Real Estate National Exam — Financing and Valuation

The loan-to-value ratio is the loan amount divided by the lesser of the property's appraised value or sale price, expressed as a percentage. For example, a $240,000 loan on a $300,000 home is an 80% LTV. LTV matters because it reflects how much equity the borrower has and therefore the lender's risk: a high LTV (small down payment) leaves the lender more exposed if the borrower defaults and the property must be sold, which is why high-LTV loans often require private mortgage insurance. Brokers and agents should understand LTV because it affects loan approval, down-payment requirements, and the financing advice clients receive.

The note (interest) rate is the percentage charged on the loan's principal balance and determines the base interest portion of the payment. The annual percentage rate (APR) is a broader figure required by the Truth in Lending Act that includes the interest rate plus certain finance charges and fees (such as some origination or mortgage-insurance costs) expressed as a yearly rate, so borrowers can compare the true cost of competing loans. Because APR folds in additional costs, it is usually slightly higher than the note rate. Brokers and agents should understand the distinction so they can help clients compare loan offers and so advertising of rates is accurate.

BROKER CONTINUITY: The broker (brokerage) is the party contractually responsible for transactions — not the individual agent. When an agent is terminated: pending listings remain the broker's listings (clients can release or continue with a new agent); pending purchase transactions continue under the brokerage; clients may have the right to transfer to a new brokerage in some circumstances (especially for exclusive buyer representation agreements). The terminated agent: must immediately stop using the brokerage's name and materials; licence returns to the state in inactive status or transfers to a new broker; has no right to take the brokerage's clients or listings. Commission owed for pending transactions: per the termination agreement; varies by contract.

MONTHLY TRUST ACCOUNT RECONCILIATION is required by most states. The reconciliation compares: BANK STATEMENT balance (what the bank shows); LEDGER BALANCE (the running total of all individual client deposits and disbursements from the broker's internal records); INDIVIDUAL CLIENT BALANCES (what each client should have in trust based on transaction records). All three must agree. Discrepancies must be investigated and resolved promptly — a discrepancy means either a bank error, a recording error, or (most seriously) funds have been spent or miscounted. Regular reconciliation is the primary tool that prevents trust account fraud from going undetected. State real estate commission audits specifically examine trust account reconciliation records.

ERRORS AND OMISSIONS (E&O) INSURANCE is professional liability insurance specific to real estate practitioners. What it covers: NEGLIGENCE claims — failing to disclose a known defect; failing to verify information the agent represented as true; drafting contracts incorrectly; missing deadlines; misrepresenting property features; ERRORS — honest mistakes in the course of professional services; OMISSIONS — failing to do something a reasonable professional should have done. What it does NOT cover: INTENTIONAL acts (fraud, deliberate misrepresentation); criminal acts; claims arising from licensed activities conducted while the agent's licence was expired. Requirement: some states require E&O as a condition of licensure; most don't — but most brokers require their agents to carry it or provide it through the brokerage. E&O premiums: $300-$1,500/year for individual agents; $2,000-$10,000+/year for brokerages depending on volume.

CLOSING A REAL ESTATE BROKERAGE requires proper wind-down of trust account obligations: DISBURSE ALL FUNDS: All client funds must be returned to the rightful parties — there should be zero balance when the trust account closes; pending earnest money must be handled per each transaction's contract; CLOSE ALL TRANSACTIONS: All pending listings and purchase transactions must be completed, transferred to another brokerage, or properly terminated with client consent; NOTIFY STATE: Most states require notifying the real estate commission of brokerage closure; RETAIN RECORDS: Trust account records and transaction files must be retained for the period required by state law (typically 3-7 years) even after the brokerage closes; AGENT NOTIFICATION: All agents must be notified so they can activate their licences under a new brokerage or go inactive; failing to properly wind down the trust account is a violation even after retirement.

