NCE PRACTICE EXAM

$135,000 x .06 = $8,100

$8,100 ÷ 2 = $4,050

20 (1,000 sq ft) x 2.5 parking spaces (1000 sq. ft) = 50

Federal lead-based paint disclosures have nothing to do with the type of loan used to purchase a home. This federal law requires lead-based paint disclosures when the residential property—offered either for sale or lease—was constructed prior to 1978. Residential housing constructed prior to 1978 is called “target housing.” For target housing, a prospective tenant must be given the EPA-approved pamphlet on the dangers of lead. The EPA-approved pamphlet must also be given to prospective purchasers of target housing. But, additionally, prospective purchasers must be given a 10-day window to have the home tested for lead-based paint. Prospective buyers can waive testing. In fact, no party is legally obligated to test or pay for removal of lead-based paint. Finally, even if construction began after January 1, 1978, actual knowledge of lead-based paint on the premises must be disclosed to both prospective tenants and prospective buyers.  Note: Federal lead-based paint disclosures are strict because lead poisoning can cause significant neurological damage, particularly to small children.

Test-Taking Tip:  Lead-based paint disclosures are the responsibility of the seller or the landlord. However, if there is a real estate licensee involved in a transaction, the licensee has a duty to make sure the client is both aware of—and has complied with—the lead-based paint rules. In fact, licensees, buyers, and sellers all must sign the lead-based paint hazard addendum which is attached to the purchase contract or lease.

Capped at $10,000, property taxes are deductible. With some restrictions, interest on a mortgage loan is also a tax-deductible expense for home owners. In fact, this is considered one of the major tax advantages of homeownership. Note: Discount points (i.e., prepaid interest) is also tax-deductible.

B is incorrect. Insurance (e.g., fire, comprehensive, title, etc.) is not a tax-deductible expense. Note: Home Owners Association dues and home repairs are not deductible.

$115,000 x .125 = $14,375

$14,375 ÷ 12 =  $1,197.92

$30,000 + $125,000 = $155,000 sale price

$125,000 ÷ $155,000 = .8 LTV

Only a real estate licensee who is authorized by law to work independently can receive a commission directly from a member of the public. If not legally authorized to work independently, a real estate licensee can only receive a commission from the employing broker. This gives the employing broker additional control to ensure that, among other things, the transaction record is complete, fair housing laws are followed, and the appropriate disclosures are made in a timely fashion.

Quietly fixing brokerage firm commissions is the anti-competitive, collusive behavior that the federal Sherman Antitrust Act made illegal in 1890.

A is incorrect. Since the federal Sherman Antitrust Act of 1890 was enacted, firms (including real estate brokerage firms) have been legally prohibited from engaging in anti-competitive activity like fixing prices, fees, or commissions. Other prohibited acts include dividing up geographic territories or boycotting brokers offering cut-rate discounts. C is incorrect. There is nothing in the test question to suggest that the two brokers are engaging in housing discrimination. D is incorrect. The Statute of Frauds is not related to price fixing. The Statute of Frauds requires certain contracts and agreements be formalized in writing in order to be enforceable in a court of law.

RESPA applies to federally related mortgage loans. Because nearly all loans on residential properties are federally related, RESPA regulations cover the vast majority of residential loans.  Here are some of the loans that are considered federally related: VA guaranteed loans, FHA insured loans, loans intended to be sold onto the secondary mortgage market, lenders with FDIC, etc.

A, B, and D are incorrect. These incorrect answer choices are examples of loans not subject to RESPA. Other exempt loans include: commercial loans, business loans, land contracts, and loans for land tracts of 25 or more acres, etc

A deed must be signed by the grantor (i.e., the owner conveying an interest in real estate to someone else).

B is incorrect. The grantee does not have to sign the deed. The grantee must accept delivery of the deed, but that can be achieved through possession of the deed, taking possession of the property, taking out a loan on the property, etc. C is incorrect. For most states, official records are recorded at the county level.

Blockbusting is also called “panic peddling.” Blockbusting is the illegal attempt by a real estate professional to obtain listings. Real estate licensees engaged in panic peddling by frightening homeowners with the prediction that minority members moving into the neighborhood would result in increased crime and declining property values. This now illegal practice was historically profitable for real estate professionals, and frequently resulted in homeowners selling at a loss.

“ARM” stands for Adjustable Rate Mortgage. In contrast to the fixed-rate mortgage, the ARM interest rate is tied to an economic index and can go up or down, depending on market trends. Typically, the ARM loan adjusts annually, but lender and borrower can negotiate how frequently an adjustment can occur.

