California Real Estate Salesperson — All Questions

Which lender is generally EXEMPT from California's usury limits?

• a.A private individual quietly lending money to a personal friend
• b.A bank, or a loan arranged by a licensed real estate broker✓
• c.A neighbor informally financing the sale of a used automobile
• d.An unlicensed private party lending against a home for profit

California exempts many lenders from usury caps, including banks, savings institutions, and loans made or arranged by licensed real estate brokers. These exemptions cover the great majority of real estate financing. Loans between private, unlicensed parties are the ones most likely still subject to the cap.CA Constitution

The federal Equal Credit Opportunity Act (ECOA) prohibits a lender from discriminating in credit decisions based on:

• a.The applicant's overall credit score and past payment history
• b.The applicant's calculated monthly debt-to-income ratio figure
• c.The dollar size of the mortgage loan the applicant requested
• d.Race, religion, sex, marital status, age, or receipt of public assistance✓

ECOA prohibits credit discrimination based on race, color, religion, national origin, sex, marital status, age, or because income comes from public assistance. Lenders may still evaluate legitimate factors such as income, debts, and credit history. The law ensures fair access to credit.

A straight (term) note requires the borrower to pay:

• a.Only the principal each period, with no interest ever charged
• b.Interest only during the term, with the full principal due at maturity✓
• c.Nothing at all until the secured property is eventually sold
• d.Equal monthly payments of both principal and accruing interest

A straight or term note calls for periodic interest-only payments, with the entire principal repaid in a lump sum at the end of the term. Because principal is not reduced along the way, the balance stays constant. This contrasts with a fully amortized loan that retires principal gradually.

In an adjustable-rate mortgage, the fixed percentage the lender adds to the index to set the rate is the:

• a.Margin✓
• b.Cap
• c.Point
• d.Index

The margin is the lender's fixed markup added to the moving index to determine the ARM's interest rate. Unlike the index, the margin usually stays constant for the life of the loan. Index plus margin equals the fully indexed rate.

The feature of an adjustable-rate mortgage that limits how much the rate can rise at each adjustment or over the loan's life is the:

• a.Index
• b.Teaser rate
• c.Rate cap✓
• d.Margin

Rate caps limit interest rate movement, with periodic caps restricting each adjustment and a lifetime cap limiting the total increase over the term. Caps protect the borrower from steep payment shocks. They do not, however, guarantee the rate will never rise.

An impound (escrow) account collected with a monthly mortgage payment is used to pay the borrower's:

• a.The listing broker's earned real estate sales commission
• b.Property taxes and hazard insurance✓
• c.The loan origination points charged by the mortgage lender
• d.The homeowners association's one-time transfer or setup fee

An impound or escrow account collects a portion of property taxes and hazard insurance premiums each month so the lender can pay those bills when due. This assures the lender that taxes and insurance stay current, protecting its collateral. FHA loans and many high-LTV loans require impounds.

A borrower's total monthly housing payment is often abbreviated PITI, which stands for:

• a.Points, interest, title charges, and the home inspection fee
• b.Principal, interest, loan term, and the adjustable rate index
• c.Principal, interest, taxes, and insurance✓
• d.Payment, interest, property taxes, and the borrower's income

PITI stands for principal, interest, taxes, and insurance, the four core components of a typical monthly payment on an impounded loan. Lenders use PITI in qualifying ratios to measure affordability. It represents the borrower's real monthly housing cost.

A lender uses a 28% housing (front-end) ratio. A buyer earns $6,000 gross per month. The maximum monthly PITI payment the buyer qualifies for is:

• a.$2,000
• b.$1,200
• c.$1,680✓
• d.$2,160

Multiply gross monthly income by the ratio: $6,000 times 0.28 equals $1,680 maximum housing payment. The front-end ratio caps housing costs as a share of income. Lenders also apply a back-end ratio covering total debt.