AGENCY SCOPE — GENERAL vs SPECIAL AGENT: GENERAL AGENT: Authorized to handle a RANGE of matters and act for the principal on an ongoing/continuous basis within a particular business; e.g., a PROPERTY MANAGER who handles many aspects of managing a property over time; a broker's salespeople are general agents of the broker; SPECIAL AGENT: Authorized to handle a SPECIFIC task or single transaction with limited authority; e.g., a LISTING BROKER hired to find a buyer for one specific property — limited to that task; UNIVERSAL AGENT: Broad authority to act in all matters (e.g., power of attorney); RELEVANCE: The scope of authority determines what the agent can legally do on the principal's behalf and the principal's liability for the agent's acts; in real estate, the typical listing or buyer broker is a SPECIAL agent (limited to the specific transaction), while a property manager is a GENERAL agent; understanding agency types and scope of authority is important broker-level knowledge tested on the national exam.

SECONDARY MORTGAGE MARKET: Where existing mortgages are BOUGHT and SOLD (as opposed to the PRIMARY market where lenders originate loans to borrowers). KEY PLAYERS: FANNIE MAE (FNMA), FREDDIE MAC (FHLMC), GINNIE MAE (GNMA — government-backed loans like FHA/VA); PURPOSE: They PURCHASE mortgages from primary lenders (banks, mortgage companies), which: gives lenders fresh capital (liquidity) to make more loans; spreads risk; standardizes loan requirements (conforming loans meet their guidelines); keeps mortgage money flowing and available; MORTGAGE-BACKED SECURITIES (MBS): Pools of mortgages are packaged and sold to investors; CONFORMING LOANS: Meet Fannie/Freddie guidelines (loan limits, underwriting standards); JUMBO LOANS exceed conforming limits; IMPACT: The secondary market makes more mortgage credit available and at lower rates by providing lenders liquidity; without it, lenders would run out of money to lend; this is important finance knowledge for brokers — the secondary market's role in providing liquidity and standardizing lending is a key national exam concept.

PITI: The four components of a typical monthly mortgage payment: PRINCIPAL (repayment of the loan balance); INTEREST (the cost of borrowing); TAXES (property taxes, often collected in escrow); INSURANCE (homeowner's/hazard insurance, and PMI if applicable, often escrowed); ESCROW ACCOUNT: Lenders often collect taxes and insurance monthly with the payment and pay them when due (impound/escrow account), ensuring these obligations are met; PMI (Private Mortgage Insurance): Required on conventional loans with less than 20% down — protects the lender; can sometimes be added to the payment; QUALIFYING RATIOS: Lenders evaluate the borrower's housing ratio (PITI ÷ gross monthly income, often ≤28%) and total debt ratio (PITI + other debts ÷ income, often ≤36-43%); PITI is the basis for these affordability calculations; understanding PITI and its role in loan qualification is fundamental finance knowledge for brokers and a common national exam topic.

NET LISTING: An arrangement where the seller sets a NET amount they want to receive, and the broker keeps ANYTHING ABOVE that amount as commission. PROBLEM/CONFLICT OF INTEREST: The broker has an incentive to: set a low net price to ensure a quick sale and large commission; or conceal the property's true value; the broker's interest (maximizing the spread) conflicts with the seller's interest (maximizing their proceeds); the seller may not know the actual sale price or how much commission the broker earned; ILLEGAL/DISCOURAGED: Many states PROHIBIT net listings or heavily restrict them because of this conflict and the potential to exploit unsophisticated sellers; OTHER LISTING TYPES: EXCLUSIVE RIGHT TO SELL (broker earns commission regardless of who sells — most common, most protective for broker); EXCLUSIVE AGENCY (broker earns unless the seller sells it themselves); OPEN LISTING (non-exclusive, multiple brokers, only the procuring broker earns); the net listing's inherent conflict of interest makes it disfavored or illegal; brokers must know listing types and the ethical/legal problems with net listings — a national exam topic.