New York Real Estate Salesperson — All Questions

A contract signed by a person who has been legally declared mentally incompetent is:

• a.Fully enforceable as long as the signature was properly witnessed
• b.Voidable only at the option of the other, competent contracting party
• c.Void✓
• d.Valid once it has been acknowledged before a notary and recorded

A contract entered by someone already adjudicated legally incompetent is void, having no legal effect. This differs from a contract by someone with lesser incapacity (or a minor), which is typically merely voidable. Capacity of the parties is an essential element of a valid contract.

In New York, an option contract to purchase real estate must be supported by:

• a.A recorded mortgage lien against the optioned parcel of land
• b.The optionee's promise to buy the property no matter what happens
• c.A completed appraisal establishing the property's fair market value
• d.Consideration paid to keep the offer open for the option period✓

An option requires the optionee to give consideration in exchange for the owner's promise to hold the offer open for a set time. The optionee gains the right, but not the obligation, to buy. Without consideration, the owner could freely revoke the offer before it is exercised.

When an offeree changes a material term of an offer and returns it, the legal effect is to create a:

• a.Binding contract on the original offeror's stated terms
• b.Ratification of the offer that cannot later be withdrawn
• c.Counteroffer that rejects the original offer✓
• d.Valid acceptance because the essential terms still overlap

Altering a material term produces a counteroffer, which both rejects the original offer and proposes new terms the original offeror may accept or reject. The original offer is extinguished and cannot later be accepted unless revived. This is central to how negotiations proceed.

A deed that recites 'ten dollars and other good and valuable consideration' uses that language to:

• a.Guarantee the buyer a mortgage loan of at least that stated amount
• b.State that consideration was given without revealing the actual price✓
• c.Prove the property's assessed value for local property tax purposes
• d.Set the exact amount of transfer tax the seller must pay at closing

Deeds often recite a nominal consideration ('$10 and other good and valuable consideration') simply to confirm that consideration passed, while keeping the true price private. The actual sale price is reported separately for transfer tax on forms like the TP-584. The recital does not set the tax.

A 'subject to inspection' contingency that has expired without the buyer objecting generally means:

• a.The buyer may still cancel at any time before the scheduled closing
• b.The seller must automatically extend the deadline for another full month
• c.The contract is void and both parties walk away with no obligations
• d.The buyer is deemed to have accepted the property's condition and must proceed✓

If an inspection contingency period passes and the buyer neither objects nor cancels as the contract allows, the contingency is typically waived and the buyer is bound to proceed. Deadlines matter, especially when time is of the essence. The buyer must act within the stated window.

The essential difference between a bilateral and a unilateral listing is illustrated by an open listing, which is:

• a.Void, because open listings are prohibited under New York license law
• b.Unilateral, because only the broker who performs by producing a buyer is paid✓
• c.Bilateral, since the seller and every broker exchange binding promises
• d.Exclusive, because only one broker may market the property at a time

An open listing is generally treated as unilateral: the seller promises to pay only the broker who performs by procuring a ready, willing, and able buyer, and no broker is obligated to act. Multiple brokers may compete, but only the procuring cause earns the commission. Exclusive listings differ.

A contract term that is illegal, such as an agreement to violate fair housing law, renders the contract:

• a.Voidable by the benefiting party
• b.Void and unenforceable✓
• c.Fully valid if both agreed
• d.Enforceable in part

A contract with an illegal object or purpose is void and unenforceable because a lawful objective is an essential element of a valid contract. Courts will not enforce agreements to break the law, including discriminatory arrangements. Neither party can compel performance.

When both parties to a contract share the same fundamental mistake about a material fact, the contract is generally:

• a.Valid unless the mistake concerned the property's exact square footage
• b.Converted into an option contract in favor of the buyer
• c.Voidable, because there was no true meeting of the minds✓
• d.Automatically enforceable since both parties signed the document

A mutual mistake about a basic, material fact means the parties never genuinely agreed on the same thing, so the contract may be rescinded (voidable). A unilateral mistake by one party is harder to undo. The remedy protects a party from being bound by a shared error.

