49 Financing & Valuation Practice Questions & Answers
Every Financing & Valuation practice question from the Real Estate License Practice Test, with the correct answer and a short explanation.
Start practice test →1. In a typical residential mortgage loan, what is the role of the promissory note?
- A.It is the borrower's promise to repay the debt and evidences the loan✓ Answer
- B.It transfers legal title of the property to the lender
- C.It is the document recorded to give public notice of the lien
- D.It pledges the property as security for the debt
The promissory note is the borrower's written promise to repay and is the evidence of the debt, while the mortgage or deed of trust pledges the property as security.
2. How many parties are involved in a deed of trust, and who are they?
- A.Two: borrower (mortgagor) and lender (mortgagee)
- B.Four: borrower, lender, trustee, and appraiser
- C.Two: grantor and grantee
- D.Three: borrower (trustor), lender (beneficiary), and a neutral trustee✓ Answer
A deed of trust involves three parties: the trustor (borrower), the beneficiary (lender), and a neutral third-party trustee who holds title until the loan is repaid.
3. What is the defining feature of a conventional loan?
- A.It is insured by the FHA
- B.It is not insured or guaranteed by a government agency✓ Answer
- C.It is always assumable without lender approval
- D.It is guaranteed by the VA
A conventional loan is one that is not insured by the FHA (Federal Housing Administration) or guaranteed by the VA (Department of Veterans Affairs).
4. One discount point charged on a mortgage loan equals what percentage of the loan amount?
- A.0.1% of the loan amount
- B.1% of the sale price
- C.10% of the loan amount
- D.1% of the loan amount✓ Answer
One discount point equals 1% of the loan amount and is paid to the lender to buy down the interest rate.
5. A property sells for $250,000 and the buyer obtains a loan of $200,000. What is the loan-to-value (LTV) ratio?
- A.50%
- B.80%✓ Answer
- C.125%
- D.20%
LTV = loan amount ÷ value, so $200,000 ÷ $250,000 = 0.80, or 80%.
6. On a conventional loan, private mortgage insurance (PMI) is typically required when the loan-to-value ratio exceeds what level?
- A.100% LTV
- B.80% LTV✓ Answer
- C.95% LTV
- D.50% LTV
PMI (private mortgage insurance) is generally required on conventional loans when the borrower puts down less than 20%, i.e., the LTV exceeds 80%.
7. In a fully amortized mortgage, what happens to the interest and principal portions of the equal monthly payments over time?
- A.Only interest is paid until a balloon payment at the end
- B.Interest decreases and principal increases each month✓ Answer
- C.Both stay exactly equal throughout the term
- D.Interest increases and principal decreases each month
In a fully amortized loan with level payments, the interest portion decreases and the principal portion increases with each successive payment as the balance is paid down.
8. Which appraisal approach to value is generally considered most reliable for valuing a single-family owner-occupied home?
- A.Sales comparison approach✓ Answer
- B.Income approach
- C.Gross rent multiplier approach
- D.Cost approach
The sales comparison approach, which compares the subject to recently sold similar properties, is considered most reliable for single-family homes.
9. Which appraisal approach is most appropriate for valuing income-producing property such as an apartment building?
- A.Assessed value approach
- B.Cost approach
- C.Sales comparison approach
- D.Income (capitalization) approach✓ Answer
The income approach, which converts a property's net operating income into value using a capitalization rate, is most appropriate for income-producing properties.
10. Which appraisal approach is best suited for valuing special-purpose or newly built properties, such as a church or school?
- A.Cost approach✓ Answer
- B.Gross rent multiplier approach
- C.Income approach
- D.Sales comparison approach
The cost approach, which estimates the cost to replace the improvements less depreciation plus land value, is best for special-purpose or new properties with few comparable sales.
11. The principle that a buyer will pay no more for a property than the cost of acquiring an equally desirable substitute is known as:
- A.The principle of contribution
- B.The principle of anticipation
- C.The principle of conformity
- D.The principle of substitution✓ Answer
The principle of substitution holds that value is set by the cost of acquiring an equally desirable substitute property, and it underlies the sales comparison approach.
12. A home sells for $320,000 with a 6% total commission. If the listing and selling brokers split the commission equally, how much does each brokerage receive?
- A.$6,400 each
- B.$12,000 each
- C.$9,600 each✓ Answer
- D.$19,200 each
Total commission is $320,000 × 6% = $19,200; split equally means each brokerage receives $9,600.
