Financing & Settlement Practice Questions
Financing and settlement is 7 scored items on the national portion of the Texas Sales Agent exam. It covers financing instruments, loan programs, federal financing regulations such as TRID and RESPA, and what happens at closing. In Texas, lenders use a deed of trust with a trustee and non-judicial foreclosure. Work the questions below, then read every explanation.
Exam prep only
Financing questions reward one habit: separate the debt from the security, and separate the loan program from the loan feature. The note is the debt, the security instrument creates the lien, and FHA, VA, and conventional are programs.
Use the debt-then-security split. Name what creates the obligation, then name what secures it, then identify the program and the federal disclosure rule the question is testing.
Quiz mode · Test yourself
Financing & Settlement Practice Questions
15 scenario-based questions on financing & settlement, scored, each with a full explanation after you answer. Every question is also written out below if you would rather study at your own pace.
Every question explained
Prefer to study at your own pace? Here are all 15 questions. Read each one and pick your answer, then reveal the correct answer, the reasoning, and the trap that catches most candidates.
1. A borrower signs both a promissory note and a security instrument to buy a home. Which document creates the borrower's obligation to repay the debt?
- A.The security instrument, because it is recorded
- B.The promissory note, which is the borrower's written promise to repay
- C.The deed, because it transfers ownership
- D.The closing disclosure
Show answer and explanation
Correct answer: B. The promissory note, which is the borrower's written promise to repay
Why B is correct: The promissory note creates the debt. It is the borrower's written promise to repay on stated terms. The security instrument, in Texas a deed of trust, pledges the property as collateral and creates the lien that secures the note.
Trap: The security instrument creates the lien, not the debt. A debt can exist without a lien, but a lien cannot exist without a debt.
Source: Financing instruments; promissory note
2. In Texas, the security instrument used in most home loans is a deed of trust, which involves a third party who holds power of sale. When a borrower defaults, foreclosure in Texas is typically
- A.judicial, requiring a court to order the sale
- B.non-judicial, conducted by the trustee under the power of sale
- C.impossible without the borrower's consent
- D.handled by TREC
Show answer and explanation
Correct answer: B. non-judicial, conducted by the trustee under the power of sale
Why B is correct: Texas uses a deed of trust with a trustee who holds the power of sale. On default, the trustee can conduct a non-judicial foreclosure under that power, without a court ordering the sale. This differs from states that use a mortgage and judicial foreclosure.
Trap: Texas foreclosure is non-judicial through the deed of trust and trustee, not judicial. Do not pick judicial foreclosure for Texas.
Source: Texas Property Code 51.002, non-judicial foreclosure sale
3. A first-time buyer wants a low down payment and is willing to pay mortgage insurance. The loan is insured by the federal government and allows a low down payment. This is most likely
- A.a VA loan
- B.a conventional loan with no insurance
- C.an FHA loan
- D.a USDA loan for an urban condo
Show answer and explanation
Correct answer: C. an FHA loan
Why C is correct: An FHA loan is insured by the Federal Housing Administration, allows a low down payment, and requires a mortgage insurance premium. It is a common choice for first-time buyers with limited savings.
Trap: FHA is insured and requires MIP. VA loans are guaranteed for eligible veterans, and USDA loans are for rural areas.
Source: Loan programs; FHA
4. On a conventional loan, private mortgage insurance is generally required when the loan-to-value ratio is
- A.below 50 percent
- B.above 80 percent, meaning the down payment is under 20 percent
- C.exactly 100 percent only
- D.never, because conventional loans have no PMI
Show answer and explanation
Correct answer: B. above 80 percent, meaning the down payment is under 20 percent
Why B is correct: Private mortgage insurance is generally required on a conventional loan when the loan-to-value ratio exceeds 80 percent, that is, when the down payment is less than 20 percent. Under federal law, PMI must automatically terminate when the balance reaches 78 percent of original value, if the borrower is current.
Trap: PMI protects the lender, not the borrower, and applies above 80 percent LTV. It can be removed as the balance drops.
