Creative Finance Terms Glossary

Understanding Creative Finance Vocabulary

Creative finance can seem complicated at first, but once you understand the basic terms, it becomes much clearer. This glossary breaks down the most important creative finance and seller financing terms in plain English, ordered to build your knowledge step-by-step.

Three Things People Mix Up

Before we dive into definitions, it is important to understand how these three things work together:

• Deed vs. Note: The deed is about who owns the property. The note is about who owes the money to the bank.
• Control: In creative finance, the buyer can have control and ownership of the property even if the original mortgage note stays in the seller's name.
• Traditional vs. Creative: In a traditional sale, the deed and note almost always move together at the same time. In creative finance, they do not always move together, and that is on purpose.

Foundational Terms

Assumable Loan

A type of mortgage that allows a buyer to take over the seller's loan officially, with the bank's permission. In this case, the loan is transferred into the buyer's name, and the seller is released from liability. Note: Not all loans are assumable (typically VA, FHA, and USDA loans are, while most conventional loans are not). However, even if a loan is not assumable, we can still use creative finance strategies like "Subject To" to achieve a similar result.

Note (Promissory Note)

A legal document that serves as a written promise to repay a debt. The note outlines the exact terms of the loan, including the monthly payment amount and when the full balance is due (the term). In creative finance, the seller often "carries the note" for their equity.

Revocable Living Trust

A flexible legal structure commonly used in estate planning to hold property and other assets. When properly drafted, it can provide privacy and help avoid probate. In creative finance, revocable living trusts are often used to hold title while payments continue to be made and to clearly define the roles of trustee and beneficiaries.

Equity

The difference between what a property is worth and what is owed on it. For example, if a house is worth $400,000 and the mortgage is $300,000, the seller has $100,000 in equity. In creative finance, we focus on how to "unlock" this equity without a traditional sale.

Liquidity

How quickly an asset can be turned into cash. Real estate is typically "illiquid" because it takes months to sell. Creative finance structures help create "liquidity" for the seller by providing a cash payment upfront through a new loan or down payment.

Payment Calculation Period

This is the time frame used to calculate the monthly payment amount. A longer payment calculation period lowers the monthly payment and increases the remaining balance if a balloon is used.

First Position Note

The primary loan on a property, usually the existing mortgage. Whoever is in "first position" gets paid first if anything happens with the property. In creative finance deals, the existing bank almost always stays in first position. Think of it as: the primary loan that must stay current and gets paid before anything else.

Second Position Note

A loan that sits behind the first mortgage. This means it gets paid after the first loan. In creative finance, the seller often holds the second position note when they finance part of their equity. This is where the seller may receive monthly payments and sometimes a balloon payment. A second position note can also belong to another lender, not just the seller.

Think of it as: the loan that gets paid second, no matter who holds it.

Core Creative Finance Terms

Seller Financing (Owner Financing)

A creative finance arrangement where the property seller provides financing to the buyer instead of the buyer getting a traditional bank loan. The buyer makes monthly payments directly to the seller over an agreed period of time. This allows sellers to receive monthly income and buyers to purchase without bank qualification.

Carry Paper

A slang term in the real estate industry for seller financing. When a seller "carries paper," they are acting as the bank and holding the "paper" (the promissory note) instead of receiving all their cash upfront. It means the seller is accepting payments over time for their equity.

Subject To (Subject-To Mortgage)

A real estate purchase strategy where the buyer takes over the seller's existing mortgage payments. The mortgage stays in the seller's name, but the buyer makes the monthly payments and takes control of the property. This is ideal for properties with favorable loan terms or sellers who need to sell quickly.

Also known as: Mortgage Takeover, Mirror Wrap, Sub-To, Taking Over Payments.

Equity Carry Method

A creative finance tool used when a bank loan is needed to create immediate cash for the seller. In this structure, the buyer gets a new mortgage (like a DSCR loan) to pay the seller a large upfront payment, and the seller "carries" their remaining equity as a second position note. This is typically used for high-equity properties where the seller needs liquidity but is willing to receive the rest of their equity over time. Equity carry usually combines a partial bank loan and partial seller financing.

Think of it as: part bank loan, part seller financing.

Also known as: Cash-Out Seller Carry, Hybrid Wrap (when combined with sub-to), Equity Out Method.

Hybrid Deal (Hybrid Creative Finance)

A combination of multiple creative finance strategies in one deal. Typically combines subject-to (taking over the existing mortgage) with seller financing (the seller carrying a note on their equity). This gives buyers the best of both worlds while providing sellers with both security and income.

Also known as: Sub-To with Seller Carry, Mixed Structure, Subject-To Hybrid.

Payment and Note Terms

Balloon Payment

A large lump-sum payment due at the end of a loan term. In creative finance, the seller may receive smaller monthly payments during the term, then receive a larger balloon payment when the loan matures. This is common in 5-10 year seller financing arrangements.

Down Payment

The money a buyer pays upfront at the closing of a creative finance deal. In seller financing, down payments are often more flexible than traditional bank requirements. Common creative finance down payments range from very low to 20% depending on the deal structure.