13. A rectangular lot measures 150 feet by 200 feet. How many acres is the lot? (1 acre = 43,560 square feet)
- A.About 1.5 acres
- B.About 0.69 acres✓ Answer
- C.About 3.0 acres
- D.About 0.34 acres
Area = 150 × 200 = 30,000 sq ft; 30,000 ÷ 43,560 ≈ 0.69 acres.
14. What does an acceleration clause in a mortgage or note allow the lender to do?
- A.Demand the entire unpaid balance become due immediately upon default✓ Answer
- B.Increase the interest rate whenever market rates rise
- C.Automatically extend the loan term if the borrower falls behind
- D.Transfer the loan to another lender without notice
An acceleration clause lets the lender declare the entire remaining balance immediately due and payable if the borrower defaults, and it is a prerequisite to foreclosure.
15. A due-on-sale (alienation) clause in a mortgage does what?
- A.Requires the lender to release the lien when the property is sold
- B.Allows the buyer to assume the loan at the original rate
- C.Prohibits the borrower from prepaying the loan early
- D.Lets the lender demand full repayment if the property is sold or transferred✓ Answer
A due-on-sale (alienation) clause allows the lender to call the entire balance due when the property is sold or transferred, which effectively prevents loan assumption without lender consent.
16. What is the purpose of a defeasance clause in a mortgage?
- A.It permits the lender to raise the interest rate after default
- B.It penalizes the borrower for paying off the loan early
- C.It accelerates the debt when the borrower dies
- D.It requires the lender to give clear title once the debt is fully paid✓ Answer
A defeasance clause requires the lender to release the lien and convey clear title (or cancel the note) once the borrower has fully repaid the debt.
17. A prepayment penalty clause in a loan does what?
- A.Requires the lender to accept partial payments
- B.Charges the borrower a fee for paying off the loan ahead of schedule✓ Answer
- C.Forgives the remaining balance after a set number of years
- D.Lowers the rate if the borrower pays extra each month
A prepayment penalty clause charges the borrower a fee for paying off all or part of the loan before it is due, compensating the lender for lost interest.
18. What is the primary role of Fannie Mae and Freddie Mac in the mortgage market?
- A.They originate loans directly to homebuyers
- B.They appraise properties for federal agencies
- C.They set the federal interest rate for all mortgages
- D.They buy loans on the secondary market to provide liquidity to lenders✓ Answer
Fannie Mae and Freddie Mac operate in the secondary mortgage market, buying loans from lenders so those lenders have fresh funds to make new loans.
19. Ginnie Mae (GNMA) is distinct from Fannie Mae and Freddie Mac because it:
- A.Is a wholly government-owned corporation that guarantees securities backed by government loans✓ Answer
- B.Originates conventional loans for first-time buyers
- C.Is a privately held company with no government ties
- D.Sets appraisal standards nationwide
Ginnie Mae is a wholly owned U.S. government corporation that guarantees mortgage-backed securities backed by government-insured loans such as FHA and VA loans.
20. The Truth in Lending Act (TILA), implemented by Regulation Z, primarily requires lenders to disclose what?
- A.The appraised value of the property
- B.The seller's original purchase price
- C.The cost of credit, including the annual percentage rate (APR) and finance charges✓ Answer
- D.The listing agent's commission split
TILA, implemented by Regulation Z, requires lenders to disclose the true cost of credit, including the APR (annual percentage rate) and total finance charges, so borrowers can compare loans.
21. The Real Estate Settlement Procedures Act (RESPA) is primarily concerned with what?
- A.Setting maximum interest rates on mortgages
- B.Disclosing settlement (closing) costs and prohibiting kickbacks✓ Answer
- C.Requiring flood insurance in all transactions
- D.Regulating property tax assessments
RESPA requires disclosure of settlement/closing costs to borrowers and prohibits kickbacks and referral fees among settlement service providers.
22. The Equal Credit Opportunity Act (ECOA) prohibits discrimination in lending based on all of the following EXCEPT:
- A.Race or color
- B.Religion or national origin
- C.The applicant's creditworthiness and ability to repay✓ Answer
- D.Sex or marital status
ECOA bans discrimination based on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance—but lenders may still evaluate creditworthiness and ability to repay.
23. A borrower gets a $180,000 loan and pays 2 discount points at closing. How much do the points cost?
- A.$360
- B.$1,800
- C.$3,600✓ Answer
- D.$7,200
Each point is 1% of the loan, so 2 points = 2% × $180,000 = $3,600.
24. An income property has a net operating income (NOI) of $60,000 and just sold for $750,000. What is the capitalization rate?
- A.6%
- B.12.5%
- C.8%✓ Answer
- D.0.8%
Cap rate = NOI ÷ value = $60,000 ÷ $750,000 = 0.08, or 8%.