A lender applies a 36% total debt (back-end) ratio. A borrower's gross monthly income is $8,000 and existing monthly debts total $500. The amount available for housing (PITI) is:

• a.$2,380✓
• b.$2,500
• c.$1,740
• d.$2,880

The back-end ratio allows total debt of $8,000 times 0.36, which is $2,880; subtracting the $500 of other debts leaves $2,380 available for housing. The back-end ratio counts all recurring debt, not just housing. The lender uses the lower of the front-end and back-end results.

A borrower takes a $200,000 interest-only loan at 5.5% annual interest. The monthly interest payment is:

• a.$1,100.00
• b.$1,000.00
• c.$916.67✓
• d.$833.33

Annual interest is $200,000 times 0.055, which equals $11,000; dividing by 12 gives about $916.67 per month. On an interest-only loan the principal does not change. Interest is always charged on the outstanding balance.

A lender charges 1.75 points on a $400,000 loan. The dollar cost of the points is:

• a.$8,000
• b.$5,250
• c.$7,000✓
• d.$4,000

One point equals one percent of the loan, so 1.75 points on $400,000 is 0.0175 times $400,000, which equals $7,000. Points are prepaid interest paid at closing to reduce the rate. They are calculated on the loan amount, not the sale price.

A property appraises at $600,000 and the buyer wants an 80% LTV loan. The required down payment is:

• a.$120,000✓
• b.$150,000
• c.$480,000
• d.$60,000

An 80 percent LTV loan is 0.80 times $600,000, which is $480,000, so the down payment is the remaining $120,000, or 20 percent. LTV measures the loan against value or price, whichever is lower. A larger down payment lowers the LTV and the lender's risk.

A home is under contract at $500,000 but appraises for only $480,000. For an 80% LTV loan, the lender bases the loan amount on:

• a.The higher $500,000 contract price agreed by the two parties
• b.A $490,000 figure representing the average of the two amounts
• c.A $520,000 amount reflecting the price plus a safety cushion
• d.$480,000, the lower appraised value✓

Lenders compute LTV on the lesser of the sale price or the appraised value, so the loan is 0.80 times $480,000, which equals $384,000. The buyer must cover the $20,000 appraisal gap plus the down payment. This protects the lender from over-lending on an inflated price.

Discount points are best described as:

• a.A government tax imposed on the transfer of recorded title
• b.Prepaid interest paid upfront to lower the loan's interest rate✓
• c.A penalty amount the lender charges for making late payments
• d.The lender's recurring monthly loan-servicing administrative fee

Discount points are prepaid interest a borrower pays at closing to buy down the interest rate, lowering monthly payments over the life of the loan. Each point equals one percent of the loan amount. Whether points are worthwhile depends on how long the borrower keeps the loan.

A loan origination fee differs from discount points in that the origination fee:

• a.Is collected at closing and paid directly to the appraiser
• b.Always lowers the loan's interest rate the same way points do
• c.Is fully refundable to the borrower when the loan is paid off
• d.Compensates the lender for processing and making the loan✓

The origination fee pays the lender for the work of processing and funding the loan, while discount points are prepaid interest that reduce the rate. Both are often quoted as a percentage of the loan. Only discount points buy down the interest rate.

A financing arrangement in which a new, larger loan is made that includes and stays subordinate to an existing loan is a:

• a.Package loan on real and personal property
• b.Open-end future-advance loan
• c.Wraparound (all-inclusive) deed of trust✓
• d.Blanket loan over several parcels

A wraparound or all-inclusive deed of trust wraps a new junior loan around an existing senior loan, which stays in place. The buyer pays the seller on the larger wrap, and the seller keeps paying the underlying loan. It is a form of seller financing.CA Civil Code

A blanket loan covering several parcels typically contains a release clause, which allows the borrower to:

• a.Obtain a partial reconveyance of individual parcels as they are sold or paid down✓
• b.Skip several scheduled monthly payments without any penalty
• c.Increase the total blanket loan amount whenever they choose
• d.Avoid recording the blanket deed of trust with the county

