Texas Real Estate Sales Agent — All Questions

Earnest money in a real estate contract functions primarily as:

• a.A good-faith deposit showing the buyer's serious intent to purchase✓
• b.The full purchase price paid up front
• c.A payment that replaces the down payment entirely
• d.A nonrefundable fee paid to the listing agent

Earnest money is a deposit that demonstrates the buyer's good faith and is typically credited toward the purchase price or closing costs at closing. If the buyer defaults without a valid contingency, the earnest money may be forfeited to the seller.

A financing contingency in a purchase contract protects the buyer by:

• a.Forcing the lender to approve the loan
• b.Allowing the buyer to cancel and recover earnest money if approved financing cannot be obtained✓
• c.Guaranteeing the seller will lower the price
• d.Requiring the seller to pay all closing costs

A financing contingency lets the buyer terminate the contract and typically recover earnest money if they cannot obtain the specified loan. It shifts the risk of loan denial away from the buyer.

The Texas 'option period' (termination option) in the standard residential contract generally allows the buyer to:

• a.Occupy the home before closing rent-free
• b.Terminate the contract for any reason during the option period in exchange for the option fee✓
• c.Extend the closing date indefinitely
• d.Force the seller to make all requested repairs

For a negotiated option fee, the buyer receives an unrestricted right to terminate the contract within the option period, commonly used to complete inspections. If the buyer does not terminate, the option simply expires and the contract continues.

Which of the following best describes a bilateral contract?

• a.Only one party is obligated to perform
• b.It must always be oral
• c.Both parties exchange mutual promises to perform✓
• d.No consideration is exchanged

In a bilateral contract, both parties make enforceable promises, such as the buyer promising to pay and the seller promising to convey. A unilateral contract, by contrast, is a promise in exchange for an act.

When an offeree responds to an offer by changing a material term, the response is legally a:

• a.Void contract
• b.Binding acceptance of the original offer
• c.Unilateral contract
• d.Counteroffer that rejects the original offer✓

Changing a material term rejects the original offer and creates a counteroffer, which the original offeror may accept or reject. The original offer is no longer available for acceptance once a counteroffer is made.

A contract that is missing an essential element and has no legal effect from the beginning is:

• a.Enforceable
• b.Void✓
• c.Executed
• d.Voidable

A void contract lacks a required element and has no legal effect at all. A voidable contract is valid until one party with the right to do so elects to disaffirm it.

A contract signed by a minor is generally considered:

• a.Automatically enforceable against the minor
• b.A criminal offense
• c.Voidable at the option of the minor✓
• d.Void from the start

Contracts with minors are usually voidable at the minor's option because minors lack full legal capacity. The minor may disaffirm the contract, though the adult party is typically bound.

'Time is of the essence' in a contract means:

• a.The contract never expires
• b.Deadlines are merely suggestions
• c.Deadlines must be met exactly, and failure to do so is a breach✓
• d.The parties may perform whenever convenient

When time is of the essence, the stated dates and deadlines are strictly enforced, and missing them can constitute default. This clause is common in real estate contracts to ensure timely closing.

Substituting a new contract for an existing one, or replacing a party with a new party by agreement, is known as:

• a.Assignment without consent
• b.Specific performance
• c.Liquidated damages
• d.Novation✓

Novation replaces an original contract or party with a new one, releasing the original obligor with all parties' consent. It differs from a simple assignment, which transfers rights but may not release the assignor.

If a buyer defaults, a contract clause that pre-sets the seller's damages (often the earnest money) is called a:

• a.Subordination clause
• b.Liquidated damages clause✓
• c.Habendum clause
• d.Specific performance clause

A liquidated damages clause fixes in advance the amount one party recovers if the other defaults, avoiding the need to prove actual damages. In many residential contracts, the earnest money serves this role.

A legal remedy in which a court orders a defaulting seller to actually convey the property as agreed is:

• a.Liquidated damages
• b.Novation
• c.Rescission
• d.Specific performance✓

Specific performance compels a party to perform the contract as promised, and it is available in real estate because each parcel is considered unique. A court may order the seller to deliver the deed rather than merely pay money.

The 'parol evidence rule' generally prevents a party from:

• a.Signing a contract electronically
• b.Assigning contract rights
• c.Recording a deed at the county
• d.Using prior oral statements to contradict the terms of a complete written contract✓

The parol evidence rule bars introducing prior or contemporaneous oral agreements to alter the terms of a fully integrated written contract. It supports the reliability of the written document.

In Texas, the Seller's Disclosure Notice for residential property generally requires the seller to disclose:

• a.The seller's asking price strategy
• b.The buyer's loan terms
• c.Known conditions and defects of the property✓
• d.The listing agent's commission

The Seller's Disclosure Notice requires sellers of most residential properties to disclose known material conditions and defects. It is based on the seller's actual knowledge, and requirements can change over time.

An 'as-is' clause in a purchase contract generally means the buyer agrees to:

• a.Accept the property in its present condition, without the seller being obligated to make repairs✓
• b.Pay above the appraised value
• c.Give up the right to a deed
• d.Waive the right to inspect the property

An as-is clause means the seller is not obligated to make repairs and the buyer accepts the current condition, though buyers typically still inspect. It does not eliminate the seller's duty to disclose known material defects.

An assignment of a contract typically transfers:

• a.Only obligations, never rights
• b.Ownership of the brokerage firm
• c.The assignor's rights under the contract to a third party✓
• d.Title to the real estate immediately

An assignment transfers the assignor's contractual rights to an assignee, who may then enforce them, subject to any anti-assignment terms. Unlike novation, an assignment may not release the original party from liability.