A is incorrect. The interest rate on an adjustable rate mortgage is periodically adjusted based on an economic index published by a neutral third party. The loan paperwork states which economic index the lender will follow. C and D are incorrect. The interest rate on an ARM loan is variable and can either rise or fall, depending on current market conditions.

A prospective borrower must be given 3 business days to review the Closing Disclosure prior to the closing. This goal of this 3-day window is to give the consumer time to raise any questions with the lender prior to becoming obligated under the terms of the new loan. Test-Taking Tip: There is an exception to this 3-day rule for Closing Disclosures. If borrowers are undergoing a personal financial emergency, they can waive taking 3 business days to review the Closing Disclosure. An example of this type of emergency is when a borrower needs a new loan immediately in order to prevent an upcoming foreclosure sale.

Note: Lenders are required to provide consumers with both a Loan Estimate and a Closing Disclosure, and are not allowed to charge for either disclosure. The Loan Estimate must be delivered to the consumer within 3 business days after the loan application is submitted.

Redlining is the illegal denial of a loan application based upon the location of the securing property without any consideration of the employment history or creditworthiness of the loan applicant or of the condition of the property itself. This activity got its name from the maps that lenders used to have up in their offices. Certain geographic areas—usually in economically depressed or crime-filled neighborhoods—were encircled with a “red line.” If the property was within these red lines, the loan application would be declined.

B is incorrect. A silent second is a loan between the buyer and the seller for part or all of the down payment. The name comes from the fact that buyer and seller do not tell the primary lender about the loan, thereby “silently” increasing the amount of debt the buyer is carrying. Silent seconds are a type of mortgage fraud and are illegal.  C is incorrect. An air loan is another type of mortgage fraud perpetrated upon lenders. This involves getting a mortgage loan on a parcel of real estate that does not exist. D is incorrect. A backward application is another type of mortgage fraud committed on lenders. Here, the buyer finds a desirable property and lies about his or her income in order to qualify for a purchase money mortgage.

$125,000 x .05 = $6,250

$125,000 - $6,250 = $118,750

Here, the test question states that the homeowner has a mortgage with a fixed interest rate. Especially when interest rates are low, a mortgage with a fixed interest rate is appealing to borrowers because the interest rate and the amount of the monthly loan payment will not change over the entire term of the loan. The question, however, is testing your knowledge of mortgage impound accounts (aka “mortgage escrow accounts”). These accounts are set up by lenders to hold the borrower's money for expenses that are charged to the property and unrelated to the loan (e.g., property taxes, homeowner's insurance, hazard insurance, etc.). Lenders collect funds along with the borrower's mortgage payment to ensure that property taxes and insurance premiums are paid. Because the amount of these property-related expenses can change over time, the monthly payment due the lender might vary, even when the loan itself has a fixed interest rate.

A is incorrect. This statement accurately describes a mortgage with a fixed interest rate, but does not account for a lender collecting whatever is needed to cover changes in property taxes and insurance premiums.

The fact pattern describes a special agency created by the listing agreement. In a listing agreement, the seller is the principal and the listing broker is the agent. When a special agent, the broker typically has one task or duty. That duty is to find a ready, willing, and able buyer for the seller's property. A special agency is an advisory position. Therefore, while the broker can advise the seller as to the merits of each offer, the broker does not have the authority to accept a particular offer and bind the seller to that decision.

B is incorrect. In contrast to a special agency, a general agent typically has a number of duties to perform. This type of agency is usually used for ongoing businesses. The general agent does have a limited authority to bind the principal. One frequently-tested example of a general agency is a property manager with the authority to, for example, find and sign well-qualified tenants. C is incorrect. An implied agency can be created unintentionally or by accident.  It may be created accidentally through the speech or actions of the agent (e.g., the broker for the seller advising a stranger who drops in at an open house). This answer choice is incorrect because, here, both parties intended to enter into an agency relationship and formalized that intention in a written listing contract. D is incorrect. A dual agency occurs when the agent represents more than one party to the transaction (e.g., representing both the buyer and the seller in a purchase transaction). There is no dual agency scenario presented in this fact pattern. Note: Some states legally prohibit dual agencies.