Source: Loan programs; private mortgage insurance
5. Under the TRID rule, within how many business days of receiving a borrower's loan application must the lender deliver the Loan Estimate?
- A.1 business day
- B.3 business days
- C.7 business days
- D.10 business days
Show answer and explanation
Correct answer: B. 3 business days
Why B is correct: Under the TILA-RESPA Integrated Disclosures (TRID) rule, the lender must deliver the Loan Estimate within three business days of receiving a loan application. Separately, the Closing Disclosure must be received at least three business days before closing.
Trap: Do not confuse the 3-business-day delivery of the Loan Estimate with the rule that the Closing Disclosure must be received 3 business days before closing.
Source: TRID rule; TILA and RESPA (CFPB)
6. A title company offers a real estate broker a cash payment for every buyer the broker refers, with no service performed in return. Under RESPA, this is
- A.a normal referral arrangement
- B.a prohibited kickback for an unearned referral fee
- C.lawful if disclosed at closing
- D.permitted because title work is not a settlement service
Show answer and explanation
Correct answer: B. a prohibited kickback for an unearned referral fee
Why B is correct: RESPA prohibits kickbacks and unearned referral fees between settlement-service providers. Paying a broker simply for referrals, with no service performed, is a prohibited kickback. Disclosure does not cure it.
Trap: A payment for steering business, with no service rendered, is a RESPA violation, not a normal commission or a curable disclosure issue.
Source: Real Estate Settlement Procedures Act (RESPA)
7. At a Texas closing, which of the following is generally NOT a cost, because Texas does not impose it?
- A.Recording fees
- B.A statewide real estate transfer tax
- C.Title insurance premiums
- D.Prorated property taxes
Show answer and explanation
Correct answer: B. A statewide real estate transfer tax
Why B is correct: Texas does not impose a statewide real estate transfer tax on sales or mortgages. Recording fees, title insurance, and prorated property taxes are still part of a typical Texas closing.
Trap: Texas has no statewide real estate transfer tax. Do not add a transfer-tax line to a Texas closing problem.
Source: Texas closing costs; no state transfer tax
8. Under the TRID rule, a borrower must receive the Closing Disclosure
- A.at the closing table
- B.at least three business days before consummation of the loan
- C.thirty days after closing
- D.only if requested
Show answer and explanation
Correct answer: B. at least three business days before consummation of the loan
Why B is correct: The Closing Disclosure must be provided to the borrower at least three business days before loan consummation, giving the borrower time to review the final terms and compare them to the Loan Estimate.
Trap: The Closing Disclosure has a 3-business-day-before-closing rule. Do not confuse it with the Loan Estimate's 3-days-after-application rule.
Source: TRID / TILA-RESPA Integrated Disclosure
9. A qualifying veteran obtains a home loan that often requires no down payment and charges a funding fee. This is a
- A.conventional loan
- B.VA-guaranteed loan
- C.hard-money loan
- D.reverse mortgage
Show answer and explanation
Correct answer: B. VA-guaranteed loan
Why B is correct: A VA loan is guaranteed by the U.S. Department of Veterans Affairs for eligible veterans and service members. It commonly allows no down payment and charges a funding fee in place of mortgage insurance.
Trap: No-down-payment plus a funding fee signals a VA loan, not a conventional loan with PMI.
Source: VA-guaranteed home loan program
10. A lender charges 2 discount points on a loan. Each discount point
- A.equals 1% of the loan amount and is paid to lower the interest rate
- B.equals $1,000 regardless of the loan
- C.is a tax paid to the county
- D.is the same as the down payment
Show answer and explanation
Correct answer: A. equals 1% of the loan amount and is paid to lower the interest rate
Why A is correct: One discount point equals 1% of the loan amount and is prepaid interest paid to buy down the borrower's interest rate, which raises the lender's yield. Origination points are a fee for making the loan and do not buy down the rate the same way.
Trap: A point is 1% of the loan, not a flat $1,000. Discount points buy down the rate.
