25 California Real Estate Financing Practice Questions
Financing is a tested subject area on the California real estate salesperson exam. The California Department of Real Estate's RE 425 examination description lists Financing at approximately 9% of the exam.
Use these original practice questions to review loan concepts, loan types, financing sources, government programs, notes, mortgages, deeds of trust, credit laws, loan brokerage, and loan originator concepts.
Disclaimer: Not affiliated with PSI, Pearson VUE, California DRE, NAR, or any state real estate commission. These are original study questions, not actual, recalled, leaked, or official exam questions.
How to Use These Questions
- Answer all 25 questions before checking the explanations.
- Mark missed questions by topic: loan type, security instrument, credit law, government program, or loan brokerage.
- Pay close attention to who signs the note, what secures the loan, and which party holds which role.
Quick Concept Review
| Concept | Plain-English Meaning |
|---|---|
| Promissory note | The borrower's written promise to repay the debt |
| Mortgage or deed of trust | Security instrument that gives the lender rights in real property if the borrower defaults |
| Principal | Loan amount borrowed or remaining unpaid balance |
| Interest | Cost of borrowing money |
| Loan-to-value ratio | Loan amount divided by property value or price, depending on the context |
| Discount point | Prepaid interest equal to 1% of the loan amount |
Do not blur the debt and the security. The note is the debt promise; the mortgage or deed of trust is the real-property security instrument.
Questions
1. Promissory Note
In a real estate loan, the promissory note is best described as:
A. The borrower's written promise to repay the debt B. The deed that transfers title to the buyer C. The broker's listing agreement D. The county's property tax bill
Answer: A
Explanation: The promissory note is the borrower's promise to repay. A separate security instrument, such as a deed of trust, secures the debt with real property.
2. Deed of Trust
In a deed of trust arrangement, the borrower is commonly called the:
A. Trustor B. Trustee C. Beneficiary D. Escrow holder
Answer: A
Explanation: In a deed of trust, the borrower is the trustor, the neutral third party is the trustee, and the lender is the beneficiary.
3. Beneficiary
In a deed of trust, the beneficiary is usually the:
A. Buyer only after escrow closes B. Lender or party receiving the benefit of the security C. County recorder D. Appraiser
Answer: B
Explanation: The beneficiary is the lender or other creditor whose loan is secured by the deed of trust.
4. Trustee
In a deed of trust, the trustee generally holds:
A. Bare legal title or power related to the security instrument B. The buyer's personal furniture C. The seller's agency disclosure form only D. The property tax assessment roll
Answer: A
Explanation: A deed of trust involves a trustee that holds limited title or power for the security purpose, including foreclosure power if default occurs and legal requirements are met.
5. Mortgage vs. Note
Which statement is most accurate?
A. The note is the promise to pay, and the mortgage or deed of trust secures that promise B. The note transfers ownership from seller to buyer C. The deed of trust is always the borrower's credit report D. The mortgage eliminates the debt
Answer: A
Explanation: Financing questions often separate the debt obligation from the security instrument. The note is the debt promise; the security instrument gives the lender a property interest as collateral.
6. Loan-to-Value Ratio
A buyer obtains an $800,000 loan on a property valued at $1,000,000. What is the loan-to-value ratio?
A. 20% B. 80% C. 100% D. 125%
Answer: B
Explanation: Loan-to-value ratio is loan amount divided by value. $800,000 / $1,000,000 = 80%.
7. Discount Point
One discount point on a $500,000 loan equals:
A. $500 B. $1,000 C. $5,000 D. $50,000
Answer: C
Explanation: One point equals 1% of the loan amount. 1% of $500,000 is $5,000.
8. Fixed-Rate Loan
A fixed-rate loan is one in which:
A. The interest rate remains the same for the period stated in the loan terms B. The property tax bill never changes C. The borrower can never prepay D. The property value is guaranteed by the lender
Answer: A
Explanation: A fixed-rate loan has an interest rate that does not change during the fixed-rate period described by the loan.