25. Using the income approach, an appraiser estimates a property's NOI at $48,000 and applies a capitalization rate of 8%. What is the indicated value?
- A.$384,000
- B.$600,000✓ Answer
- C.$3,840
- D.$960,000
Value = NOI ÷ cap rate = $48,000 ÷ 0.08 = $600,000.
26. A single-family rental sold for $240,000 and rents for $2,000 per month. What is its gross rent multiplier (GRM)?
- A.120✓ Answer
- B.12
- C.480
- D.10
GRM = sale price ÷ monthly rent = $240,000 ÷ $2,000 = 120.
27. The principle of highest and best use refers to:
- A.The use the current owner personally prefers
- B.The cheapest possible use of the land
- C.The use that generates the lowest property taxes
- D.The use that is legally permitted, physically possible, financially feasible, and most profitable✓ Answer
Highest and best use is the legally permissible, physically possible, financially feasible use that produces the greatest value or return to the land.
28. In appraisal, loss in value due to an outdated floor plan or lack of modern features is called:
- A.Physical deterioration
- B.Functional obsolescence✓ Answer
- C.External (economic) obsolescence
- D.Accrued appreciation
Functional obsolescence is a loss in value from within the property caused by outdated design, poor layout, or lack of modern features.
29. Loss in value caused by factors outside the property, such as a new landfill built nearby, is called:
- A.Functional obsolescence
- B.Physical deterioration
- C.Curable depreciation
- D.External (economic) obsolescence✓ Answer
External (economic) obsolescence is a loss in value caused by factors outside the property boundaries, and it is generally considered incurable.
30. The appraisal principle that maximum value is achieved when a neighborhood's properties are similar in style and use is called:
- A.The principle of conformity✓ Answer
- B.The principle of anticipation
- C.The principle of regression
- D.The principle of change
The principle of conformity holds that value is maximized when properties in an area are reasonably similar in style, size, and use.
31. When a lender combines the principal, interest, taxes, and insurance into one monthly payment, the taxes and insurance are held in what account?
- A.A trust account owned by the borrower
- B.An escrow (impound/reserve) account✓ Answer
- C.The lender's general operating account
- D.A defeasance account
The taxes and insurance portions of a PITI payment are held in an escrow (impound or reserve) account and paid out by the servicer when due.
32. A loan whose amount is within the limits set by Fannie Mae and Freddie Mac is called a:
- A.Jumbo loan
- B.Subprime loan
- C.Conforming loan✓ Answer
- D.Bridge loan
A conforming loan meets the underwriting and dollar-amount limits set by Fannie Mae and Freddie Mac; loans exceeding the limit are called jumbo loans.
33. A key advantage of a VA-guaranteed loan for eligible veterans is that it:
- A.Requires a minimum 20% down payment
- B.May allow financing with no down payment✓ Answer
- C.Is only available for investment properties
- D.Carries no interest for the first five years
VA-guaranteed loans often allow eligible veterans to finance a primary residence with no down payment, because the VA guarantee reduces the lender's risk.
34. FHA loans are characterized by which of the following?
- A.The FHA lends money directly to buyers
- B.They require no mortgage insurance of any kind
- C.The FHA insures the loan, which is made by an approved lender, allowing low down payments✓ Answer
- D.They are available only to veterans
The FHA does not lend money; it insures loans made by approved lenders, which lets borrowers qualify with low down payments (mortgage insurance premiums are required).
35. In a title theory state, who holds legal title to the property during the mortgage term?
- A.The lender (mortgagee) holds legal title until the debt is repaid✓ Answer
- B.The county recorder holds title in trust
- C.The borrower always holds legal title
- D.Title is held jointly by the appraiser and lender
In a title theory state, the lender (mortgagee) holds legal title while the borrower retains possession; title reverts to the borrower once the loan is paid. In lien theory states the borrower keeps title.
36. A borrower's monthly loan payment is $1,200, of which $1,000 is interest in the first month. On a $200,000 loan, what annual interest rate does that first-month interest imply?
- A.5%
- B.6%✓ Answer
- C.7.2%
- D.12%
Monthly interest × 12 = annual interest: $1,000 × 12 = $12,000; $12,000 ÷ $200,000 = 0.06, or 6%.
37. Under the sales comparison approach, when a comparable property is superior to the subject in some feature, the appraiser:
- A.Adjusts the subject's value upward
- B.Makes no adjustment because comparables are never altered
- C.Adjusts the comparable's sale price downward✓ Answer
- D.Discards the comparable entirely
Adjustments are made to the comparables, not the subject. If a comparable is superior, its sale price is adjusted downward to reflect what it would have sold for if it were like the subject.
