Creative Finance Glossary

Every industry uses vocabulary as a gate. Real estate is worse than most, because a lot of the people teaching it benefit from you feeling like you need a guide to translate.

You do not. Here is the whole vocabulary.

The core structures

Creative finance

Any purchase structure that does not rely on a conventional bank mortgage. These structures are long-established and legal — they are “creative” only in the sense that they are less common than walking into a bank.

Subject To (Sub-To)

Buying a property subject to the existing mortgage. The deed transfers to you; the seller’s loan stays in their name; you make the payments. No new loan is originated, so no credit check gates the purchase. Full guide →

Seller financing (owner financing, seller carryback)

The seller acts as the lender. You sign a note promising payments to them, secured by the property. Works best when the seller owns free and clear. Full guide →

Wraparound mortgage (a “wrap”)

A seller-financed note that wraps around an existing mortgage still in place. You pay the seller on the larger new note; the seller keeps paying the underlying loan and keeps the spread. Carries the same due-on-sale exposure as subject-to, and states regulate wraps differently.

Lease option (rent-to-own)

You lease the property with a contractual right — not an obligation — to buy it at an agreed price within a set window. Part of the rent may credit toward purchase. You are a tenant with an option, not an owner, until you exercise it. Read the default terms carefully; this is where these go wrong.

Land contract (contract for deed)

You make payments and take possession, but title does not transfer until the contract is paid off. That is the crucial difference from seller financing, where you get title up front. Heavily regulated in some states and weaker for the buyer than it first appears.

Loan and payment terms

Due-on-sale clause

A term in most mortgages letting the lender demand the full balance if the property transfers. It is an option the lender may exercise, not an automatic penalty, and triggering it is not a crime. It is the central risk in subject-to and wrap deals.

Balloon payment

A large lump sum due at a set date — often three to five years in — after a period of smaller payments. Common in seller-financed notes. The most important number in any note you sign, because you must be able to refinance or sell before it lands.

Amortization

The schedule by which a loan is paid down over time. Payments are often calculated on a 30-year amortization to stay affordable while the actual term is much shorter — which is exactly what creates a balloon.

PITI

Principal, Interest, Taxes, Insurance — the four parts of a typical mortgage payment. When analyzing a rental, PITI is the floor of your costs, never the total, because vacancy, repairs, and capital expenditures still have to be reserved.

Promissory note

The written promise to pay: amount, rate, schedule, and what happens on default. The note is the debt.

Deed of trust / mortgage

The instrument recorded against the property that secures the note. It is what lets a lender foreclose if you stop paying. Which one your state uses varies.

DSCR loan

Debt Service Coverage Ratio — an investor loan underwritten primarily on whether the property’s income covers its debt, rather than on your personal income. Useful for investors whose tax returns understate their capacity.

Hard money

Short-term, asset-based lending at high rates and points, usually for renovation projects. Fast and expensive. Dangerous without a proven exit.

Deal analysis terms

Cash flow

What remains monthly after every cost, including reserves. If you are not subtracting vacancy, repairs, and capital expenditures, the number you are calling cash flow is not cash flow.

Cap rate

Net operating income divided by purchase price. A comparison tool between properties, most meaningful on multifamily and commercial.

Cash-on-cash return

Annual cash flow divided by the actual cash you put in. Usually more useful to a small investor than cap rate, because it measures the return on your money.

CapEx (capital expenditures)

Big-ticket replacements — roof, HVAC, water heater. They are not emergencies; they are scheduled certainties. Reserve monthly for them or they will arrive as a crisis.

ARV (after repair value)

What a property is expected to be worth once renovated. Optimistic ARV estimates are the most common way flippers lose money.

The 1% rule

Monthly rent should be roughly 1% of purchase price. A quick filter for discarding bad deals, not analysis. Almost nothing meets it in high-cost markets.

House hacking

Buying a small multifamily as your primary residence, living in one unit and renting the rest. Qualifies for owner-occupied financing, which means far less down. Probably the most underrated first move available. See where it fits →

People and paperwork

Title company / escrow

The neutral third party that verifies who legally owns the property, what liens exist, and handles the money at closing. Never skip this, no matter how simple the deal sounds.

Title insurance

Protects you against ownership claims that surface after closing — an unknown heir, an unrecorded lien, a clerical error from decades ago.

Loan servicer

A third-party company that collects payments, keeps amortization records, and issues year-end tax documents. On seller-financed deals, using one removes an entire category of future dispute for a small monthly fee.

Motivated seller

Someone whose priority is speed or relief rather than maximum price — facing foreclosure, relocating, managing an inherited property, or exhausted by a stalled listing. Note what this does not mean: it does not mean desperate, and it does not mean someone to take advantage of. The entire model only works if they end up better off too.