care About a Note It Isn’t Funding?
Because the note shares the collateral. If the borrower defaults on either loan, both holders look at the same property. The hard money lender’s question is simple: how much total debt sits on this asset, who gets paid first, and can the borrower still carry the project?
No regulator publishes a single rulebook for this. It comes down to lender policy plus lien law. Priority is generally set by recording order, so a first-position lender collects first from foreclosure proceeds and later liens collect only from what remains, as Note Servicing Center explains. Nolo makes the same point for seller financing: a seller who carries a junior mortgage is paid only after the first lender, and only if the sale yields enough. It also notes that a bank may refuse a borrower who is carrying that much debt.
Brokering these files every day, we see a consistent pattern. The seller note is rarely the deal-killer by itself. The killers are the things around it: a note nobody told the lender about, a maturity date that arrives before the project is done, or combined leverage that leaves the borrower with no real money in the deal.
Will the Lender Allow It at All?
Often not, and that is the first gate. Many hard money lenders prohibit a recorded second position outright. One common reason is that lenders who sell their loans after closing find that buyers avoid notes with a junior lien behind them, a point raised in a BiggerPockets discussion of lenders that prohibit a second mortgage.
Across the wholesale network, policy splits into three camps:
- Prohibit any junior lien. The cleanest answer. The seller carry has to be restructured or replaced with cash.
- Allow it with conditions. Combined leverage is capped, and the borrower must bring real capital of their own.
- Allow an unsecured note but not a recorded lien. The distinction matters. A promissory note behind the first loan is a different animal from a recorded second mortgage, and a lender may accept one while refusing the other. Confirm which your lender means before you sign anything with the seller.
There is also the “throw-away second,” where the price is inflated so the buyer appears to put more down. Lenders read this as a leverage problem, and it is the exact structure underwriters look hardest for.
How Is the Note Classified?
The lender sorts the instrument before it does any math.
1. Recorded junior lien. A second mortgage or deed of trust, recorded in the right county, with priority set by recording order.
2. Unrecorded or unsecured note. A side obligation. Some lenders accept it with disclosure. Others treat it as undisclosed debt and decline.
3. Land contract or contract for deed. A different structure entirely. The seller keeps legal title until the final payment, so the lender is reading a title problem, not a junior lien.
Title is the first thing read. A preliminary title report lists every recorded lien, easement, and encumbrance, so it shows whether a senior mortgage already exists and where a new note would sit, as Note Servicing Center describes.
The Clause-by-Clause Read
This is where files actually get decided. A lender reads the note and security instrument for what each provision does to its position.
| Item | What the lender looks for | Risk it signals | Typical fix |
|---|---|---|---|
| Maturity or balloon date | Does it land before the exit? | Seller demands payoff mid-project | Extend maturity past the loan term |
| Payment structure | Interest-only, amortizing, or deferred | Cash drag on the borrower | Defer or convert to interest-only |
| Prepayment terms | Can it be paid off at exit freely? | Trapped at refinance or sale | Add a clean prepayment right |
| Default and cross-default | Does a default on one trigger the other? | Seller can force a default | Strip the cross-default |
| Due-on-sale | Is the new transfer permitted? | Underlying loan gets called | Get written consent or payoff |
| Subordination language | Is it signed and recorded? | Priority is only verbal | Record a subordination agreement |
| Assignment clause | Can the seller sell the note? | A stranger holds a junior lien | Restrict assignment |
Two items deserve more words. First, subordination. Priority can be permanently changed only by a signed, recorded subordination agreement, and verbal agreements carry no weight in a priority dispute, per Note Servicing Center. Second, the maturity date. If the first lien is paid off, a junior lien moves up unless it is subordinated. A seller note maturing mid-rehab can force the borrower to refinance before the property is ready.
Verifying Status: Signed, Recorded, Performing
A lender does not take the borrower’s word on any of this. Expect to hand over:
- The signed promissory note, with rate, term, payment schedule, late fees, and default triggers.
