The Definition of Creative Financing


Creative Financing

1. In general. Any funds acquisition, bank lending, or capital raising technique that differs from standard industry practices. Borrowers often resort to innovative financing when financing from conventional sources are unavailable or can be arranged at more favorable terms using nonstandard financing techniques. Such techniques have become more common in the fixed income and equity markets in recent years.

2. Commercial lending. A customized loan in which the rate paid and credit terms are negotiated by borrower and lender. The lender may agree to arrange financing at an attractive rate and favorable terms if a borrower assumes part of the credit risk in funding a loan. So-called performance based loan pricing also allows a lender to tailor a line of credit or revolving credit so that pricing is set according to the borrower's usage of the credit.

3. Mortgages. Any mortgage that differs from a 30-year Conventional Mortgage in rate, credit terms, or other factors. Creative financing allows a lender to tailor mortgage financing to suit a borrower's income and financial situation, making home ownership more affordable by a wider group of borrowers. Reduced interest rate loans, seller buy-downs, or jumbo loans are examples. Creative financing also can also involve taking out a Second Mortgage at loan origination to lower the required down payment. Most creative mortgages are ineligible for purchase by federal agencies in the Secondary Mortgage Market. See also Alternative Mortgage Instrument; Sale and Leaseback.

Submitted by:
AJ Allen
Designated Broker
Park Place Realty NW
Phone 425-223-6021
Fax   425-988-1675