Monthly Payment

The amount the buyer pays each month in a creative finance arrangement. This may include the underlying mortgage payment (in a subject-to deal) plus any additional payment to the seller for their equity (seller carry note).

Term Length

The duration of the seller financing agreement, typically expressed in years. Common terms range from 5 to 30 years. Shorter terms mean higher monthly payments but faster payoff. Longer terms mean lower monthly payments but the seller waits longer for full payment.

Investment and Performance Terms

DSCR (Debt Service Coverage Ratio)

DSCR measures whether a property's Net Operating Income (NOI) can cover its debt payments. It is typically calculated as NOI divided by annual debt service. A DSCR of 1.20 means the property produces 20% more income than required to service the debt.

PITI

The total monthly housing cost for an existing mortgage, including the mortgage payment plus property taxes and homeowner's insurance. Investors calculate cash flow after accounting for all PITI expenses. Investors often analyze cash flow using PITI plus reserves, while DSCR calculations typically use just the mortgage payment portion.

CapEx (Capital Expenditures)

Major property expenses that go beyond routine maintenance. These are infrequent but expensive items like replacing a roof, HVAC system, or water heater. Smart investors set aside a portion of their monthly rent (typically 5-10%) into a CapEx reserve fund to ensure they have the cash when these big repairs are needed.

Cash Flow

The net income remaining after all expenses are paid. For investors, positive cash flow means the rental income exceeds the mortgage payment, taxes, insurance, and other costs. Creative finance investors typically look for $200-$500+ per month in positive cash flow per property.

Buy Box

An investor's set of criteria for the types of deals they want to purchase. A buy box typically includes preferred markets, property types, price ranges, minimum cash flow requirements, and acceptable deal structures (seller financing, subject to, equity carry, etc.).

Investor-Friendly Terms

Deal terms that make a property attractive to real estate investors. This typically includes positive monthly cash flow, reasonable down payment requirements, and terms that allow for profitable operation of the property as a rental.

Legal and Protection Terms

Loan Servicer

A company that handles the day-to-day management of a mortgage, such as collecting payments, managing escrow accounts (for taxes and insurance), and answering borrower questions. The servicer is often different from the bank that actually owns the loan. In creative finance, we interact with the servicer to ensure payments stay current.

Title

The legal right to own and use a property. While a "deed" is a physical piece of paper, "title" is the concept of ownership. Having "clear title" means there are no unexpected liens, debts, or legal disputes that would prevent the property from being sold or transferred.

Title Company

A neutral third party that researches a property's history to ensure the title is clear and then handles the closing process. They issue title insurance to protect both the buyer and lender from future ownership disputes. In creative finance, we work with "investor-friendly" title companies who understand how to handle trusts and creative structures correctly.

Grantor

The person who creates the trust and transfers their property into it. In a creative finance deal, the seller is typically the grantor because they are "granting" the property to the trust for the benefit of the buyer.

Trustee

The person or entity responsible for managing the trust. The trustee follows the rules set in the trust document. In creative finance, this is often a third party or a specialized service that ensures both the buyer and seller are protected.

Beneficiary

The person who actually "owns" and benefits from the property held in a trust. While the trustee manages the trust, the beneficiary is the one who has the right to live in the house or collect the rent. In creative finance, the buyer usually becomes the primary beneficiary.

Beneficial Interest

The right to receive the benefits of the property (like cash flow or appreciation) even though you don't hold the legal title directly. In a typical creative finance trust structure, the buyer receives the majority of the "beneficial interest" while the seller might retain a small portion for safety.

Due-On-Sale Clause

A provision in many mortgages that allows the lender to demand full repayment if the property is transferred. Enforcement varies by lender and situation. Creative finance strategies aim to reduce risk by keeping loans current and using familiar ownership structures, but they do not eliminate the clause.

Deed-in-Lieu of Foreclosure

A separate agreement that may be used as a default remedy. It can allow the property to transfer back to the seller or lender if the buyer defaults, potentially avoiding a longer foreclosure process depending on state law and how the agreement is drafted.

90/10 Beneficial Interest Trust

A trust structure used in creative finance where the property is placed into a trust with the seller retaining 10% beneficial interest and the buyer receiving 90% beneficial interest. This structure does not remove the due-on-sale clause, but is sometimes used to reduce enforcement risk while payments remain current.

Letter of Intent (LOI)

A non-binding document that outlines the basic terms of a proposed creative finance deal. The LOI summarizes the purchase price, down payment, monthly payments, term length, and other key details. It's used to confirm both parties are in agreement before moving to formal contracts.

Advanced Terms

The following terms are more technical and are included for educational accuracy. They are not required to understand creative finance deals.

Amortization (Advanced Term)

Amortization is a traditional banking term that describes how loan payments are calculated and spread over time. Traditional mortgages use amortization schedules. In creative finance seller carry deals, we use the simpler concept of a payment calculation period to determine monthly payments.

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