9. Adjustable-Rate Loan
An adjustable-rate mortgage is most likely to:
A. Keep the same rate forever B. Change interest rate according to the loan terms and an index or adjustment structure C. Eliminate the need for underwriting D. Require no promissory note
Answer: B
Explanation: Adjustable-rate loans can change according to their terms. Exam questions often test the contrast with fixed-rate loans.
10. Amortization
Amortization means:
A. Paying a loan through scheduled payments that reduce the debt over time B. Recording a deed before signing it C. Increasing a loan balance without any payments D. Creating a zoning variance
Answer: A
Explanation: Amortization is repayment over time through scheduled payments that usually include principal and interest.
11. Balloon Payment
A balloon payment is:
A. A large final payment due at the end of a loan term B. A monthly property tax installment C. A broker's commission advance D. A title insurance endorsement
Answer: A
Explanation: A balloon loan may have smaller periodic payments with a large remaining balance due at maturity.
12. Conventional Loan
A conventional loan is best described as:
A. A loan not insured or guaranteed by a government program such as FHA or VA B. A loan made only by a city government C. A loan that never requires underwriting D. A loan that cannot be secured by real estate
Answer: A
Explanation: Conventional loans are not government-insured or government-guaranteed in the same way FHA or VA loans are.
13. FHA Loan
An FHA-insured loan is associated with:
A. Federal insurance that protects the lender against certain borrower default risk B. A private seller's promise to repair every defect C. A county recorder's guarantee of value D. A loan that can only be used for commercial warehouses
Answer: A
Explanation: FHA programs insure approved loans, reducing lender risk under program rules. FHA does not mean the government directly appraises a property as a guaranteed investment.
14. VA Loan
A VA loan program is most closely associated with:
A. Eligible veterans, service members, and certain qualifying borrowers B. Only foreign investors C. Only agricultural leases D. Only unsecured personal loans
Answer: A
Explanation: VA loan benefits are tied to eligible military service or qualifying status under program rules.
15. Seller Financing
Seller financing occurs when:
A. The seller extends credit to the buyer for part or all of the purchase price B. The buyer pays only property taxes and no purchase price C. The escrow holder becomes the lender automatically D. The county records a deed without any agreement
Answer: A
Explanation: In seller financing, the seller acts as a financing source by accepting repayment over time under agreed terms.
16. Institutional Lender
Which is most likely an institutional source of real estate financing?
A. Bank, credit union, or savings institution B. Open house guest C. Home inspector only D. Neighborhood association newsletter
Answer: A
Explanation: Institutional lenders include banks, credit unions, savings associations, mortgage companies, and similar financing sources.
17. Truth in Lending
Truth in Lending rules are most closely associated with:
A. Disclosure of credit terms and cost of borrowing in consumer credit transactions B. A seller's disclosure of roof leaks only C. Zoning restrictions D. Broker trust account reconciliation only
Answer: A
Explanation: Truth in Lending focuses on consumer credit disclosures, such as finance charges and annual percentage rate, under applicable rules.
18. Equal Credit Opportunity
The Equal Credit Opportunity Act is designed to:
A. Prevent discrimination in credit based on protected characteristics B. Require every applicant to receive the same interest rate regardless of risk C. Eliminate all down payments D. Require sellers to finance every buyer
Answer: A
Explanation: ECOA prohibits credit discrimination based on protected characteristics. It does not require identical loan terms for applicants with different lawful risk profiles.
19. RESPA
RESPA is most closely connected with:
A. Settlement procedures and certain disclosures in residential real estate transactions involving covered loans B. Water rights only C. Zoning variances D. Property tax assessment appeals only
Answer: A
Explanation: RESPA concerns real estate settlement procedures, including certain disclosures and limits on improper referral fee practices in covered transactions.
20. Loan Brokerage
A real estate licensee who negotiates loans secured by real property must be especially careful to:
A. Follow applicable license, disclosure, compensation, and loan-related rules B. Ignore written agreements because loans are informal C. Promise loan approval to every borrower D. Avoid disclosing fees to borrowers
Answer: A
Explanation: Loan brokerage is a regulated activity. Licensees must follow applicable laws, documentation requirements, fee rules, and disclosure obligations.
