The quick read: Seller financing behind a bank first mortgage works only on the bank's terms. The seller carries a junior note that is recorded behind the bank's first lien, so it sits outside the bank's own loan-to-value test, but it is still debt, not the hard equity a bank's policy requires. Under SBA 7(a), seller debt counts as equity only on full standby, with no principal or interest paid for the term of the 7(a) loan. On a 504 loan the seller's note must be subordinate and cannot be prepaid without SBA consent, and an agency small-balance term sheet dated April 2026 bars hard subordinate debt outright. In practice a seller note trims the cash you bring to closing; it rarely replaces the down payment.
This page covers bank-first and SBA purchases. If the senior loan is short-term bridge debt, the rules and the risks change, and they are covered in can you combine seller financing with a bridge loan.
How does seller financing work behind a bank first mortgage?
Seller financing behind a bank first mortgage works as a second-position note: the bank lends the senior loan against the property, the seller accepts a promissory note for part of the price, and you fund the rest in cash, with the seller's lien recorded behind the bank's and governed by terms the bank approves.
The mechanics run in a fixed order at closing:
Senior loan: the bank funds its share of the price and records the first mortgage
Seller note: the seller takes a note for part of the price instead of cash, secured by a second mortgage or left unsecured
Buyer cash: the investor wires the remaining price plus closing costs
Subordination: the seller signs an agreement putting its lien and its right to enforce behind the bank's
The seller gets a price it accepts and an interest stream; you get a smaller cash check. The bank gets the last word, because it decides whether a second lien is allowed at all, how large it can be, and when the seller may be paid. Those terms are bank policy and are negotiated deal by deal, so read the commitment letter before you agree a seller note in the purchase contract. The acquisition loan structures that can sit on top of it are on the acquisition loans page.
Can you use seller financing with a bank loan on a commercial purchase?
You can use seller financing with a bank loan on a commercial purchase when the bank's credit policy permits secondary financing, the seller agrees to subordinate, and the property's income covers both payments, but each bank sets those limits itself, and some senior loan types forbid a hard second lien entirely.
For a conventional bank loan, the federal real estate lending guidelines in 12 CFR part 34, appendix A to subpart D, frame the bank's side. When a bank computes its loan-to-value ratio, the guidelines tell it to include "the total amount of all senior liens" on the property. A seller note recorded behind the bank is junior, not senior, so it does not enter the bank's own LTV. That is why a bank can stay at a 70% first lien while the total debt on the property is higher.
The same guidelines also tell banks to set "minimum requirements for initial investment and maintenance of hard equity by the borrower" for commercial property, and list the level of equity invested among the factors underwriting should weigh. A seller note is borrowed money, so it is not hard equity. The bank's policy decides how much true cash it wants under its loan, and that floor is what stops a seller note from replacing the down payment.
The supervisory LTV limit in those guidelines is 85% for improved property. That is a ceiling on bank policy, not a typical offer, and it governs the bank's own loan.
Does a seller note count as down payment?
A seller note counts as down payment only where the senior lender's rules say so: under SBA 7(a) it counts as equity only on full standby, under SBA 504 the borrower may borrow its contribution from a third party on a lien subordinate to the 504 loan, and a conventional bank counts it as its policy states.
The SBA rule is the most precise. SOP 50 10 8.1, effective October 1, 2026, says "only debt that is on full standby (no payments of principal or interest for the term of the 7(a) loan) may be considered as equity for SBA's purposes." The standby debt may accrue interest, and that interest may be added to the balance and amortized after the 7(a) loan is paid in full.
Under 504, 13 CFR 120.912 says "The Borrower may borrow its cash contribution from the CDC or a third party"; if that loan is secured by project assets it must be subordinate to the 504 liens and "may not be repaid at a faster rate than the 504 Loan unless SBA gives prior written approval." The SOP also lists a seller "carrying back a loan that is part of the Borrower's contribution" as a case that requires an appraisal even on a smaller property.
A conventional bank has no single rule. Its policy names the hard equity it requires, and a seller note sits above that floor, not inside it. The broader question of which cash, gifts and borrowed funds a lender will accept is in where the down payment on a commercial property comes from.
What subordination and standby terms apply?
Subordination and standby terms set who gets paid first, when the seller may collect, and what the seller can do on a default; under SBA programs the SOP fixes the core terms, while on a conventional bank loan they are written into a negotiated subordination agreement that the bank drafts and the seller signs.
SBA 7(a) standby: under SOP 50 10 8.1, the standby creditor "must subordinate any lien rights in collateral" to the lender and take no action against the borrower or the collateral without the lender's consent. The lender uses SBA's standby agreement form or its own equivalent, with a copy of the note attached.
SBA 7(a) partial payments: seller debt that is not on full standby is not equity, and where the equity injection comes from borrowed funds such as seller financing beyond the minimum injection, the lender "must address the proposed repayment terms as well as any Standby or Subordination terms" in its write-up.
SBA 504: under 13 CFR 120.923, "Financing provided by the seller of Project Property must be subordinate to the 504 loan," and the borrower "must not prepay any Project financing subordinate to the 504 loan without SBA's prior written consent."
Conventional bank: the bank's subordination agreement usually covers payment priority, limits on the seller's remedies, notice and cure rights, and whether the seller note can be paid off or modified. Standstill periods and cure rights are negotiated, so the seller's counsel and yours should read the draft before the purchase contract is signed.
Which senior loans allow a seller second?