A blanket loan secures more than one parcel, and its release clause lets the borrower free individual lots from the lien as they are sold and the loan is partially paid. Subdividers and developers use blanket loans to finance multiple lots. Each release requires paying the agreed release price.CA Civil Code

A package loan finances:

• a.A phased construction project paid out in staged loan draws
• b.Several entirely separate parcels of land under one lien
• c.Only the underlying land, expressly excluding the improvements
• d.Real property together with personal property such as appliances or furnishings✓

A package loan covers both the real estate and specified personal property, such as built-in appliances or furnishings, under one loan. It is common in furnished condominium or resort sales. This differs from a blanket loan, which covers multiple parcels of real estate.

A construction loan is usually disbursed:

• a.In installments (draws) as stages of construction are completed✓
• b.In one lump sum disbursed to the borrower at the initial closing
• c.Only after the finished home is sold to an end buyer
• d.By the county assessor's office after final inspection

Construction loans are paid out in a series of draws tied to completed phases of work, with inspections before each release. Interest accrues only on funds actually disbursed. The short-term construction loan is typically replaced by permanent take-out financing when the project is done.

A federally insured Home Equity Conversion Mortgage (HECM) reverse mortgage is generally available to homeowners who are at least:

• a.55 years old
• b.70 years old
• c.65 years old
• d.62 years old✓

HECM reverse mortgages, insured by the FHA, are available to homeowners age 62 or older who have substantial equity. The loan converts equity into cash with no monthly payments, and the balance is repaid when the owner sells, moves, or dies. Interest and fees accrue and increase the balance over time.

When an arranger negotiates seller (purchase-money) financing on a one-to-four unit residential sale in California, the law generally requires a:

• a.A recorded Notice of Default starting the foreclosure clock
• b.A brand-new appraisal ordered and paid for by the county
• c.A trustee's deed of reconveyance releasing the existing lien
• d.Seller Financing Disclosure Statement describing the loan terms and risks✓

California requires a Seller Financing Disclosure Statement when an arranger negotiates purchase-money seller financing on one-to-four residential units. It spells out the loan terms, the risks of default, and the priority of liens. This protects both buyer and seller in carryback transactions.CA Civil Code

A buyer who takes title 'subject to' an existing loan, rather than assuming it, is:

• a.Made fully and personally liable for repaying the entire debt
• b.Required to pay the existing loan off in full immediately
• c.Not personally liable on the note, though the property remains security for it✓
• d.Automatically released from the seller's underlying loan lien

Buying 'subject to' a loan means the buyer makes payments but does not take on personal liability; on default the lender can foreclose on the property but cannot pursue the buyer personally. In an assumption, by contrast, the buyer becomes personally liable. Both may trigger a due-on-sale clause.CA Civil Code

A defeasance clause in a security instrument requires the lender to:

• a.Accelerate the entire balance immediately upon any default
• b.Add a prepayment penalty to the borrower's promissory note
• c.Raise the note's interest rate at any time after closing
• d.Release the lien and restore clear title once the debt is fully paid✓

A defeasance clause obligates the lender or trustee to defeat, or cancel, the security interest and return clear title when the borrower satisfies the debt. In California this is carried out through a deed of reconveyance. It assures the borrower that repayment clears the lien.CA Civil Code

Under an exclusive agency listing, the seller owes no commission if the property is sold by:

• a.A subagent of the listing broker
• b.The owner personally, without any broker's involvement✓
• c.Any cooperating broker in the MLS
• d.The listing broker during the term

An exclusive agency listing lets the seller reserve the right to sell the property personally with no commission owed, but any broker-procured sale during the term earns the listing broker a commission. It differs from an exclusive right to sell, where even an owner sale earns commission. It gives the seller one escape from the fee.CA Civil Code

A listing agreement is best characterized as:

• a.A security instrument for a loan
• b.A conveyance of title to the broker
• c.An employment contract between the seller and the broker✓
• d.A lease of the property to the broker