- The deed of trust or mortgage, recorded in the correct county.
- A title policy and hazard insurance naming the lender.
- A payoff or estoppel statement from the seller confirming the balance and that no default exists.
- Payment history, if the note is already on the property.
Documentation is where preventable gaps pile up. An unrecorded note, a missing signature, or a seller who will not sign an estoppel stalls review. These items cost nothing to gather early and a lot to chase late.
What If the Seller Still Has a Mortgage?
This is the underlying-loan problem, and it belongs to the second situation described above. A seller who carries a note on a property that already has a mortgage raises a due-on-sale question.
Under the Garn-St. Germain Act, a lender may not call a loan on residential property with fewer than five units just because a subordinate lien that does not transfer occupancy rights was created. The statute text also defines the due-on-sale clause as a provision letting a lender accelerate if any interest in the property is transferred without consent. Two limits matter. The protection covers only fewer than five dwelling units, so larger multifamily sits outside it. And it limits acceleration; it does not force any new lender to approve the deal.
On the lender’s side, the file needs a payoff statement and lien release from title, plus ownership history. A wrap, where the seller’s new note wraps around the old mortgage, adds a layer: the lender wants to know the underlying loan stays current.
Combined Leverage and Program Numbers
The lender adds every lien and divides by value. The hard money loan carries its own ceiling, and the seller note counts against the equity the borrower must show.
Here are the network’s figures for the hard money piece, which vary by lender, property, and experience:
- Fix-and-flip: 93% of project cost at 5 or more completed projects, 90% at 2 or more, and 85% below that, every tier capped at 75% of after-repair value.
- Bridge purchases without rehab: up to 80% of purchase price.
- Cash-out and rate-and-term refinance: up to 65% of value.
- Up to 100% of the rehab budget funds in draws against completed work. That is a rehab-budget figure, not a purchase leverage figure.
Now layer a seller note on top. Say a fix-and-flip at the 90% of project cost tier already has the lender funding nearly everything. A recorded seller second on top of that leaves the borrower with almost no capital at risk. Most lenders in this position refuse the second or force it down. The network figures above are the ones that apply to files placed through Lendmire.
For context, Freddie Mac’s guide defines secondary financing as any financing subordinate to the first lien. That is agency language and a contrast point only. Hard money and DSCR loans are not agency products and follow lender policy.
Three Outcomes: Accept, Modify, Decline
| Outcome | Example trigger | What changes |
|---|---|---|
| Accept | Recorded, disclosed, maturity past loan term | File proceeds as structured |
| Modify | Balloon lands before exit; cross-default present | Extend maturity, strip clause, add subordination |
| Decline | Hidden note, prohibited second, no borrower capital | Restructure the deal or use cash |
Most files that stall land in the middle row. The fix is usually a document change the seller agrees to, which is why bringing the seller into the process early matters.
Exit and Maturity Alignment
The hard money loan is a short, interest-only bridge. Terms run 6 to 18 months, with no multi-year options, and loan amounts reach up to $5,000,000. The seller note’s life has to fit inside that window, or it has to be payable at the exit.
Many investors refinance out of hard money into long-term DSCR financing once the property is stabilized, and Lendmire brokers that path. The seller note matters there too. A DSCR refinance must pay off or subordinate it, so the seller’s cooperation can decide whether the refinance works. On a DSCR refinance, select programs generally cap cash-out at around 75% LTV on standard rentals, with about 6 months of seasoning as the common expectation. Lendmire’s complete DSCR loans guide covers how those programs read the file.
Ask for payoff terms, prepayment rights, and subordination language up front. A seller note can cost less than the new loan, so compare terms before paying it off early.
Where the General Rule Breaks
- Sold-note lenders. If a lender sells its loans after closing, buyers tend to refuse junior liens. Policy is stricter than at portfolio lenders.
