Texas Real Estate Sales Agent — All Questions

In a typical mortgage loan, the document that serves as the borrower's written promise to repay the debt is the:

• a.Deed of trust
• b.Warranty deed
• c.Title commitment
• d.Promissory note✓

The promissory note is the borrower's personal promise to repay the loan under stated terms. The deed of trust (or mortgage) is the separate instrument that pledges the property as security for that note.

Texas commonly uses a 'deed of trust' rather than a traditional mortgage. In a deed of trust, the neutral third party who holds legal title until the loan is repaid is the:

• a.Grantee
• b.Beneficiary
• c.Trustor only
• d.Trustee✓

In a deed of trust, the borrower (trustor) conveys title to a trustee who holds it for the lender (beneficiary) until the debt is paid. This structure allows a non-judicial foreclosure process if the borrower defaults.

A loan feature that lets the lender declare the entire remaining balance due upon borrower default is a(n):

• a.Acceleration clause✓
• b.Subordination clause
• c.Defeasance clause
• d.Prepayment penalty

An acceleration clause allows the lender to demand the full unpaid balance immediately if the borrower defaults, which is a prerequisite to foreclosure. A defeasance clause, by contrast, cancels the lien once the debt is fully paid.

A 'due-on-sale' (alienation) clause in a mortgage generally:

• a.Allows the lender to require full repayment if the property is sold or transferred✓
• b.Prohibits any prepayment
• c.Forces the buyer to assume the loan
• d.Requires the lender to lower the interest rate annually

A due-on-sale clause lets the lender call the loan due when the borrower transfers the property, preventing an unapproved buyer from simply taking over the existing loan. It protects the lender's ability to re-price the loan at current rates.

In an amortized loan, the early payments are applied:

• a.Entirely to property taxes
• b.Entirely to principal
• c.Mostly to principal, with a small portion to interest
• d.Mostly to interest, with a small portion to principal✓

In a standard amortizing loan, early payments are weighted heavily toward interest because the outstanding balance is high. As the balance declines, more of each payment goes toward principal.

The four components commonly abbreviated as 'PITI' in a monthly housing payment are:

• a.Principal, interest, taxes, and insurance✓
• b.Principal, interest, transfer, and inspection
• c.Principal, insurance, taxes, and inspection
• d.Points, interest, title, and insurance

PITI stands for principal, interest, taxes, and insurance, the four parts of a typical escrowed mortgage payment. Lenders often collect taxes and insurance in an escrow account and pay them when due.

Private mortgage insurance (PMI) on a conventional loan is generally required when the borrower's down payment is:

• a.Any amount, regardless of down payment
• b.Less than 20% of the price (LTV above 80%)✓
• c.Exactly 20% of the price
• d.More than 50% of the price

PMI protects the lender against default and is typically required on conventional loans when the loan-to-value ratio exceeds 80%, meaning less than 20% down. It can usually be canceled once sufficient equity is reached.

A loan that is insured by the Federal Housing Administration is called a(n):

• a.FHA loan✓
• b.Jumbo loan
• c.VA loan
• d.Conventional loan

An FHA loan is insured by the Federal Housing Administration and typically allows lower down payments and more flexible qualifying. A VA loan is guaranteed by the Department of Veterans Affairs for eligible service members.

A key benefit of a VA-guaranteed loan for eligible veterans is that it:

• a.Requires a minimum 20% down payment
• b.Charges the highest interest rates by law
• c.Often requires no down payment✓
• d.Is available to all buyers regardless of service

VA loans, guaranteed by the Department of Veterans Affairs, often allow eligible veterans to purchase with no down payment. They are limited to qualified veterans, service members, and certain spouses.

In an adjustable-rate mortgage (ARM), the interest rate is periodically adjusted based on a specified:

• a.Property tax rate
• b.Broker's commission rate
• c.Appraised value of the home
• d.Financial index plus a margin✓

An ARM's rate is tied to a published index, and the lender adds a fixed margin to set the new rate at each adjustment. Caps typically limit how much the rate can change per period and over the loan's life.

Discount points paid to a lender at closing are typically used to:

• a.Buy down (lower) the loan's interest rate✓
• b.Pay the real estate commission
• c.Cover the appraisal fee only
• d.Increase the loan amount

Discount points are prepaid interest paid to reduce the loan's interest rate, with one point equal to 1% of the loan amount. Paying points can lower monthly payments over the life of the loan.

