Finance Practice Items for the Real Estate Exam
Program rules change. Down payment minimums, insurance premiums, funding fees, loan limits and eligibility criteria are published by the agency or the secondary market entity that sets them, and are revised periodically. Learn what each program is for and take current figures from the agency's own publications.
Finance items split into two kinds. One kind asks what an instrument, clause or market participant does. The other hands you three numbers and asks for a fourth. Both are scored the same, and candidates who prepare only for the first kind lose points on the clock.
The eight items below are original study material written for this page. They are not taken from any licensing examination. Work each one, then read the explanation.
What Finance Items Are Really Testing
The conceptual items reward precision about roles. A note is the promise to repay and a mortgage or deed of trust is the security for it; a lender who originates is not necessarily the lender who holds; an agency that insures is not doing the same job as an agency that guarantees. Most wrong answers are a correct statement about the wrong instrument or the wrong party.
The arithmetic items reward setup rather than calculation. None of the math is difficult. What costs candidates points is deciding which number the question wants, what period it covers, and what base a percentage is being taken of. Get the setup written down and the arithmetic takes seconds.
Setups Candidates Blow
Percent of what. Commission is taken on sale price, a loan-to-value ratio is taken on the lesser of price or appraised value, a return is taken on the amount invested, and a rate of interest is taken on the outstanding balance. Naming the base first eliminates most wrong options.
Annual or monthly. An interest rate is quoted annually and charged monthly. Divide before you multiply, and check which the question wants back.
Whose money. A question about the seller's proceeds, the buyer's cash to close, the lender's exposure and the broker's share all use the same transaction and produce four different numbers.
Before or after. Prorations, the first payment on a new loan, and interest in arrears all depend on the cutoff date. Write the date on the page.
Principal or payment. An amortizing payment is fixed while its split between interest and principal moves every month. Items are built on that drift.
A Routine for the Calculation Items
Write down what is asked in units before touching the numbers: dollars per month, a percentage, a dollar total. Then list the given values beside their labels. Then pick the relationship that connects them. Only then calculate. This takes about fifteen seconds and removes nearly every setup error.
Estimate before you compute. If you expect a figure in the low thousands and your answer comes out in the hundreds of thousands, you have misplaced a decimal or used an annual figure where a monthly one belonged. The option list is usually built to reward exactly that slip.
If an item stalls, mark it and move. Calculation questions are the easiest place to burn four minutes for one point while three recall questions sit unanswered at the end of the section.
Eight Items to Work
Original study items written by RE License Prep. All figures are hypothetical and chosen to keep the arithmetic clean.
Question 1
A borrower signs a document promising to repay a sum on stated terms, and a second document pledging the property as security. The lender later sells the debt to an investor. Which document is negotiated to the investor, and what happens to the second one?
The promissory note is the negotiable instrument and it is what changes hands. The mortgage or deed of trust secures that promise and follows the note, because the security interest is an accessory to the debt rather than a freestanding asset. This is why the note is the borrower's obligation to pay and the security instrument is the lender's remedy if the borrower does not. An option describing the security instrument as the promise to repay is the standard distractor.
Question 2
A hypothetical property sells for $240,000 and the lender will lend at an 80 percent loan-to-value ratio. The appraisal comes in at $230,000. How much will the lender advance, and what must the buyer cover?
Lenders apply the ratio to the lower of the sale price or the appraised value, so the base is $230,000, not $240,000. Eighty percent of $230,000 is $184,000. The buyer must bring the difference between the purchase price and the loan, which is $56,000 before any closing costs. The wrong answer, $192,000, comes from applying the ratio to the sale price and is placed in the option list for exactly that reason.
Question 3
Distinguish an acceleration clause, a due-on-sale clause and a defeasance clause, and say which one protects the borrower.
Acceleration lets the lender declare the entire remaining balance immediately payable on a defined default, which is what makes foreclosure of the whole debt possible rather than suit on missed payments alone. A due-on-sale, or alienation, clause lets the lender call the balance when the property is transferred, which is what prevents an unapproved assumption. Defeasance is the borrower's protection: it provides that the security instrument is defeated and the lien released once the debt is satisfied. Only the third operates in the borrower's favor.