Familial status is a protected classification under the federal Fair Housing Act, as amended.  When first enacted in 1968, the law prohibited discrimination in housing only on the basis of color, race, national origin, and religion. An amendment in 1974 added sex as a protected class. In 1988, the federal law was further amended to add two more protected classes: familial status (to protect families with minor children and pregnant women) and handicap/disability (including those afflicted with HIV/AIDs). Test-Taking Tip: You need to have this federal law—including the amendments—memorized before taking your state exam.
A, B, and C are not protected classes under the federal Fair Housing Act. 

“Mortgagee” means lender. A lender's policy of title insurance remains in force until the loan is paid in full. Test-Taking Tip: The coverage under a lender's policy of title insurance declines as the loan is being paid off. After the loan is paid in full, the coverage expires.
 
A and B are incorrect. A lender's policy of title insurance will remain in effect as long as loan is outstanding. The owner dying or selling the property would not in and of itself terminate a lender's policy of title insurance. C is incorrect. A title insurance policy premium is paid only once, usually at the closing. 

A valid contract must contain all of these elements. There must be an offer that sets forth clear terms, and is more than a mere invitation to negotiation. The offer must be accepted without any conditions or qualifications, and the acceptance must be communicated to the person making the offer. There also must be consideration. For a bilateral contract, consideration is the exchange of promises. For example, in a purchase and sale contract, the seller is promising to convey title to the buyer, and the buyer is promising to pay the purchase price to the seller. Finally, the purpose of the contract must be lawful.

Only a licensed appraiser can perform an appraisal. An appraisal is required for all federally related loans like, for example, an FHA-insured loan, a VA-guaranteed loan, a conventional loan, and loans from lenders with FDIC.

A is incorrect. The lender, however, needs the appraisal to ensure that the loan-to-value ratio is appropriate. C is incorrect. The Broker Opinion of Value (aka “Broker Price Opinion”) is the broker's estimation of a property's market value based on recent sales of nearby comparable properties. While this approach is similar to the market data approach used by appraisers, the broker is not authorized to complete an appraisal. D is incorrect. A home inspector does not appraise a property, but reports on the condition of its major systems and components (e.g., electrical, plumbing, foundation, walls, insulation, heating, air conditioning, etc.)

The basic owner's title insurance policy typically does not cover violations related to building permit violations or zoning violations.
A, B, and C are incorrect answer choices. These answer choices show items typically covered under the basic owner's policy. Note: Matters of record that were not discovered by the title insurance company during their search—and are unknown to the owner—would also be covered under this type of policy. However, if an owner knows about a problem prior to the issuance of an owner's title insurance policy, then the title insurance company would exclude it from coverage under the policy.

There are two phases in a foreclosure: Reinstatement (the first phase) and Redemption (the second phase). During the Reinstatement phase, the homeowner must only pay any missed mortgage payments (plus court costs, legal fees and interest). This will “cure” the default and allow the homeowner to continue paying off the mortgage. During the Redemption phase, the homeowner must pay the entire outstanding mortgage loan amount (plus court costs, legal fees, and interest). Redeeming a property means saving it from foreclosure.

A, B, and C are incorrect because they are incomplete. In order to exercise the right of redemption and save the property from foreclosure, the property owner must pay the entire outstanding mortgage, court costs, legal fees, and any interest owed.

“ARM” stands for Adjustable Rate Mortgage (aka “variable rate mortgage”). While the interest on a fixed-rate mortgage does not change over the term of the loan, the ARM interest rate is tied to an economic index, and can go up or down, depending on market trends. Many ARM loans start at a lower interest rate than the fixed-rate mortgage. Then, following this introductory period, the interest rate is tied to changes in an economic index and can either rise or fall.

A, B, and C are incorrect because they are all fixed rate mortgage loans.

After the woman dies, her debts will be paid and assets distributed through the probate court. When a parcel of real estate is transferred through the probate court as per the terms of a valid will, it is called a “devise.” (Test-Taking Tip: An inheritance of personal property, by contrast, is called a “bequest” or a “legacy.”)

B is incorrect. This answer choice reverses the woman's wishes. In order to comply with the woman's desires with a life estate, the woman should be the life tenant and measuring life, and the son should be the remainderman. C is incorrect.  To alienate means to convey. A deed that has been delivered and accepted would result in an immediate transfer of the real estate from the woman to her son. D is incorrect. An estate in severalty (aka “a tenancy in severalty”) is ownership by one person. When a parcel of real estate is owned in severalty, there are no other owners to consult. Test-Taking Tip: One person, one corporation, one governmental entity, one trust, one partnership can all own real estate in severalty. As long as there is only one owner, that is an estate in severalty. Examiners like to test this because of the word “several” in severalty.