The federal law that requires lenders to disclose the annual percentage rate (APR) and total finance charges to consumers is the:

• a.Fair Housing Act
• b.RESPA
• c.Sherman Antitrust Act
• d.Truth in Lending Act (TILA)✓

The Truth in Lending Act requires lenders to disclose credit costs, including the APR and finance charges, so consumers can compare loans. RESPA, by contrast, focuses on settlement (closing) cost disclosures and prohibits kickbacks.

The Real Estate Settlement Procedures Act (RESPA) primarily regulates:

• a.Zoning of residential neighborhoods
• b.Closing (settlement) cost disclosures and prohibits kickbacks✓
• c.The design of TREC contract forms
• d.Property tax assessment methods

RESPA governs the disclosure of settlement costs on federally related mortgage loans and prohibits kickbacks and unearned referral fees. It works alongside TILA, which addresses the cost of credit.

Foreclosure under a Texas deed of trust with a power-of-sale clause is often carried out through:

• a.Automatic transfer to the county
• b.A non-judicial trustee's sale✓
• c.A lengthy jury trial
• d.An IRS auction

The power-of-sale clause in a Texas deed of trust allows a non-judicial foreclosure conducted by the trustee, which is faster than a court process. Statutory notice requirements must still be met, and the rules can change.

A borrower's ability to reclaim the property by paying the full debt before a foreclosure sale is known as the:

• a.Equitable right of redemption✓
• b.Statutory acceleration
• c.Right of subrogation
• d.Right of rescission

The equitable right of redemption lets a defaulting borrower pay the entire debt plus costs to stop the foreclosure and keep the property before the sale. Some states also provide a statutory redemption period after the sale for certain loans.

In a mortgage assumption, the buyer:

• a.Automatically receives a new lower interest rate
• b.Takes over the seller's existing loan and its terms✓
• c.Is never personally liable for the debt
• d.Pays cash for the full purchase price

In an assumption, the buyer takes over the seller's existing loan, including its balance, rate, and terms, subject to lender approval where required. Whether the seller is released from liability depends on the lender and loan documents.

The loan-to-value (LTV) ratio is calculated as the:

• a.Property value divided by the loan amount
• b.Loan amount divided by the property's value or price✓
• c.Interest rate multiplied by the term
• d.Down payment divided by the interest rate

LTV equals the loan amount divided by the lesser of the appraised value or sales price, expressed as a percentage. A lower LTV means more borrower equity and generally lower lender risk.

A buyer purchases a home for $300,000 and makes a $60,000 down payment. What is the loan-to-value ratio?

• a.70%
• b.120%
• c.20%
• d.80%✓

The loan amount is $300,000 minus $60,000, or $240,000, and LTV equals $240,000 divided by $300,000, which is 0.80 or 80%. The $60,000 down payment represents 20% equity.

'Usury' laws are designed to:

• a.Guarantee loan approval for all buyers
• b.Require all loans to be assumable
• c.Limit the maximum interest rate a lender may lawfully charge✓
• d.Set minimum home prices

Usury laws cap the interest rate that lenders may legally charge to protect borrowers from excessive rates. Charging above the legal limit can subject a lender to penalties.

The secondary mortgage market, including entities like Fannie Mae and Freddie Mac, primarily functions to:

• a.Buy loans from lenders, providing liquidity so lenders can make new loans✓
• b.Directly lend money to homebuyers at closing
• c.License real estate agents
• d.Set property tax rates nationwide

The secondary market buys existing mortgages from primary lenders, giving those lenders fresh capital to originate more loans. This improves the flow of mortgage money and helps standardize lending.

Under the TRID rules, a lender must generally deliver the Loan Estimate to the applicant within how long after receiving a completed loan application?

• a.At the closing table, together with all of the other final loan documents
• b.Within 1 hour, so the borrower can immediately compare competing lenders
• c.Within 30 calendar days, the same period allowed to schedule the appraisal
• d.Within 3 business days after the lender receives the application✓

TRID requires the lender to provide the Loan Estimate within 3 business days of receiving a completed application, giving the borrower an early, standardized disclosure of loan terms and costs. Exact regulatory timing can change.

Under TRID, the Closing Disclosure must generally be provided to the borrower:

• a.On the same day as closing, so the figures are as current as possible
• b.Within 30 days after closing, once the final numbers have all settled
• c.At least 3 business days before consummation of the loan✓
• d.Only if the borrower specifically asks the lender to prepare one

TRID requires the borrower to receive the Closing Disclosure at least 3 business days before consummation, giving time to review final terms and costs. This waiting period helps prevent last-minute surprises; the rules can change.

The TRID (TILA-RESPA Integrated Disclosure) rule combined disclosures required under which two federal laws?

