Massachusetts Real Estate License Practice Test

What is a common financial arrangement between a seller and a buyer known as seller financing?

1. A bank loan

2. A lease agreement

3. A short-term note

4. A payment agreement

The correct answer is: A short-term note

Seller financing is a financial arrangement where the seller of a property provides financing to the buyer, enabling them to purchase the property without needing a traditional bank loan. In this scenario, the buyer makes payments directly to the seller, often in the form of a promissory note that outlines the terms of the loan, including the interest rate, payment schedule, and duration. Choosing a short-term note accurately reflects the nature of seller financing because these arrangements can often have shorter repayment terms than typical mortgage loans offered by financial institutions. This flexibility allows both parties to negotiate terms that suit their circumstances; for example, the buyer may benefit from less stringent qualifying criteria compared to conventional refinancing. In contrast, options such as a bank loan involve third-party financial institutions and usually have more rigid qualifications and terms. A lease agreement pertains to renting a property rather than purchasing it. A payment agreement can be too vague in this context as it may refer to various types of financial arrangements that do not specifically denote the structure involved in seller financing. Thus, a short-term note captures the essence of the seller financing process.