A listing is an employment or agency contract in which the seller hires the broker to find a ready, willing, and able buyer. It does not transfer any interest in the property. An exclusive listing in California must be in writing with a definite termination date.CA Civil Code

Under California law, an exclusive listing must contain:

• a.A notarized seller signature
• b.An automatic renewal clause
• c.A commission rate fixed by the DRE
• d.A definite, specified termination date✓

California requires exclusive listings to state a definite termination date; a listing with an open-ended automatic extension can subject the broker to discipline. The fixed end date protects the seller. Commission rates themselves remain fully negotiable.CA Business & Professions Code

The broker who sets in motion an uninterrupted chain of events leading to a sale is entitled to the commission as the:

• a.Procuring cause of the sale✓
• b.Subagent of the buyer
• c.Designated dual agent
• d.Neutral escrow officer

Procuring cause is the broker whose efforts primarily bring about the ready, willing, and able buyer, entitling that broker to the commission. Disputes over procuring cause are common in open listings. The broker must be the effective, uninterrupted cause of the sale.

A broker generally earns the commission when they produce a buyer who is:

• a.Unable to qualify for financing
• b.Interested but not yet committed
• c.Ready, willing, and able to buy on the seller's terms✓
• d.Merely curious about the property

The broker classically earns the commission by producing a buyer ready, willing, and able to purchase on the terms stated in the listing, even if the seller then backs out. 'Able' means financially capable of completing the purchase. Many contracts, however, tie the fee to actual closing.

The Multiple Listing Service (MLS) primarily functions to:

• a.Set the commission rates that member brokers must charge sellers throughout the state
• b.Let member brokers share listings and offers of cooperation and compensation✓
• c.License and discipline real estate agents
• d.Appraise properties for mortgage lenders

The MLS is a cooperative database where member brokers share listing information and offer compensation to cooperating brokers who bring buyers. It broadens exposure for sellers and inventory for buyers. It is a private service, not a government body, and does not set fees.

A property management agreement between an owner and a broker should:

• a.Remain oral to preserve flexibility
• b.Be recorded with the county recorder against the property's title before rent is collected
• c.Transfer ownership of the property to the manager
• d.Be in writing and define the manager's authority, duties, and compensation✓

A property management agreement should be written, spelling out the manager's authority, responsibilities, reporting, and fees, and it creates an agency relationship. The manager owes the owner fiduciary duties. Collecting rent and leasing for others requires a real estate license.CA Business & Professions Code

A property manager collecting tenant rents for an owner must place those funds in:

• a.A trust account, kept separate from the broker's own funds✓
• b.A general business operating account
• c.The broker's personal checking account
• d.Cash held in the office safe indefinitely

Rents collected for an owner are trust funds that must be held in a trust account, separate from the broker's money, to avoid commingling. The manager accounts to the owner regularly. Mishandling trust funds is a serious DRE violation.CA Business & Professions Code

California generally requires a resident manager on the premises of an apartment building with:

• a.16 or more dwelling units✓
• b.8 or more dwelling units
• c.4 or more dwelling units
• d.50 or more dwelling units

California requires a resident manager for apartment complexes of 16 or more units so someone is available for tenant needs. Smaller buildings do not require an on-site manager. A resident manager of the building where they live is exempt from the real estate licensing requirement.

As of California's current security deposit law effective in 2024, a landlord may generally collect a security deposit of no more than:

• a.Two months' rent for unfurnished units
• b.Any amount agreed to in the lease
• c.Three months' rent for furnished units
• d.One month's rent for most landlords✓

California law (AB 12, effective July 1, 2024) generally caps security deposits at one month's rent, whether the unit is furnished or unfurnished. A limited exception lets certain small landlords collect up to two months. This replaced the older two-month unfurnished and three-month furnished limits.CA Civil Code

After a residential tenant moves out in California, the landlord must return the deposit or provide an itemized statement of deductions within:

• a.30 calendar days
• b.60 calendar days
• c.21 calendar days✓
• d.10 business days