Question 4
A hypothetical loan has a balance of $180,000 at the start of a month at a nominal annual rate of 6 percent, with a fixed fully amortizing payment of $1,200. How much of that payment is interest, how much reduces principal, and what happens to the split next month?
Monthly interest is the annual rate divided by twelve applied to the outstanding balance: 6 percent divided by 12 is 0.5 percent, and 0.5 percent of $180,000 is $900. The remaining $300 of the $1,200 payment reduces principal, leaving a balance of $179,700. Next month interest is charged on the smaller balance, so the interest portion falls slightly and the principal portion rises by the same amount while the payment itself stays at $1,200. That progressive shift is amortization.
Question 5
A buyer takes over an existing loan. In one version the lender releases the original borrower; in another the buyer takes title subject to the loan. Who remains liable in each case, and what happens on default?
In an assumption with a release, the buyer becomes personally liable on the note and the seller is discharged, which requires the lender's agreement. Where the buyer takes title subject to the loan, the original borrower stays personally liable while the buyer simply owns property encumbered by the lien. On default the lender forecloses the lien in either case, but a deficiency, where the jurisdiction permits one, is pursued against whoever remains personally obligated. Any assumption also has to get past the due-on-sale clause.
Question 6
Identify the primary market and the secondary market, name what participants in each actually do, and explain why the second exists.
The primary market is where loans are originated: a lender underwrites a borrower and funds a loan. The secondary market is where those closed loans are bought, sold and pooled among investors, with Fannie Mae, Freddie Mac and Ginnie Mae as the entities exam items name. The purpose is liquidity. Selling a closed loan returns the lender's capital so it can originate again, and it also spreads risk and moves funds toward regions where demand for credit exceeds local deposits. The secondary market's purchase standards are also why conforming underwriting criteria exist at all.
Question 7
An adjustable-rate loan is described as carrying an index, a margin, a periodic cap and a lifetime cap. Explain each, and say which part the lender controls.
The index is an independent published rate that the loan tracks, so neither party sets it. The margin is the fixed percentage the lender adds to the index, and it is the lender's price for the loan; it stays constant for the life of the loan while the index moves. Their sum, subject to limits, is the note rate at each adjustment. A periodic cap limits how far the rate may move at any single adjustment, and a lifetime cap limits how far it may move above the start rate over the whole term. Both caps protect the borrower, and an item describing the margin as floating is wrong.
Question 8
An investor is considering a hypothetical small rental producing $36,000 of annual net operating income. Comparable properties in the area trade at a capitalization rate of 9 percent. What value does the income approach indicate, and what happens to that value if required cap rates rise?
Value under the income approach is net operating income divided by the capitalization rate: $36,000 divided by 0.09 gives $400,000. Note that net operating income is calculated before debt service, so the buyer's financing does not enter this figure. Because the rate is the divisor, value moves inversely to it. If investors begin requiring a higher return, the same income stream supports a lower price, which is why rising required rates push income-property values down without any change in the rent roll.
Working the Finance Section
Is finance mostly arithmetic?
No. Most finance items are conceptual: instruments, clauses, parties and market roles. The calculation items are a minority, but they are a predictable minority, and they are the ones with a method you can drill to the point of being automatic.
Am I allowed a calculator?
Commonly yes, in the form of an on-screen or approved basic model, but what is permitted in the room is decided by the exam vendor and your jurisdiction. Check the current candidate handbook for your test center before you plan around it, and practice with whatever it allows rather than with a phone.
Do I need to know loan program figures?
Know what each program exists to do and who it serves. Specific minimums, premiums, funding fees and loan limits are set by the administering agency and revised periodically, so any figure in a study guide may already be stale. Where an item genuinely turns on one, it usually turns on the relationship rather than the digits.
Is finance different on the broker exam?
The instruments are the same; the emphasis shifts. Broker items lean harder on trust accounting, disclosure obligations around financing terms, and the supervision of transactions where financing goes wrong. The arithmetic also tends toward investment and brokerage operations rather than a single household's loan.
How do I find out whether finance is actually my weak area?
Sit a cold full-length practice exam and read the result by content area rather than overall. RE License Prep's free diagnostic does that, your PassPulse Score shows whether later attempts hold up, and your PassMap™ puts the weakest areas first. Full access is a single $79 payment with no subscription, open immediately at checkout and refundable within thirty days.
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