Remember you are financing a residence which invokes different laws than other chattel property lending.

This will be my first time going the commercial lending route and I'm running into some nuances I'm unfamiliar with. 

If you are talking to wealthy people re: Private Lending, the best book I know is “Values Based Selling” by Bill Bacharach.

The inaccuracy of BPO's lend to the risk of buying the note, but also the opportunity of reward as well.

I have experience buying and selling, doing listings, open houses, writing contracts, doing hard money lending, and more.

Give the seller 7% interest rate but I am using private lending for the 20% down payment of $20K.

You can qualify for residential lending for up to 4 units.  

preferred community bank does portfolio lending but it appears to be mainly owner occupied.

Choice is yours.In real estate, there are many roads to get to your destination and in the lending arena, you have a basket full of options.

Your question is if the sellers subordinates to the HML so you can get rehab funds and said lender wants to be in first ( demands) and your seller is in second ( subordinated) if it goes TU what happens to the Seller's subordinated interest.I think that is what your trying to say.Well the seller ( who has a subordinated interest) is in second position if the first forecloses the second ( seller ) needs to cure.. either pay it off or pay the payments. this would mean you defaulted as the buyer .. they keep first current and foreclose on second they end up owning the property subject to the first.. and you are out in the cold.Very dangerous position for a seller. one I would never personally do or recommend unless seller is very cashed up and can easily take project from you and pay HML off in cash.the most dangerous lending position is subordinated loan to FTD construction loan does not get much riskier and if they go to an attorney for advice I highly doubt they will do the deal.