• a.The Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA)✓
• b.The Sherman Antitrust Act and the Equal Credit Opportunity Act
• c.The Community Reinvestment Act and the Home Mortgage Disclosure Act
• d.The Fair Housing Act and the Americans with Disabilities Act

TRID integrated the disclosure requirements of TILA and RESPA into the Loan Estimate and Closing Disclosure forms. It streamlined the older forms into two consumer-friendly documents.

Regulation Z is the federal regulation that implements which consumer-protection statute?

• a.The National Flood Insurance Act, governing flood zone coverage
• b.The Real Estate Settlement Procedures Act, governing closing costs
• c.The Fair Housing Act, prohibiting discrimination in housing
• d.The Truth in Lending Act, governing the disclosure of credit terms✓

Regulation Z implements the Truth in Lending Act and governs disclosure of credit costs such as the APR and finance charges. RESPA is implemented by Regulation X, a separate rule.

The Equal Credit Opportunity Act (ECOA) prohibits a lender from discriminating against a credit applicant based on:

• a.The size of the down payment the applicant is able and willing to make
• b.Race, color, religion, national origin, sex, marital status, age, or public assistance income✓
• c.The applicant's verifiable income, current debts, and overall credit history
• d.The appraised value and physical condition of the property being financed

ECOA prohibits credit discrimination based on protected characteristics such as race, color, religion, national origin, sex, marital status, age, and receipt of public assistance. Lenders may still evaluate legitimate factors like income, debts, and credit history.

The Truth in Lending Act's three-day right of rescission generally applies to:

• a.The initial loan a builder uses to construct a brand-new subdivision
• b.Every purchase of a primary residence financed with any type of mortgage loan
• c.The purchase of investment property held solely for rental income
• d.Certain refinances and home equity loans on a borrower's principal residence✓

The right of rescission lets a borrower cancel certain non-purchase loans, such as many refinances and home equity loans on a principal residence, within three business days. It does not apply to loans used to purchase the borrower's home.

A key difference between FHA mortgage insurance and conventional private mortgage insurance (PMI) is that FHA loans:

• a.Generally require a mortgage insurance premium even with the minimum down payment✓
• b.Are guaranteed by the Department of Veterans Affairs instead of being insured
• c.Require mortgage insurance only when the borrower puts down more than 20 percent
• d.Never require any form of mortgage insurance, regardless of the down payment

FHA loans generally carry a mortgage insurance premium (MIP) regardless of the down payment amount, unlike conventional PMI, which applies when the down payment is under 20 percent. FHA insures the loan through HUD, not the VA.

A 'conventional' mortgage loan is BEST defined as a loan that is:

• a.Always insured by the Federal Housing Administration through HUD
• b.Guaranteed exclusively for veterans by the Department of Veterans Affairs
• c.Not insured by the FHA or guaranteed by the VA or other government agency✓
• d.Made only by the federal government directly to qualified first-time buyers

A conventional loan is one that is neither insured by the FHA nor guaranteed by the VA or other government program. It relies on the borrower's creditworthiness and, when the down payment is under 20 percent, private mortgage insurance.

A 'conforming' loan is one that:

• a.Requires no credit check because it conforms to a simplified approval process
• b.Meets the underwriting standards and loan limits set by Fannie Mae and Freddie Mac✓
• c.Exceeds the maximum loan limits set for purchase by Fannie Mae and Freddie Mac
• d.Is available only to borrowers purchasing government-owned foreclosed properties

A conforming loan meets the size limits and underwriting guidelines set by Fannie Mae and Freddie Mac, making it eligible for purchase in the secondary market. Loans exceeding those limits are called jumbo (non-conforming) loans.

A 'jumbo' loan is one that:

• a.Exceeds the conforming loan limits set by Fannie Mae and Freddie Mac✓
• b.Must always be repaid within a maximum term of exactly ten years
• c.Carries the lowest interest rate available because it is fully guaranteed
• d.Is insured by the FHA and designed specifically for lower-income borrowers

A jumbo loan exceeds the conforming loan limits and therefore cannot be sold to Fannie Mae or Freddie Mac, often requiring stronger borrower qualifications. It is a type of non-conforming loan.

The defining feature of a fixed-rate, fully amortizing mortgage is that:

• a.The monthly payment rises steadily each year for the full loan term
• b.The interest rate resets every year based on a published financial index
• c.The interest rate and the principal-and-interest payment stay the same for the whole term✓
• d.Only interest is paid, and the entire principal is due as a lump sum at maturity

In a fixed-rate, fully amortizing loan, the interest rate and the principal-and-interest payment remain constant, and the balance is paid off by the end of the term. Adjustable-rate and interest-only loans behave differently.