Source: Mortgage finance; discount points
11. In a fully amortizing loan, each scheduled payment
- A.pays only interest, leaving the full balance at the end
- B.pays both principal and interest so the balance reaches zero at the end of the term
- C.increases every month
- D.is interest-free
Show answer and explanation
Correct answer: B. pays both principal and interest so the balance reaches zero at the end of the term
Why B is correct: A fully amortizing loan applies each level payment to interest and principal so that the balance is paid to zero by the end of the term. Early payments are mostly interest; later payments are mostly principal.
Trap: Amortizing loans retire the balance over the term. An interest-only loan leaves the principal due later.
Source: Mortgage finance; amortization
12. The loan-to-value (LTV) ratio is calculated as
- A.the loan amount divided by the property's value or price
- B.the down payment divided by the interest rate
- C.the property tax divided by the loan
- D.the commission divided by the sale price
Show answer and explanation
Correct answer: A. the loan amount divided by the property's value or price
Why A is correct: LTV is the loan amount divided by the lesser of the property's appraised value or sale price, expressed as a percentage. A higher LTV means a smaller down payment and generally more lender risk, often triggering mortgage insurance.
Trap: LTV is loan over value. A higher LTV (smaller down payment) usually means PMI on a conventional loan.
Source: Mortgage finance; loan-to-value
13. A loan clause that lets the lender demand full repayment if the borrower sells or transfers the property is a
- A.due-on-sale (alienation) clause
- B.defeasance clause
- C.subordination clause
- D.habendum clause
Show answer and explanation
Correct answer: A. due-on-sale (alienation) clause
Why A is correct: A due-on-sale, or alienation, clause allows the lender to call the entire loan balance due if the property is sold or transferred. It generally prevents a buyer from assuming the loan without the lender's consent.
Trap: The due-on-sale clause blocks unapproved loan assumptions by accelerating the balance on transfer.
Source: Mortgage finance; due-on-sale clause
14. After a borrower defaults, the clause that allows the lender to declare the entire unpaid balance immediately due is the
- A.acceleration clause
- B.escalator clause
- C.exculpatory clause
- D.reconveyance clause
Show answer and explanation
Correct answer: A. acceleration clause
Why A is correct: An acceleration clause lets the lender declare the whole unpaid balance due upon default, which is a necessary step before foreclosure. Without acceleration, the lender could only sue for missed payments.
Trap: Acceleration makes the full balance due on default. It is the step that sets up foreclosure.
Source: Mortgage finance; acceleration clause
15. The Equal Credit Opportunity Act (ECOA) prohibits a lender from discriminating in credit decisions based on
- A.the borrower's credit score
- B.race, color, religion, national origin, sex, marital status, age, or receipt of public assistance
- C.the property's appraised value
- D.the size of the down payment
Show answer and explanation
Correct answer: B. race, color, religion, national origin, sex, marital status, age, or receipt of public assistance
Why B is correct: ECOA prohibits 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. Lenders may still evaluate creditworthiness, income, and the collateral.
Trap: ECOA bars discrimination on protected bases, not legitimate credit factors like income or credit history.
Source: Equal Credit Opportunity Act (ECOA)
15 here, 1,200+ in the app
You found your gaps. Now close them across all 14 areas.
Pass Texas gives you 1,200+ Texas-specific questions, diagnostics across the 14 exam areas, Trap Library, Math Coach, offline access, and one $59.99 purchase. No subscription. No copied exam questions.
Get the full question bankFrequently asked questions
How many financing and settlement questions are on the Texas exam?+
Financing and Settlement is 7 scored items on the national portion of the Texas Sales Agent exam. Expect questions on financing instruments, loan programs, federal regulations such as TRID and RESPA, and closing costs and prorations.
How does foreclosure work in Texas?+
Texas lenders typically use a deed of trust with a trustee who holds the power of sale. On default, the trustee can conduct a non-judicial foreclosure under Texas Property Code 51.002, without a court ordering the sale, which differs from judicial foreclosure used in mortgage states.
Does Texas charge a transfer tax at closing?+
No. Texas does not impose a statewide real estate transfer tax on sales or mortgages. Recording fees, title insurance, and prorated property taxes are still part of a typical Texas closing.