A seller carryback is seller financing for part of the purchase price rather than all of it. The buyer brings a first mortgage or cash, the seller carries the remainder as a second lien, and the gap between what the buyer can finance and what the seller wants closes. It is the most common piece of creative financing in ordinary transactions and it is usually the smallest, most negotiable part of a deal.
Where it fits in the capital stack
A buyer purchasing at $500,000 with a $375,000 first lien and $75,000 of cash is $50,000 short. The seller carries that $50,000 as a second, secured by a recorded junior lien, on whatever terms the parties agree — commonly interest-only with a balloon in three to five years. The seller receives most of their money at closing and finances the tail. For the buyer it is the difference between closing and not closing.
Second position is the whole risk, and it is asymmetric
On default the first lien is paid before the second sees anything. If the property sells or forecloses for less than the first balance plus costs, the carryback is wiped out. Sellers routinely underprice this: a second behind a 75% LTV first is exposed to the top slice of value, which is the slice that disappears first in a downturn. That exposure is why carryback rates should sit above first-lien rates, and why a seller should think about it as subordinated credit rather than as part of the sale price.
Whether the first-lien lender will permit it at all
This is the question that decides feasibility and it is frequently asked too late. Many institutional lenders restrict or prohibit secondary financing at purchase, and nearly all require it to be disclosed — undisclosed seller seconds are loan fraud, not a structuring choice. Combined loan-to-value limits apply. On investment property, DSCR lenders vary: some permit a seller second within a stated CLTV cap, others do not allow secondary financing at all. Confirm with the first-lien lender in writing before the carryback is drafted.
Subordination, and what sellers give away when they sign one
A subordination agreement lets the buyer refinance the first lien while keeping the carryback in second position behind the new loan. Buyers want this, and sellers often sign it without pricing it. A blanket subordination permits the buyer to replace a $375,000 first with a larger one, pushing the carryback further from recoverable value. If a subordination is granted, cap it — to a maximum new first-lien balance, or a maximum CLTV, or refinances that do not increase the balance.
The exit: retiring the second before the balloon
Carrybacks balloon early, typically three to five years. The buyer’s options are to pay it from operating cash flow, or to refinance the first and the second together into one loan. On a rental that consolidation is usually a DSCR cash-out refinance, where qualification turns on whether the property’s rent covers the new combined payment — the DSCR calculator answers that in a minute. Run that arithmetic before agreeing the carryback terms, not in the final year.
Seller Carryback Financing FAQ
Typically above first-lien rates, reflecting second position. The number is negotiated; what should drive it is the genuine subordination risk, which sellers commonly undercharge for.
Sometimes, within combined LTV limits, and always only if disclosed. Some lenders prohibit secondary financing outright. Ask in writing before drafting the note — an undisclosed second is fraud.
It should be. An unrecorded note is unsecured, leaving the seller as a general creditor with no claim on the property. Record the junior lien at closing.
Three to five years with a balloon is the common shape, frequently interest-only. Sellers rarely want a long position, and buyers plan to refinance out before the date.
Only with limits. Blanket subordination lets the buyer place a larger first lien ahead of the carryback, eroding its security. Cap it by balance or CLTV, or restrict it to refinances that do not increase the senior debt.
Yes — a single new loan paying both is the standard exit. On a rental, DSCR underwriting will test whether the rent covers the consolidated payment, so model it before you agree terms rather than discovering the gap in year four.