A contract in which all parties have fully performed their obligations is described as:

• a.Executory
• b.Void
• c.Voidable
• d.Executed✓

An executed contract is one that has been fully performed by all parties, such as after a completed closing. An executory contract still has obligations remaining to be performed.

For an acceptance to create a binding contract under the common law 'mirror image' rule, the acceptance must:

• a.Include additional consideration
• b.Be delivered only in person
• c.Match the terms of the offer exactly without material changes✓
• d.Add several new favorable terms for the offeree

Under the mirror image rule, acceptance must agree to the offer's terms exactly; a change in material terms is a counteroffer, not an acceptance. This ensures both parties agree to the same bargain.

A contract provision allowing a buyer to transfer their rights and obligations under the purchase contract to another buyer is a(n):

• a.Assignment clause✓
• b.Defeasance clause
• c.Habendum clause
• d.Subordination clause

An assignment clause permits the buyer to assign the contract to a third party, who then steps into the buyer's position, subject to any limits in the contract. Some contracts restrict or prohibit assignment without the seller's consent.

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.

The most common method an appraiser uses to value a single-family home is the:

• a.Sales comparison (market) approach✓
• b.Income capitalization approach
• c.Assessed value approach
• d.Gross rent multiplier only

The sales comparison approach values a home by comparing it to recent sales of similar nearby properties, with adjustments for differences. The income approach is used mainly for investment property, and the cost approach for special-purpose or new construction.

The appraisal approach that estimates value based on the cost to rebuild the improvements, minus depreciation, plus land value, is the:

• a.Income approach
• b.Gross income approach
• c.Sales comparison approach
• d.Cost approach✓

The cost approach estimates value as the current cost to construct the improvements new, less accrued depreciation, plus the value of the land. It is most useful for new or special-purpose properties with few comparable sales.

The income capitalization approach is MOST appropriate for valuing:

• a.An income-producing apartment building✓
• b.A historic monument
• c.A brand-new custom home
• d.A vacant lot

The income approach converts a property's expected net operating income into value using a capitalization rate, making it ideal for rental and commercial properties. Owner-occupied homes are usually valued by the sales comparison approach.

The principle of 'progression' in valuation states that a property's value tends to:

• a.Stay fixed regardless of the neighborhood
• b.Decrease when improvements are added
• c.Equal exactly its construction cost
• d.Increase when surrounded by higher-value properties✓

Under progression, a lower-valued home benefits from being located among higher-valued homes. The opposite principle, regression, holds that a higher-valued home may be dragged down by surrounding lower-valued properties.

The federal Fair Housing Act prohibits discrimination in housing based on all of the following protected classes EXCEPT:

• a.Sex, disability, and familial status
• b.Religion and national origin
• c.The buyer's occupation or income source in general✓
• d.Race and color

The federal Fair Housing Act protects race, color, religion, national origin, sex, disability, and familial status. General occupation is not a federally protected class, though some state or local laws add protections; requirements can change.

'Steering' is a prohibited fair housing practice in which an agent:

• a.Directs prospective buyers toward or away from neighborhoods based on a protected class✓
• b.Charges different commissions to different sellers
• c.Refuses to make any loan
• d.Advertises a property online

Steering unlawfully channels buyers toward or away from particular areas based on race, national origin, or another protected class. It limits housing choice and violates fair housing law.

'Blockbusting' refers to the illegal practice of:

• a.Setting minimum square footage requirements
• b.Requiring flood insurance
• c.Refusing to rent to families with children
• d.Inducing owners to sell by suggesting that people of a certain protected class are moving into the area✓

Blockbusting involves persuading owners to sell, often at a loss, by exploiting fears about the entry of a protected group into the neighborhood. It is prohibited under fair housing laws.

A lender's illegal refusal to make loans in certain neighborhoods based on their racial or ethnic composition is called:

• a.Redlining✓
• b.Steering
• c.Puffing
• d.Subordination

Redlining is the discriminatory denial of loans or insurance in specific areas based on the makeup of the residents rather than the applicant's qualifications. It is a violation of fair housing and fair lending laws.

Under federal law, sellers and landlords of most housing built before which year must provide a lead-based paint disclosure?

• a.1950
• b.1988
• c.2000
• d.1978✓

Federal law requires lead-based paint disclosure for most residential housing built before 1978, when residential lead paint was banned. Sellers must provide a disclosure and pamphlet and allow the buyer an opportunity to test.

A naturally occurring radioactive gas that can seep into homes and is a common environmental concern in real estate is:

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

Radon is an odorless, radioactive gas that can accumulate in homes and poses a health risk, and testing is common in some regions. Mitigation systems can reduce indoor radon levels.

A homestead exemption in Texas primarily provides a homeowner with:

• a.A guaranteed sale price
• b.Protection of the home from certain creditors and a reduction in property taxes✓
• c.Exemption from all federal taxes
• d.Free title insurance

The Texas homestead exemption shields a primary residence from many creditors and reduces the taxable value for property tax purposes. Specific dollar amounts and rules are set by law and can change.

In property management, the manager's primary fiduciary duty is to:

• a.Protect the owner's investment and maximize its return within the law✓
• b.Set rents below market to fill vacancies quickly
• c.Personally guarantee rent payments
• d.Favor tenants over the owner

A property manager acts as the owner's agent and must protect and enhance the owner's investment while complying with the law. This includes prudent management of income, expenses, and maintenance.