Real Estate Broker License Exam Trust Accounts and Real Estate Finance Management Syllabus

What is a balloon (partially amortized) loan?

A loan with smaller periodic payments that do not retire the full principal, leaving a large lump-sum 'balloon' payment due at the end of the term.

What distinguishes a conventional loan from a government-backed loan?

A conventional loan is not insured or guaranteed by a government agency; government-backed loans are insured/guaranteed by agencies such as FHA, VA, or USDA.

What does an acceleration clause do in a mortgage?

It allows the lender, upon borrower default, to declare the entire remaining loan balance immediately due and payable rather than just the missed payments.

What does an alienation (due-on-sale) clause do?

It requires the borrower to pay off the entire loan balance if the property is sold or transferred, preventing the buyer from assuming the existing loan without lender approval.

What is a prepayment clause/penalty?

A provision allowing the borrower to pay off the loan early; a prepayment penalty charges a fee for doing so, compensating the lender for lost interest.

What is a defeasance clause?

A clause requiring the lender to release the lien and convey clear title to the borrower once the debt is fully paid off.

What is the difference between an acceleration clause and an alienation clause?

An acceleration clause triggers full repayment upon default; an alienation (due-on-sale) clause triggers full repayment upon sale or transfer of the property.

What is foreclosure?

The legal process by which a lender forces the sale of a mortgaged property to recover the unpaid loan balance after the borrower defaults.

Distinguish judicial from non-judicial foreclosure.

Judicial foreclosure goes through the courts and is used mainly with mortgages; non-judicial foreclosure uses a power-of-sale clause (common in deeds of trust) to sell the property without a court action, making it faster.

What is a deed in lieu of foreclosure?

An arrangement where the borrower voluntarily transfers the property's deed to the lender to satisfy the debt and avoid formal foreclosure proceedings.

What is a short sale?

A sale in which the lender agrees to accept less than the full mortgage balance owed because the property's value (sale price) is lower than the debt; the lender must approve the sale.

What is a deficiency judgment?

A court judgment against a borrower for the remaining debt when a foreclosure sale yields less than the amount owed on the loan.

What is the primary mortgage market?

The market where lenders originate loans directly to borrowers (banks, credit unions, mortgage companies making the actual loans to homebuyers).

What is the secondary mortgage market?

The market where existing mortgages are bought and sold among investors and agencies (e.g., Fannie Mae, Freddie Mac), providing lenders liquidity to make new loans.

What role does Fannie Mae (FNMA) play?

The Federal National Mortgage Association buys conventional mortgages from lenders in the secondary market and packages them into mortgage-backed securities, providing liquidity to lenders.

What role does Freddie Mac (FHLMC) play?

The Federal Home Loan Mortgage Corporation buys mortgages (originally from thrifts/savings institutions) in the secondary market and issues mortgage-backed securities, adding liquidity and stability.

What role does Ginnie Mae (GNMA) play, and how does it differ from Fannie/Freddie?

The Government National Mortgage Association is a government-owned corporation that guarantees mortgage-backed securities backed by government-insured loans (FHA/VA/USDA). Unlike Fannie/Freddie, it is fully government-owned and does not buy/sell loans itself.

What is the purpose of the Truth in Lending Act (TILA)?

To require lenders to disclose the true cost of credit—including the finance charge and APR—so consumers can compare loan terms and make informed borrowing decisions.

What is Regulation Z?

The Federal Reserve regulation that implements TILA, governing credit cost disclosures, advertising of credit terms, and the consumer's right of rescission.

What is the Annual Percentage Rate (APR)?

The total yearly cost of credit expressed as a percentage, including the interest rate plus certain finance charges/fees—allowing borrowers to compare loans on equal footing.

Under Reg Z, what is the 'right of rescission'?

For certain refinances or home-equity loans on a borrower's principal residence, the borrower has 3 business days to cancel the loan. (It does not apply to purchase-money loans.)

Under TILA/Reg Z advertising rules, what is a 'trigger term'?

A specific credit term (e.g., down payment amount, monthly payment, number of payments, or finance charge) that, if advertised, requires the ad to disclose additional terms such as APR and total terms of repayment.

What is the purpose of the Real Estate Settlement Procedures Act (RESPA)?

To protect consumers in residential real estate transactions by requiring disclosure of settlement costs and prohibiting kickbacks and referral fees that increase the cost of settlement services.

What does RESPA's Section 8 prohibit?

Kickbacks, referral fees, and unearned fees—paying or receiving anything of value for the referral of settlement-service business (e.g., title, escrow, lender referrals).

What are the two TRID disclosure forms, and when must each be provided?

The Loan Estimate (LE)—provided within 3 business days of application—and the Closing Disclosure (CD)—provided at least 3 business days before consummation/closing.

What does the TILA-RESPA Integrated Disclosure (TRID) rule accomplish?

It combined the older TILA and RESPA disclosure forms into two standardized forms—the Loan Estimate and Closing Disclosure—to make loan costs clearer and easier to compare.

What is the purpose of the Loan Estimate (LE)?

To give the borrower a good-faith estimate of loan terms, projected payments, interest rate, and closing costs shortly after application so they can shop and compare lenders.

What is the purpose of the Closing Disclosure (CD)?

To provide the borrower the final, actual loan terms and closing costs, allowing comparison against the Loan Estimate before the loan closes.

What does the Equal Credit Opportunity Act (ECOA) prohibit?

Discrimination in any aspect of a credit transaction based on race, color, religion, national origin, sex, marital status, age, or because income comes from public assistance.

Name common mortgage fraud red flags a broker should watch for.

Inflated/false appraisals, straw buyers, falsified income or employment documents, undisclosed kickbacks, last-minute changes to parties, and 'too good to be true' cash-back-at-closing arrangements.

What is a profit-and-loss (income) statement for a real estate business?

A financial statement summarizing revenue (commissions/income) minus operating expenses over a period to show net profit or loss.

In real estate, what is cash flow?

The money remaining after operating expenses and debt service are paid from income—positive cash flow means income exceeds expenses; negative means expenses exceed income.

What is the difference between operating expenses and reserves in a budget?

Operating expenses are recurring costs to run the business/property (utilities, maintenance, fees); reserves are funds set aside for future major repairs or unexpected costs/replacements.

When must a broker issue a Form 1099 to an independent-contractor agent?

When the broker pays an independent-contractor agent $600 or more in commissions during the tax year (reported on Form 1099-NEC for nonemployee compensation).

Why are most real estate agents classified as independent contractors for tax purposes?

Because they typically control their own hours/methods and are paid by commission; this means no income tax is withheld and they are responsible for their own self-employment taxes.

Give examples of deductible business expenses for a real estate agent.

Vehicle/mileage, marketing and advertising, MLS and license fees, professional dues, office supplies, business use of home, continuing education, and insurance.

What is the basic formula for net operating income (NOI) used in real estate finance?

NOI = Gross Operating Income (effective rental income plus other income) minus Operating Expenses, excluding debt service (mortgage payments) and income taxes.