A seller who accepts a full-price, on-terms offer from a buyer produced by the listing broker, then refuses to sell, generally:

• a.Owes nothing because the transaction never actually reached closing
• b.May relist the property with a new broker to avoid the commission
• c.Still owes the broker the commission for producing a ready, willing, and able buyer✓
• d.Can keep the buyer's earnest money deposit as liquidated damages

A broker generally earns the commission once they produce a buyer who is ready, willing, and able to purchase on the seller's stated terms, even if the seller then backs out. The commission is tied to procuring such a buyer, not to closing. The seller's refusal does not defeat the earned fee.

A deed is properly executed for recording in New York once it is:

• a.Witnessed by the real estate salesperson who arranged the sale
• b.Approved by the buyer's lender and stamped by the appraiser
• c.Signed by the grantee and mailed to the state Department of State
• d.Signed by the grantor and acknowledged before a notary✓

To be eligible for recording, a New York deed must be signed by the grantor and acknowledged (notarized), confirming the grantor's identity and voluntary act. The grantee generally need not sign. Acknowledgment is a recording requirement, not what transfers title between the parties.

The habendum clause of a deed serves to:

• a.List the amount of consideration paid for the property in full
• b.Reserve mineral rights beneath the property to the original grantor
• c.Identify the notary public who acknowledged the grantor's signature
• d.Define the extent of the estate the grantee is receiving✓

The habendum clause, beginning 'to have and to hold,' describes the type and extent of the estate being conveyed, such as fee simple. It must be consistent with the granting clause. It clarifies exactly what interest the grantee takes.

A binder deposit given by a prospective buyer is best held:

• a.In cash by the listing salesperson until the closing date arrives
• b.In the seller's personal bank account for immediate use as they wish
• c.In the broker's escrow account until a formal contract is signed or the deal ends✓
• d.By the buyer's attorney in the firm's general operating account

Funds a broker receives, such as a binder or earnest money deposit, must be kept in a separate escrow or trust account, not commingled with the broker's or seller's own funds. The deposit is released according to the parties' agreement. Mishandling client funds can lead to discipline.

The 'granting clause' and 'consideration' recital together show that a deed:

• a.Guarantees the property will appreciate to a specific future value
• b.Conveys the described interest in exchange for value received✓
• c.Requires the county to insure the grantee's title against defects
• d.Obligates the grantee to obtain a mortgage from a named lender

A deed's granting clause contains the words that convey the interest, and the consideration recital acknowledges that value was received for the transfer. Together they evidence a completed conveyance. The recited consideration is often nominal and need not equal the true price.

A 'sale of buyer's current home' contingency benefits the buyer by:

• a.Forcing the listing broker to market both properties for a single fee
• b.Guaranteeing the buyer a higher price when they sell their old residence
• c.Letting the buyer cancel if their existing home does not sell in time✓
• d.Requiring the seller to purchase the buyer's current home at market value

This contingency conditions the purchase on the buyer selling their present home within a set period, so the buyer is not stuck owning two homes. If the current home does not sell, the buyer may cancel and recover the deposit. Sellers may add a 'kick-out' clause to keep marketing the property.

New York requires a real estate broker holding client deposits to maintain them in a manner that avoids:

• a.Commingling client funds with the broker's own money✓
• b.Providing the client any receipt or accounting for the deposit
• c.Earning any interest on the deposited funds under any circumstances
• d.Placing the funds in a federally insured banking institution

Brokers must keep client deposits in a separate escrow or trust account to avoid commingling them with the broker's personal or business funds. Commingling and, worse, conversion of client money are serious violations of license law. Proper record-keeping and prompt accounting are also required.

A quitclaim deed used to release one spouse's marital interest in the family home operates to:

• a.Guarantee the receiving spouse marketable title against all claims
• b.Convey whatever interest that spouse has, with no title warranties✓
• c.Automatically extinguish any existing mortgage lien on the property
• d.Transfer full fee simple ownership free of every prior encumbrance

A quitclaim deed conveys only whatever interest the grantor holds and makes no warranties, which is why it is well suited to releasing a spouse's or heir's possible claim. It does not affect existing mortgages or guarantee clear title. It simply removes that person's potential interest from the chain.