California requires the landlord to return the security deposit, or an itemized accounting of lawful deductions, within 21 calendar days after the tenant vacates. Deductions are allowed for unpaid rent, cleaning, and damage beyond ordinary wear. Failure can expose the landlord to penalties.CA Civil Code

A California landlord seeking to evict a tenant for nonpayment of rent generally must first serve a:

• a.30-day no-cause notice
• b.60-day termination notice
• c.Immediate lockout notice
• d.3-day notice to pay rent or quit✓

For nonpayment, the landlord serves a 3-day notice to pay rent or quit before filing an unlawful detainer. If the tenant pays within the period, the tenancy continues. Self-help lockouts are illegal; eviction must go through the court.CA Code of Civil Procedure

To end a month-to-month tenancy in California when the tenant has lived there over one year, the landlord (absent just-cause rules) must generally give:

• a.No advance notice at all
• b.3 days' written notice
• c.60 days' written notice✓
• d.30 days' written notice

For a tenant of one year or more, California generally requires 60 days' notice to terminate a month-to-month tenancy; a tenant of less than a year gets 30 days. Statewide just-cause rules may impose additional requirements. A tenant who is terminating generally gives 30 days.CA Civil Code

The California court action a landlord uses to legally regain possession from a holdover tenant is called:

• a.An unlawful detainer✓
• b.A judicial foreclosure
• c.A partition suit
• d.A quiet title action

Unlawful detainer is the summary court proceeding to evict a tenant who fails to pay rent or holds over after proper notice. It is a relatively fast process focused only on possession. Landlords may not use self-help such as changing locks or removing belongings.CA Code of Civil Procedure

A California residential landlord's duty to keep the unit fit to live in, with working plumbing, heat, and a weatherproof structure, is the:

• a.Tenant's right of first refusal
• b.Covenant of quiet enjoyment
• c.Warranty of marketable title
• d.Implied warranty of habitability✓

The implied warranty of habitability requires landlords to maintain rental units in a livable condition, including working plumbing, heating, and a safe, weatherproof structure. Tenants may have remedies such as repair-and-deduct if the landlord fails. It cannot be waived in a residential lease.CA Civil Code

The covenant of quiet enjoyment in a lease guarantees the tenant:

• a.An automatic reduction in rent for each year in which the landlord's operating expenses decline
• b.The right to possess and use the premises without wrongful interference by the landlord✓
• c.Free utilities for the lease term
• d.A completely soundproof unit

The covenant of quiet enjoyment assures the tenant the right to use and enjoy the property without unlawful disturbance from the landlord or those claiming under the landlord. It does not relate to literal noise. A serious breach can amount to constructive eviction.CA Civil Code

Before entering a tenant's unit for non-emergency repairs, a California landlord must generally give the tenant:

• a.At least 24 hours' notice✓
• b.At least 72 hours' notice
• c.No advance notice
• d.At least 7 days' notice

California requires reasonable notice, presumed to be 24 hours, before a landlord enters for non-emergency reasons such as repairs or showings. Entry must be during normal business hours absent agreement. Genuine emergencies allow entry without prior notice.CA Civil Code

A common environmental hazard found in older building insulation and floor tiles, dangerous when its fibers become airborne, is:

• a.Radon
• b.Carbon monoxide
• c.Formaldehyde
• d.Asbestos✓

Asbestos was widely used in insulation, floor and ceiling tiles, and pipe wrap before the late 1970s, and it poses a health risk when fibers are disturbed and inhaled. Removal or encapsulation should be done by trained professionals. Sellers must disclose known asbestos hazards.

A naturally occurring radioactive gas that can seep from soil into homes and is a leading cause of lung cancer is:

• a.Formaldehyde
• b.Radon✓
• c.Asbestos
• d.Methane

Radon is an odorless, colorless radioactive gas produced by the breakdown of uranium in soil that can accumulate in enclosed spaces. Testing and mitigation systems can reduce indoor levels. Known radon problems are a material fact requiring disclosure.