In an adjustable-rate mortgage, a 'lifetime cap' limits:

• a.The maximum size of the down payment the borrower is allowed to make
• b.The dollar amount the lender may charge for the loan origination fee
• c.The number of times the borrower is permitted to make an extra principal payment
• d.The total amount the interest rate can increase over the entire life of the loan✓

A lifetime cap sets the maximum the interest rate can rise above the initial rate over the loan's life, protecting the borrower from unlimited increases. Periodic caps separately limit changes at each adjustment.

In an adjustable-rate mortgage, the 'index' is:

• a.The one-time fee the borrower pays the lender to originate the loan
• b.The fixed percentage the lender adds on top of the base rate as its profit
• c.A published benchmark interest rate, such as SOFR, that moves with the market✓
• d.The maximum interest rate the loan can ever reach over its full term

The index is a published market benchmark, such as SOFR, to which the ARM's rate is tied. The lender adds a fixed margin to the index to determine the fully indexed rate at each adjustment.

In an adjustable-rate mortgage, the 'margin' is:

• a.A published economic benchmark that fluctuates up and down with market conditions
• b.The portion of each monthly payment that is applied to reduce the principal
• c.The fixed percentage the lender adds to the index to set the interest rate✓
• d.The maximum number of percentage points the rate may change at each adjustment

The margin is the fixed number of percentage points the lender adds to the moving index to compute the fully indexed rate. Unlike the index, the margin normally stays constant for the life of the loan.

One 'discount point' paid to a lender at closing is equal to:

• a.One-tenth of one percent of the total sales price of the property
• b.One percent of the property's appraised value as determined by the appraiser
• c.One percent of the loan amount, paid to reduce the interest rate✓
• d.A flat fee of exactly one hundred dollars regardless of the loan amount

One discount point equals one percent of the loan amount and is prepaid interest used to buy down the interest rate. Points are calculated on the loan amount, not the sales price or appraised value.

How does a loan origination fee differ from discount points?

• a.An origination fee lowers the interest rate, while discount points cover the appraisal
• b.An origination fee compensates the lender for processing the loan, while discount points buy down the rate✓
• c.An origination fee is paid by the seller, while discount points are always paid by the agent
• d.There is no difference; the two terms describe exactly the same charge

An origination fee covers the lender's cost of processing and originating the loan, whereas discount points are prepaid interest paid specifically to reduce the interest rate. Both are typically expressed as a percentage of the loan amount.

In a Texas deed of trust, the lender who is owed the debt is referred to as the:

• a.Trustor, the borrower who pledges the property as security for the loan
• b.Trustee, the neutral third party who holds title until the loan is repaid
• c.Beneficiary, the party for whose benefit the security instrument is held✓
• d.Grantee, the party who receives full legal title free of any liens

In a deed of trust, the borrower (trustor) conveys title to a trustee who holds it for the lender, called the beneficiary. If the borrower defaults, the trustee may sell the property under the power-of-sale clause for the beneficiary.

In a typical Texas home loan, which document actually creates the lien that secures repayment against the property?

• a.The general warranty deed the seller delivers to the buyer at closing
• b.The promissory note, which is the borrower's personal promise to repay the debt
• c.The deed of trust, which pledges the property as security for the note✓
• d.The title insurance policy that protects the lender against title defects

The deed of trust creates the lien that secures the loan against the property, while the promissory note is the borrower's separate promise to repay. Together the two documents make up the secured loan.

'Hypothecation' in real estate finance refers to:

• a.Converting an adjustable-rate loan into a fixed-rate loan at the borrower's request
• b.Pledging property as security for a debt while the borrower keeps possession of it✓
• c.Combining several parcels under a single blanket mortgage covering all of them
• d.Selling a mortgage loan from the original lender to an investor in the secondary market

Hypothecation is pledging property as collateral for a loan without giving up possession, which is exactly how a mortgage or deed of trust works. The borrower continues to use the property while it secures the debt.

A non-judicial foreclosure sale under a Texas deed of trust is generally conducted:

• a.Only after a full jury trial in district court decides that the borrower is in default
• b.By the county tax office as part of the annual delinquent property tax sale
• c.On the first Tuesday of the month, after statutory notice, by the trustee at public auction✓
• d.Privately by the lender, with no public notice or auction required at any point

Texas allows non-judicial foreclosure under the deed of trust's power-of-sale clause, with the trustee conducting a public auction on the first Tuesday of the month after required notices. This is faster than a court-supervised judicial foreclosure; rules can change.