A contract of sale that fails to adequately describe the property being sold is:

• a.Likely unenforceable for lacking an essential term✓
• b.Automatically cured once the buyer records the eventual deed
• c.Valid because the street address is never a required contract term
• d.Fully enforceable as long as the purchase price is clearly stated

An enforceable land contract must identify the property with reasonable certainty; a description too vague to locate the parcel can render the contract unenforceable. Price, parties, and property are essential terms. A sufficient legal description or clear address usually satisfies this requirement.

A 'binder' deposit differs from the earnest money in a formal contract of sale mainly because a binder is given:

• a.After the mortgage lender has issued a final loan commitment letter
• b.By the seller to the buyer as an incentive to complete the purchase
• c.At the preliminary stage, before the binding contract is prepared✓
• d.Only at the closing table when the deed is delivered to the buyer

A binder deposit accompanies a preliminary binder agreement showing intent, typically before attorneys draft the formal contract. Earnest money is the deposit under the signed contract of sale itself. Both should be held in escrow; a binder's legal effect depends on its wording.

Under New York's Human Rights Law, a real estate agent asked to help a seller refuse offers from a protected class must:

• a.Follow the seller's instruction under the fiduciary duty of obedience
• b.Refer the seller to another agent willing to carry out the request
• c.Refuse the instruction, because obeying it would be illegal discrimination✓
• d.Quietly comply while documenting the seller's request in the file

The duty of obedience extends only to lawful instructions. Helping a seller discriminate against a protected class violates federal and New York fair housing law, so the agent must refuse and may need to withdraw. An agent who complies shares liability for the violation.

A 'meeting of the minds' can be defeated by fraud, which in a real estate contract makes the agreement:

• a.Voidable by the deceived party✓
• b.Enforceable after disclosure
• c.Fully binding once both parties sign
• d.Automatically void from the beginning

Fraud undermines genuine mutual assent, so the deceived party may rescind or enforce the contract at their option, making it voidable rather than void. A void contract has no effect at all. The remedy belongs to the innocent, defrauded party.

A 'kick-out' clause added to a contract with a home-sale contingency lets the seller:

• a.Force the buyer to waive the mortgage financing contingency at closing
• b.Continue marketing the property and accept a better offer if the buyer cannot remove the contingency✓
• c.Keep the buyer's earnest money automatically if the closing is delayed
• d.Cancel the sale at any time and for any reason at all, without giving the buyer any notice whatsoever

A kick-out clause lets a seller who accepted a contract contingent on the buyer selling their current home keep marketing the property. If a better offer arrives, the seller can notify the buyer, who must then remove the contingency within a set time or step aside. It protects the seller from being tied up.

The recording of a deed establishes its priority in New York under a system best described as:

• a.Race-notice, favoring a good-faith buyer who records first✓
• b.Pure notice, where actual knowledge alone decides every dispute
• c.First-to-sign, based solely on the date the deed was executed
• d.Pure race, in which only the order of recording matters at all

New York is a race-notice jurisdiction: a subsequent purchaser prevails only if they take without notice of a prior interest AND record first. A buyer who knows of an earlier unrecorded deed cannot win by recording. This encourages prompt, good-faith recording.

When an executor sells estate property, the deed delivered to the buyer is typically an:

• a.Referee's deed issued only after a contested judicial foreclosure sale
• b.Full general warranty deed guaranteeing the title against all prior defects
• c.Executor's deed, which conveys the estate's interest with limited warranties✓
• d.Quitclaim deed signed personally by every heir named in the will

An executor's (or administrator's) deed conveys a decedent's property from the estate, and it generally carries limited warranties because the executor conveys only in a representative capacity. The estate warrants against its own acts but not the decedent's. Court authority may be required for the sale.

In a mortgage loan, the promissory note is the document that:

• a.Records the borrower's ownership interest in the public land records
• b.Evidences the debt and the borrower's promise to repay✓
• c.Transfers legal title of the property to the lending institution
• d.Pledges the real property as security and creates the lender's lien

The promissory note is the borrower's written promise to repay the loan on stated terms and is the evidence of the debt. The mortgage is the separate security instrument that pledges the property as collateral. A typical loan involves both documents.