21. Mortgage Loan Originator
A mortgage loan originator is generally involved in:
A. Taking residential mortgage loan applications or offering/negotiating loan terms for compensation B. Issuing building permits C. Recording deeds as a county employee D. Setting zoning districts
Answer: A
Explanation: Mortgage loan originator concepts focus on residential mortgage loan application and loan term activity for compensation, subject to licensing and registration requirements.
22. Prepayment Penalty
A prepayment penalty is:
A. A charge that may apply if a borrower pays off a loan early, if permitted and properly disclosed B. A required bonus paid to every seller C. A title insurance premium D. A zoning fee charged by the city
Answer: A
Explanation: Some loans may include a prepayment penalty, subject to legal limits and disclosure requirements. It is tied to early payoff.
23. Impound Account
An impound or escrow account in loan servicing is commonly used to collect and pay:
A. Property taxes and insurance premiums B. Broker advertising copy C. Seller staging costs only D. Appraisal theory notes
Answer: A
Explanation: Lenders may use impound accounts to collect funds for property taxes and insurance premiums along with the borrower's monthly payment.
24. Priority
The priority of real estate loans secured by the same property is often affected by:
A. Recording order and applicable priority rules B. The color of the loan documents C. The buyer's moving date D. The number of keys delivered at closing
Answer: A
Explanation: Lien priority often depends on recording and legal priority rules. Priority matters because it affects repayment order if foreclosure occurs.
25. Best Overall Exam Approach
Which approach best fits financing questions?
A. Separate the debt promise from the security instrument, identify the loan type, and watch for disclosure or credit-law issues B. Treat every loan as identical C. Ignore the borrower, lender, trustee, and beneficiary roles D. Assume government programs guarantee a profit to the buyer
Answer: A
Explanation: Financing questions often test roles, loan structure, documents, loan type, and legal disclosures. Start by identifying the parties and instruments.
Answer Key
| # | Answer | Topic |
|---|---|---|
| 1 | A | Promissory note |
| 2 | A | Trustor |
| 3 | B | Beneficiary |
| 4 | A | Trustee |
| 5 | A | Note vs. security instrument |
| 6 | B | Loan-to-value |
| 7 | C | Discount points |
| 8 | A | Fixed-rate loan |
| 9 | B | Adjustable-rate loan |
| 10 | A | Amortization |
| 11 | A | Balloon payment |
| 12 | A | Conventional loan |
| 13 | A | FHA loan |
| 14 | A | VA loan |
| 15 | A | Seller financing |
| 16 | A | Financing sources |
| 17 | A | Truth in Lending |
| 18 | A | Equal Credit Opportunity |
| 19 | A | RESPA |
| 20 | A | Loan brokerage |
| 21 | A | Mortgage loan originator |
| 22 | A | Prepayment penalty |
| 23 | A | Impound account |
| 24 | A | Priority |
| 25 | A | Study strategy |
Score Guide
| Score | What It Means |
|---|---|
| 22-25 | Strong financing review result. Start mixing financing with valuation, contracts, and transfer questions. |
| 18-21 | Solid base. Review missed loan roles, loan types, and credit-law concepts. |
| 14-17 | Re-study notes, deeds of trust, loan types, LTV, points, and disclosure rules before a timed mixed quiz. |
| 0-13 | Rebuild the basics: borrower/lender roles, note vs. security, loan types, government programs, and credit laws. |
Related Study Guides
- Practice by topic: California Real Estate Salesperson Practice Questions
- Review the full exam outline: California Real Estate Salesperson Exam Content Outline
- Practice transfer questions: 25 California Real Estate Transfer of Property Practice Questions
- Practice valuation questions: 25 California Real Estate Valuation Practice Questions
- Practice contracts questions: 25 California Real Estate Contracts Practice Questions
- Practice property ownership questions: 25 California Real Estate Property Ownership Practice Questions
Source
- California Department of Real Estate, "Examination Description - RE 425": https://www.dre.ca.gov/files/pdf/forms/re425.pdf