Massachusetts Real Estate License Practice Test

What is the name of the financing arrangement in which the seller accepts a note from a buyer instead of cash?

1. Lease Purchase

2. Seller Financing

3. Open Mortgage

4. Wrap-Around Mortgage

The correct answer is: Seller Financing

The financing arrangement where the seller accepts a note from a buyer instead of cash is referred to as seller financing. This method allows the buyer to make payments directly to the seller over time, often because the buyer may not qualify for traditional financing through a bank or mortgage lender. In this arrangement, the seller essentially acts as the bank, carrying the loan and receiving interest on the outstanding balance over time. Seller financing is beneficial for both parties: the buyer may gain access to property ownership without needing to receive immediate bank financing, while the seller can potentially sell the property more quickly and collect interest on the financing provided. It's particularly useful in buyer's markets or in situations where buyers face difficulty obtaining conventional loans. The context of the other options illuminates different financial arrangements that do not fit this scenario. A lease purchase involves renting a property with the option to buy later, while an open mortgage typically allows the borrower to pay off the mortgage without penalty. A wrap-around mortgage is a unique financing method involving existing financing that wraps around a new, larger loan, which is not the same as direct seller financing.