The mortgage instrument, as opposed to the promissory note, functions to:

• a.State the interest rate, monthly payment, and total amount borrowed
• b.Convey marketable title from the seller to the buyer at closing
• c.Pledge the property as security, creating a lien the lender can foreclose✓
• d.Serve as the borrower's personal promise to repay the debt in full

The mortgage is the security instrument: it pledges the real property as collateral and gives the lender the right to foreclose if the borrower defaults. The note contains the promise to pay and the loan terms. The two documents work together in a mortgage loan.

New York is considered a 'lien theory' state, which means that in a mortgage the:

• a.Borrower forfeits all ownership rights upon signing the mortgage
• b.Borrower keeps title, and the lender holds only a lien on the property✓
• c.Lender takes legal title until the loan is completely paid off
• d.Property is held by a neutral third-party trustee during the loan

In a lien-theory state like New York, the borrower retains title and the lender holds a lien as security. In title-theory states, the lender (or a trustee) holds legal title until the debt is paid. This distinction affects the foreclosure process used.

A deed of trust, used in some states instead of a mortgage, involves three parties: the borrower (trustor), the lender (beneficiary), and the:

• a.Trustee, who holds title as security until the loan is repaid✓
• b.Assessor, who determines the property's value for annual taxation
• c.Guarantor, who insures the lender against the borrower's default
• d.Grantor, who conveys ownership of the property to the borrower

A deed of trust adds a neutral trustee who holds title (or a power of sale) as security for the lender-beneficiary until the trustor-borrower repays. This structure enables non-judicial foreclosure in many states. New York, however, uses mortgages and judicial foreclosure rather than deeds of trust.

Hypothecation in real estate finance refers to:

• a.Pledging property as loan collateral while keeping possession of it✓
• b.Physically surrendering the property to the lender during the loan term
• c.Insuring the lender against loss through private mortgage insurance
• d.Selling the property to repay an outstanding debt before it matures

Hypothecation is pledging property as security for a debt without giving up possession, which is exactly what a mortgage does. The borrower continues to live in and use the home while the lender holds a lien. Losing the collateral occurs only upon default and foreclosure.

When a mortgage loan is fully repaid, the lender records a document that releases the lien, known in New York as a:

• a.Subordination agreement
• b.Certificate of occupancy from the town
• c.Notice of default starting foreclosure
• d.Satisfaction of mortgage✓

A satisfaction of mortgage (satisfaction piece) is recorded when the debt is paid in full, releasing the lender's lien and clearing the title. Failing to record it can leave a cloud on title. The defeasance clause in the mortgage is what requires this release upon full payment.

The defeasance clause in a mortgage requires the lender to:

• a.Release the lien once the borrower has fully repaid the debt✓
• b.Take possession of the property immediately after the loan closes
• c.Accelerate the entire balance the moment a single payment is late
• d.Increase the interest rate if market rates rise during the loan term

The defeasance clause obligates the lender to discharge the mortgage lien and return clear title when the loan is paid in full, typically evidenced by recording a satisfaction. It is distinct from the acceleration clause, which lets the lender demand the full balance upon default.

An FHA loan is best described as a mortgage that is:

• a.Offered only to first-time buyers
• b.Made directly by the federal government
• c.Insured by the Federal Housing Administration✓
• d.Guaranteed by Veterans Affairs for eligible veterans

The FHA does not lend money; it insures loans made by approved lenders, protecting them against borrower default. This insurance lets lenders offer lower down payments and more flexible qualifying. Borrowers pay mortgage insurance premiums for this protection.

A distinctive benefit of a VA-guaranteed loan for an eligible veteran is that it:

• a.Carries no closing costs at all
• b.Is available to any borrower, veteran or not
• c.Can allow purchase with no down payment✓
• d.Requires a minimum twenty percent down payment

VA loans, guaranteed by the Department of Veterans Affairs for eligible veterans and service members, often allow qualified borrowers to buy with no down payment. The VA guarantee reduces lender risk. A funding fee usually applies, and eligibility depends on service.