Senior loans differ sharply on seller seconds: a conventional bank decides by policy, SBA 7(a) treats seller debt as equity only on full standby, SBA 504 requires the seller's note to be subordinate, an agency small-balance loan bars hard subordinate debt, and bridge lenders set their own rules.
Table: Seller financing behind the senior loan, by senior loan type (sources: 12 CFR part 34; SBA SOP 50 10 8.1, effective 10/1/2026; 13 CFR 120.923; Freddie Mac Conventional Small term sheet, 4/26)
| Senior loan | Seller second allowed? | Counts as equity? | Condition |
|---|---|---|---|
| Senior loan Brokerage route (YieldStack) | Seller second allowed? Compared across 5–8 matches | Counts as equity? Shown per matched lender | Condition Each lender's own subordination terms, side by side |
| Senior loan Bank | Seller second allowed? Set by bank policy | Counts as equity? Not hard equity; policy sets the cash floor | Condition Junior lien outside the bank's LTV; subordination agreement |
| Senior loan SBA 7(a) | Seller second allowed? Yes, if subordinated | Counts as equity? Only on full standby | Condition No principal or interest for the 7(a) loan's term |
| Senior loan SBA 504 | Seller second allowed? Yes, subordinate to the 504 loan | Counts as equity? A borrowed contribution is allowed if subordinate | Condition No prepayment without SBA consent |
| Senior loan Agency small loan | Seller second allowed? Hard subordinate debt not permitted | Counts as equity? No | Condition Freddie Mac Conventional Small term sheet, 4/26 |
| Senior loan Bridge | Seller second allowed? Set by lender policy | Counts as equity? Set by lender policy | Condition See the bridge guide linked above |
The brokerage row is first because the deciding fact in this table is which lender accepts the seller note you have already negotiated, and that answer differs lender by lender. Asking one bank tells you one policy; putting the same file in front of several lenders shows which will take a seller second at what size.
The agency row matters for apartment buyers. Freddie Mac's Conventional Small term sheet, dated April 2026, states that "Hard subordinate debt is not permitted." A seller who insists on a recorded second mortgage pushes a multifamily buyer toward a bank, SBA or bridge execution instead.
What does a $3.0 million purchase look like with a seller note?
On an illustrative $3.0 million purchase, a bank lending 70% plus a seller note of 15% leaves 15% for the buyer to fund in cash, and the bank's own LTV stays at 70% because the seller's lien is junior, while combined debt reaches 85% of the price and the payments must fit the property's income.
This worked example is illustrative: the price, net operating income, rates and terms are assumptions, not a quote, a dated rate or a real deal.
Purchase price: $3,000,000
Bank first mortgage at 70%: $2,100,000
Seller note at 15%: $450,000
Buyer cash at 15%: $450,000, before closing costs
Bank LTV: 70%, because only senior liens count
Combined loan-to-value: 85%
Net operating income: $240,000 a year
Bank loan terms: 6.75%, 25-year amortization, about $174,100 a year of debt service
Bank-only DSCR: about 1.38x
Seller note terms: 7.00% interest-only, $31,500 a year
Combined DSCR with seller payments: about 1.17x
The arithmetic shows where the deal can break. The bank's loan alone clears a 1.25x coverage test, but if the bank also tests coverage with the seller's payment included, 1.17x fails at a 1.25x minimum. Three fixes are common: the seller accepts payments that start later or accrue, the note shrinks, or the buyer brings more cash. Bank policy decides which test applies, so ask before you sign the purchase contract.
Run the same deal as an SBA 7(a) loan and the result changes. If the $450,000 note is on full standby, with no principal or interest for the loan's term, it can count as equity for SBA's purposes and the seller's payment drops out of coverage, but the seller waits for the whole 7(a) term to be paid. Measure the senior ratio the way the bank does with the LTV definition in our glossary.
How do you get a bank to accept a seller note on your purchase?
You get a bank to accept a seller note by bringing the senior lender the full structure up front, meaning price, seller note terms, cash source, rent roll and operating statements, and by comparing several lenders' subordination terms before the purchase contract fixes the seller's payment schedule in place.
There are two ways to run that comparison, and the brokerage route comes first because one submission returns 5–8 matches, so you compare several lenders' terms on the same file.
- Brokerage route. YieldStack is an AI-native commercial mortgage brokerage that arranges financing for commercial real estate investors. Its software matches the deal against 20,000+ loan programs and typically returns 5–8 matches, so you see which lenders accept a seller second and on what terms. Its brokers then structure the senior request, negotiate the subordination and payment terms on your side, and carry the deal toward closing. It is a 5-minute submit, with a median first offer in under an hour, from an institutional lender. It costs Zero upfront to submit a deal and review offers; YieldStack's broker fee is 0.50–1.00% of the loan amount and is paid only at closing.
- Direct route. Ask one bank for its policy on secondary financing, then repeat the file with each additional lender you want to compare.
Every credit decision is made by the lender; YieldStack arranges the introductions and negotiates on the borrower's side, and no loan, rate, or closing is guaranteed.
Submit your purchase with its seller financing for lender offers
The bottom line
Seller financing behind a bank first mortgage is a junior note that the bank controls. It sits outside the bank's own LTV, but it is not the hard equity bank policy requires, so it trims your closing cash rather than replacing it. SBA 7(a) counts it as equity only on full standby, SBA 504 requires it to be subordinate with no prepayment without SBA consent, and the Freddie Mac Conventional Small term sheet bars hard subordinate debt. Agree the seller's payment terms only after the senior lender has approved them.