A 'deficiency judgment' may arise when:

• a.The borrower makes an extra principal payment that exceeds the scheduled amount
• b.The lender waives all remaining interest as a courtesy to the borrower
• c.The property appraises for more than the loan balance at the time of the sale
• d.A foreclosure sale brings less than the debt owed, and the lender seeks the shortfall from the borrower✓

A deficiency judgment is a court judgment for the remaining debt when a foreclosure sale does not fully satisfy the loan. Whether and how a lender may pursue it is governed by state law, which can limit or regulate deficiencies.

A 'deed in lieu of foreclosure' is a transaction in which:

• a.The lender sells the loan to another lender before the borrower ever defaults
• b.A court forces the borrower to sign over the property after a completed trial
• c.The borrower refinances the existing loan into a new loan at a lower rate
• d.The borrower voluntarily conveys the property to the lender to avoid foreclosure✓

In a deed in lieu of foreclosure, the borrower voluntarily deeds the property to the lender to satisfy the debt and avoid the foreclosure process. Lenders may accept it to save time and cost, though other liens can complicate it.

A 'short sale' of a home occurs when:

• a.The seller sells to a relative for far less than the property's market value
• b.The buyer closes on the purchase in an unusually short amount of time
• c.The seller lists the property for a very short period, usually less than one week
• d.The property is sold for less than the amount owed, with the lender's approval✓

A short sale is a sale for less than the outstanding mortgage balance, which requires the lender's approval to accept the reduced payoff. It is an alternative to foreclosure that can lessen the impact on the seller.

The Texas Constitution places special limits on home equity loans, including a general rule that the total of all mortgage debt against a homestead may not exceed:

• a.50 percent of the original purchase price of the homestead
• b.100 percent of the fair market value of the homestead
• c.80 percent of the fair market value of the homestead✓
• d.125 percent of the county-appraised taxable value of the homestead

Texas constitutional home equity rules generally cap combined loans against a homestead at 80 percent of its fair market value, among other borrower protections. These homestead lending protections are a distinctive feature of Texas law and can change.

Under the federal Homeowners Protection Act, private mortgage insurance (PMI) on many conventional loans must automatically terminate when the loan balance reaches what percentage of the original value?

• a.Automatically at 78 percent of the original value, if payments are current✓
• b.Automatically at 90 percent, halfway through the standard loan term
• c.It never terminates automatically and must always be canceled by request
• d.Automatically at 50 percent, once the borrower has substantial equity

The Homeowners Protection Act generally requires automatic PMI termination when the balance reaches 78 percent of the original value and the borrower is current. Borrowers may also request cancellation earlier, at around 80 percent.

A 'prepayment penalty' clause in a loan:

• a.Charges the borrower a fee for paying off the loan early, where legally permitted✓
• b.Increases the interest rate automatically every time the borrower is late
• c.Forces the borrower to pay off the entire loan within the first year
• d.Requires the lender to accept early payoff without charging the borrower anything

A prepayment penalty charges the borrower a fee for paying off the loan ahead of schedule, compensating the lender for lost interest, where such penalties are legally allowed. Many consumer loans limit or prohibit them.

In loan qualifying, the 'front-end' (housing) ratio measures:

• a.The borrower's total assets compared with the borrower's total liabilities
• b.The proposed monthly housing payment (PITI) compared with monthly gross income✓
• c.The loan amount compared with the appraised value of the property
• d.Total monthly debt payments compared with the borrower's monthly gross income

The front-end ratio compares the proposed housing payment (principal, interest, taxes, and insurance) to gross monthly income. The back-end ratio, by contrast, compares total monthly debt payments to gross income.

A borrower's gross monthly income is $7,000. Using a 28% front-end (housing) qualifying ratio, the maximum monthly PITI payment would be:

• a.$700
• b.$1,960✓
• c.$1,400
• d.$2,520

Multiply gross monthly income by the ratio: $7,000 x 0.28 = $1,960. This is the maximum housing payment (principal, interest, taxes, and insurance) under a 28 percent front-end guideline.

A borrower takes a $250,000 loan at a 4.8% annual interest rate. Using simple interest, how much interest accrues in the FIRST month?

• a.$12,000
• b.$1,200
• c.$1,000✓
• d.$100

Annual interest is $250,000 x 0.048 = $12,000. Divide by 12 to get one month: $12,000 / 12 = $1,000.

A buyer finances a home appraised and priced at $400,000 with a loan of $340,000. What is the loan-to-value (LTV) ratio?

• a.60%
• b.15%
• c.85%✓
• d.100%

LTV equals the loan amount divided by value: $340,000 / $400,000 = 0.85, or 85%. The remaining 15 percent, $60,000, is the borrower's equity from the down payment.