38. Annual property taxes are $3,650. Using a 365-day year, the seller owned the property for 120 days before closing. What is the seller's share of the taxes?
- A.$1,000
- B.$1,200✓ Answer
- C.$2,450
- D.$3,650
Daily tax = $3,650 ÷ 365 = $10; seller's share = $10 × 120 days = $1,200.
39. A residential income building generates $100,000 in potential gross income, with a 5% vacancy allowance and $30,000 in operating expenses. What is the net operating income (NOI)?
- A.$70,000
- B.$95,000
- C.$65,000✓ Answer
- D.$100,000
Effective gross income = $100,000 − 5% vacancy ($5,000) = $95,000; NOI = $95,000 − $30,000 operating expenses = $65,000.
40. A property sells for $425,000 with a 5% commission. The listing agent's brokerage keeps 40% and the agent receives 60% of the brokerage's share. How much does the agent earn?
- A.$8,500
- B.$21,250
- C.$10,625
- D.$12,750✓ Answer
Total commission = $425,000 × 5% = $21,250; the agent receives 60% of the full commission, $21,250 × 60% = $12,750.
41. A buyer purchases a home for $350,000 with a loan at 90% loan-to-value. How much is the down payment?
- A.$35,000✓ Answer
- B.$315,000
- C.$45,000
- D.$90,000
At 90% LTV the loan is $315,000, so the down payment is the remaining 10%: $350,000 × 10% = $35,000.
42. Under the cost approach, a residential building costs $275,000 to reproduce and depreciates over a 27.5-year economic life using straight-line depreciation. What is one year's depreciation?
- A.$27,500
- B.$10,000✓ Answer
- C.$5,000
- D.$11,000
Straight-line depreciation = cost ÷ economic life = $275,000 ÷ 27.5 = $10,000 per year.
43. The right that allows a defaulting borrower to reclaim the property by paying the full debt before the foreclosure sale is called the:
- A.Equitable right of redemption✓ Answer
- B.Statutory right of reversion
- C.Right of first refusal
- D.Right of subrogation
The equitable right of redemption lets a defaulting borrower cure the default and reclaim the property by paying the debt in full before the foreclosure sale.
44. A deed in lieu of foreclosure refers to:
- A.A court order forcing the sale of the property
- B.The borrower voluntarily conveying the property to the lender to avoid foreclosure✓ Answer
- C.A clause preventing the borrower from selling
- D.The lender's insurance against borrower default
A deed in lieu of foreclosure is a voluntary conveyance of the property from the borrower to the lender to satisfy the debt and avoid a formal foreclosure.
45. The Federal Reserve influences mortgage interest rates and money supply primarily through:
- A.Directly setting the price of every home loan
- B.Appraising properties for lenders
- C.Guaranteeing individual mortgages
- D.Monetary policy tools such as the discount rate and reserve requirements✓ Answer
The Federal Reserve affects credit availability and interest rates indirectly through monetary policy tools like the discount rate, reserve requirements, and open market operations.
46. In an adjustable-rate mortgage (ARM), the interest rate is determined by adding what to the index?
- A.The margin✓ Answer
- B.The discount points
- C.The loan origination fee
- D.The prepayment penalty
In an ARM, the interest rate equals the index (a benchmark rate that moves with the market) plus the lender's margin (a fixed number of percentage points).
47. The appraisal principle stating that a property's value depends on the expected future benefits of ownership is called:
- A.The principle of contribution
- B.The principle of anticipation✓ Answer
- C.The principle of conformity
- D.The principle of substitution
The principle of anticipation holds that value is created by the expectation of future benefits, such as income or appreciation, from owning the property.
48. The appraisal principle of contribution states that:
- A.The value of an improvement is measured by how much it adds to the property's overall value, not by its cost✓ Answer
- B.All improvements add value equal to their cost
- C.Land always contributes more value than buildings
- D.Value is set solely by replacement cost
The principle of contribution holds that the value of any component is measured by how much it adds to (or subtracts from) the total property value, which may differ from its cost.
49. Which document is the security instrument that pledges the property as collateral, as opposed to the promise to repay?
- A.The promissory note
- B.The mortgage (or deed of trust)✓ Answer
- C.The estoppel certificate
- D.The satisfaction of mortgage
The mortgage (or deed of trust) is the security instrument that pledges the property as collateral for the loan, while the promissory note is the borrower's promise to repay.
Practice questions cover the uniform national portion of the real estate exam. Your state adds a state-law portion — study your state's official materials before testing. Licensing info (ARELLO) →