- Commercial and larger multifamily. A seller carrying part of the remainder behind a bank loan at its limit is a fairly standard structure there, as one BiggerPockets thread on commercial second liens describes. Note the hard money program here covers 1-4 unit non-owner-occupied residential, with ground-up construction to 10 units.
- Five or more units. The statutory due-on-sale protection does not apply.
- Servicer limits on later loans. A loan that gets sold may be serviced by someone who cannot grant a subordination. Settle it before closing, not after.
Red Flags That End Files
- A seller note nobody disclosed. A BiggerPockets commenter calls hiding a seller second from the lender mortgage fraud, and the advice is to find a lender that accepts the structure instead. That is a practitioner opinion, but the underwriting reality matches: concealment ends the file.
- Mismatched party names between note, deed, and title.
- Missing signatures or an unrecorded security instrument.
- Side agreements that change the note’s terms.
- A price that looks inflated to disguise a down payment.
What to Prepare Before You Apply
1. The signed note and recorded security instrument, or a clear statement that the note is unsecured.
2. A title report showing every lien.
3. A seller estoppel or payoff statement.
4. A draft subordination agreement if a junior lien is recorded.
5. The project budget and exit plan, with the seller note’s maturity mapped against both.
6. Proof of the borrower’s own capital in the deal.
Credit still matters on the hard money side: a 620 minimum score, with added conditions below 660. Underwriting stays asset-based, meaning property, plan, and exit.
For rehabs that will convert to rentals, Lendmire’s piece How a DSCR Lender Reads New Leases on Hard Money Rehabs covers the next step.
Frequently Asked Questions
Will a hard money lender let the seller carry a second behind its loan?
Some will, many will not. Policy ranges from a flat prohibition to conditional approval with a combined leverage cap and a requirement that the borrower bring real capital. Ask before you write the offer, because the answer shapes the whole structure.
Does it matter if the seller note is recorded?
Yes. Priority runs from recording, and an unrecorded interest can be outranked. A lender may also treat an unrecorded note as an undisclosed obligation. A promissory note and a recorded second mortgage are different instruments, and lenders treat them differently.
Can federal law force the first lender to accept the seller’s lien?
No. The statute limits a lender’s ability to call a loan on residential property with fewer than five units because a subordinate lien was created. It does not make any lender approve the transaction.
What happens to the seller note when I refinance out of hard money?
It has to be paid off or subordinated. A DSCR refinance needs a payoff statement and lien release from title, and it applies its own seasoning and leverage rules. Seller cooperation on payoff terms can decide the outcome.
Can I leave the seller note off the application?
No. Disclosure is required, and concealing a seller second from a lender is treated as a fraud risk. The better move is finding a lender whose policy accepts the structure.
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. Tax treatment varies; consult a qualified professional.
For current guidelines and terms, see Lendmire’s hard money loan programs page.
About Lendmire
Lendmire — NMLS# 2371349 — is a DSCR and non-QM mortgage brokerage with investor loan programs in 41 markets, including Washington, D.C. DSCR eligibility is commonly reviewed by the lender around property-level rent rather than personal income documentation, subject to lender guidelines, and the brokerage helps arrange financing for LLC-owned portfolios beyond conventional financed-property limits. Recognized by Scotsman Guide as a Top Mortgage Workplace in 2025 and 2026.
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References
1. noteservicingcenter.com: Which Option Fits Your Needs Lien Position and Priority Basics
3. BiggerPockets, hard money lender prohibits second position
4. noteservicingcenter.com: Top Tools for Lien Position and Priority Basics
5. noteservicingcenter.com: A Side by Side Look at Lien Position and Priority Basics
7. BiggerPockets thread on commercial second liens
8. BiggerPockets, seller carry 2nd
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Can Hard Money Buy Out a Land Contract If the Seller Will Not Refinance? · Conventional Loan vs Hard Money Loan for a High-Debt Investor · Can a Hard Money Loan Pay Off a Land Contract on a Rental?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.