In an adjustable-rate mortgage, the interest rate at each adjustment is set by combining the:

• a.The purchase price
• b.Discount points and origination fee
• c.Loan-to-value ratio and credit score
• d.Index and the margin✓

An ARM's rate equals a published index (which moves with the market) plus a fixed margin the lender adds. For example, an index of 4% plus a 2.5% margin yields a 6.5% rate. Caps limit how much the rate can change per period and over the life of the loan.

An ARM with a 2/6 cap structure means the interest rate cannot increase more than:

• a.6% at each adjustment and 2% over the entire loan term combined
• b.2% at each adjustment and 6% over the life of the loan✓
• c.6% total, applied only during the first year after loan closing
• d.2% per year, with absolutely no limit over the life of the loan

In a 2/6 cap, the first number (2%) is the periodic cap limiting each adjustment, and the second (6%) is the lifetime cap limiting the total increase above the start rate. Caps protect borrowers from sharp payment shocks. A start rate of 4% could rise no higher than 10%.

A balloon mortgage is characterized by:

• a.Smaller periodic payments with a large final lump-sum payment due at maturity✓
• b.Payments that rise on a fixed schedule during the early years of the loan
• c.Level payments that fully pay off the loan by the end of its term
• d.An interest rate that adjusts up or down every year until payoff

A balloon loan has payments that do not fully amortize the debt, leaving a large 'balloon' balance due in one payment at the end of the term. Borrowers often plan to refinance or sell before the balloon comes due. It carries refinancing risk if values or credit decline.

A purchase-money mortgage most commonly refers to financing in which:

• a.A government agency directly funds the entire purchase for the buyer
• b.The buyer pays the full price in cash without any financing at all
• c.The buyer's employer lends the down payment as a workplace benefit
• d.The seller extends credit to the buyer for part of the purchase price✓

A purchase-money mortgage is credit the seller extends to the buyer to help finance the purchase, with the seller taking back a note and mortgage. It is a form of seller financing. It can help buyers who need supplemental financing beyond a primary loan.

A blanket mortgage is one that:

• a.Covers more than one parcel of real estate under a single loan✓
• b.Insures the lender against the borrower's default on the payments
• c.Includes personal property such as appliances along with the real estate
• d.Allows the borrower to draw funds repeatedly up to a set credit limit

A blanket mortgage finances several parcels under one loan, common with subdivisions and developers. It usually contains a partial release clause allowing individual lots to be freed from the lien as they are sold. This lets a developer convey clear title lot by lot.

A package mortgage differs from a standard home loan because it also finances:

• a.Several separate parcels of land under one blanket obligation
• b.Personal property, such as appliances, along with the real estate✓
• c.The construction of improvements in periodic advances during building
• d.The borrower's other consumer debts by consolidating them into one loan

A package mortgage includes certain items of personal property, like kitchen appliances or furnishings, in the financing along with the real estate. It is common in some condominium and new-home sales. A blanket mortgage, by contrast, covers multiple parcels of real property.

A reverse mortgage is designed primarily for:

• a.First-time buyers seeking the smallest possible monthly payment
• b.Investors financing the purchase of multiple rental properties at once
• c.Builders funding new construction through periodic loan advances
• d.Older homeowners who convert home equity into payments to themselves✓

A reverse mortgage lets qualifying senior homeowners borrow against their equity and receive funds, with repayment deferred until they sell, move out, or die. The loan balance grows over time rather than shrinking. It is a way to tap equity without monthly principal-and-interest payments.

A home is purchased for $300,000 with a $255,000 loan. What is the loan-to-value ratio?

• a.85%✓
• b.90%
• c.80%
• d.75%

LTV equals the loan amount divided by the price or value: $255,000 / $300,000 = 0.85, or 85%. The remaining 15% ($45,000) is the borrower's down payment and equity. Because the LTV exceeds 80%, the borrower would typically owe private mortgage insurance.

A buyer purchases a $360,000 home with a 10% down payment. What is the loan amount?