Visible mold growth from chronic moisture in a home is significant because it:

• a.Need not be disclosed once the visible growth has been cleaned and painted over by the seller
• b.Is never the seller's responsibility
• c.Improves the home's indoor air quality
• d.Is a material fact affecting health and value that must be disclosed if known✓

Mold from water intrusion can affect health and property value, making known mold a material fact the seller and agent must disclose. Buyers may investigate the source of moisture. Remediation involves fixing the water problem and removing affected materials.CA Civil Code

The federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) can hold a current property owner responsible for:

• a.Covering the buyer's closing costs
• b.Reimbursing the prior owner for the cost of any environmental cleanup completed before the sale
• c.Paying the current tenants' rent
• d.Cleanup of hazardous-substance contamination, even if a prior owner caused it✓

CERCLA, or Superfund, imposes strict and often joint and several liability for cleaning up hazardous contamination, which can reach current owners even if a previous owner caused the problem. An innocent-landowner defense requires due diligence before purchase. This is why environmental site assessments matter in commercial deals.

Before the sale or transfer of most California homes, the seller must certify that the property has:

• a.Working smoke detectors and a properly braced (strapped) water heater✓
• b.A brand-new roof
• c.Rooftop solar panels sized to offset at least half of the home's annual electricity use
• d.A monitored burglar alarm

California requires that homes have operable smoke detectors and that water heaters be braced, anchored, or strapped to resist earthquake movement, and the seller certifies compliance at transfer. These are inexpensive safety measures. Carbon monoxide detectors are also required in units with fuel-burning appliances or attached garages.CA Health and Safety Code

If a home lies within a FEMA-designated special flood hazard area, a federally regulated lender will generally require the borrower to carry:

• a.No additional coverage
• b.Only a lender's title policy
• c.Flood insurance✓
• d.Earthquake insurance

Federally regulated or insured lenders require flood insurance for homes in FEMA special flood hazard areas as a condition of the loan. Standard hazard policies exclude flood damage. The property's flood status is also disclosed on the Natural Hazard Disclosure Statement.

A cooperating broker who works with the buyer but represents the seller through the listing broker acts as a:

• a.Dual agent for both parties
• b.Subagent of the seller✓
• c.Exclusive buyer's agent
• d.Designated agent for the buyer

Under traditional subagency, a cooperating broker helps the buyer but legally represents the seller by extension of the listing broker, owing fiduciary duties to the seller. This arrangement has faded as buyer representation has grown. The buyer should understand whom the agent actually represents.CA Civil Code

California's agency disclosure form requires each agent to identify whether they represent:

• a.The seller alone, the buyer alone, or both parties as a dual agent✓
• b.The mortgage lender
• c.The appraiser of record
• d.The neutral escrow company that will hold the parties' funds and documents through closing

The agency confirmation portion requires each agent to state whether they represent the seller alone, the buyer alone, or both as a dual agent. This must be confirmed before the principal signs the purchase contract. Clear disclosure prevents undisclosed dual agency, which is prohibited.CA Civil Code

A licensee who receives an undisclosed rebate from a termite company for referring the seller's inspection has engaged in:

• a.Taking an undisclosed secret profit, a breach of fiduciary duty✓
• b.A lawful and routine referral, because the rebate was paid by a third party and not the seller
• c.Permissible dual compensation
• d.An ordinary business courtesy

Accepting an undisclosed rebate or referral fee is a secret profit that breaches the agent's duty to disclose and account to the principal, and it may violate RESPA. All compensation and rebates must be disclosed and consented to. Hidden profits can lead to discipline and forfeiture of the fee.CA Business & Professions Code

To renew a California real estate license, a licensee must generally complete:

• a.45 hours of approved continuing education every four years✓
• b.No continuing education at all
• c.200 hours of education every two years
• d.12 hours of education every year

California requires 45 clock hours of approved continuing education for each four-year license renewal, including mandated topics such as ethics, agency, fair housing, trust fund handling, and risk management. This keeps licensees current on law and practice. Requirements differ slightly for a first renewal.CA Business & Professions Code