• a.$396,000
• b.$324,000✓
• c.$300,000
• d.$36,000

A 10% down payment on $360,000 is $36,000. The loan is the price minus the down payment: $360,000 - $36,000 = $324,000. This corresponds to a 90% loan-to-value ratio.

A borrower pays 3 discount points on a $250,000 loan. What is the cost of the points?

• a.$25,000
• b.$750
• c.$7,500✓
• d.$3,000

One discount point equals 1% of the loan amount, so 3 points is 3% of $250,000 = $7,500. Points are paid at closing to buy down the interest rate. They are essentially prepaid interest.

A lender uses a 28% front-end (housing) ratio. If a buyer's gross monthly income is $7,000, the maximum monthly PITI payment is:

• a.$700
• b.$1,750
• c.$2,520
• d.$1,960✓

The front-end ratio caps housing costs at a percentage of gross income: $7,000 x 0.28 = $1,960 for principal, interest, taxes, and insurance (PITI). Lenders use this ratio to judge affordability. A separate back-end ratio limits total debt payments.

A borrower has total monthly debt payments (including PITI) of $2,450 and gross monthly income of $7,000. The back-end (debt-to-income) ratio is:

• a.45%
• b.40%
• c.28%
• d.35%✓

The back-end ratio divides total monthly debt by gross monthly income: $2,450 / $7,000 = 0.35, or 35%. It includes housing plus car loans, credit cards, and other obligations. Lenders use it alongside the front-end ratio to assess borrower capacity.

A borrower obtains a $180,000 loan at 5% annual interest. What is the interest portion of the first monthly payment?

• a.$9,000
• b.$750✓
• c.$900
• d.$600

Annual interest is $180,000 x 0.05 = $9,000. Dividing by 12 gives $750 of interest in the first month. In an amortized loan, interest is charged on the outstanding balance, which is highest at the beginning.

A fully amortized loan has a monthly principal-and-interest payment of $1,000, and this month's interest portion is $750. How much reduces the principal?

• a.$1,750
• b.$250✓
• c.$1,000
• d.$750

In each payment, interest is paid first and the remainder reduces principal: $1,000 - $750 = $250 to principal. As the balance falls, later payments apply more to principal and less to interest. The total payment stays level in a fixed-rate loan.

Using a loan factor of $6.00 per $1,000 borrowed, the monthly principal-and-interest payment on a $200,000 loan is:

• a.$12,000
• b.$1,200✓
• c.$600
• d.$1,020

A per-thousand factor is multiplied by the number of thousands borrowed: $200,000 / $1,000 = 200 units, and 200 x $6.00 = $1,200 per month. These factors, drawn from amortization tables, provide a quick payment estimate for a given rate and term.

A home is worth $400,000 and the mortgage balance is $250,000. The owner's equity is:

• a.$400,000
• b.$250,000
• c.$150,000✓
• d.$650,000

Equity is the property's value minus what is owed against it: $400,000 - $250,000 = $150,000. Equity grows as the loan is paid down and as the property appreciates. It represents the owner's actual financial stake in the property.

Private mortgage insurance on a conventional loan must automatically terminate, under the Homeowners Protection Act, once the loan balance reaches:

• a.50% of the current appraised value at the borrower's request
• b.The full original loan amount at the scheduled maturity date
• c.78% of the original property value, if payments are current✓
• d.90% of the original loan amount after five years of payments

Under the federal Homeowners Protection Act, the lender must automatically cancel borrower-paid PMI when the balance is scheduled to reach 78% of the original value and the borrower is current. A borrower may also request cancellation at 80%. PMI protects the lender, not the borrower.

New York uses judicial foreclosure, which means that to foreclose a lender must:

• a.Simply post a public notice and sell the property without any court
• b.File a lawsuit and obtain a court order authorizing a sale✓
• c.Wait for the borrower to voluntarily surrender the property peacefully
• d.Obtain approval from the New York Department of State before selling

In judicial foreclosure, used in New York, the lender must sue the defaulting borrower, prove the default in court, and obtain a judgment authorizing a referee's sale. This court supervision protects borrowers but makes the process slower. Non-judicial 'power of sale' foreclosure is not the norm in New York.