Chapter 20 — Self-Check Quiz

The Purchase Transaction: The Contract, Contingencies, Earnest Money, and the LO's Role in the Deal

Twenty-six questions. Multiple choice and short answer, written in the style of the SAFE MLO test where the material is exam-relevant. Answer key in the collapsed block at the bottom — write your answers down before you open it.

Where a question involves a contribution cap, a state-law rule, or a contract form's mechanics, the best answer describes the structure and names the authority to verify. There is no national purchase contract and there is no permanent cap table.

1.

Which party's signature appears on a residential purchase agreement in a typical financed transaction?

  • A. The buyer, the seller, and the lender
  • B. The buyer, the seller, and both real estate agents
  • C. The buyer and the seller
  • D. The buyer, the seller, and the closing agent

2.

An offer is written on March 1 naming an April 15 closing. The parties negotiate and the contract is fully executed on March 8. How many days actually remain to close?

  • A. 45
  • B. 44
  • C. 38
  • D. 30

3.

An interested-party contribution limit is applied to which figure?

  • A. The loan amount
  • B. The sales price
  • C. The appraised value
  • D. The lesser of the sales price or the appraised value

4.

On a conventional primary-residence purchase, a seller may contribute toward which of the following?

  • A. Closing costs, prepaid items, and discount points, within a limit
  • B. Closing costs and the borrower's down payment, within a limit
  • C. The borrower's down payment only
  • D. Nothing; conventional financing prohibits seller contributions

5.

A property is under contract at \$400,000 and appraises at \$412,000. The buyer is putting 20% down. The loan amount is:

  • A. \$329,600
  • B. \$320,000
  • C. \$412,000
  • D. \$330,000

6.

A contract is executed at \$540,000 with 20% down. The appraisal returns at \$505,000. Assuming the maximum loan-to-value remains 80%, how much additional cash does the buyer need beyond the originally planned down payment?

  • A. \$35,000
  • B. \$28,000
  • C. \$7,000
  • D. \$108,000

7.

Earnest money is best described as:

  • A. A non-refundable fee paid to the seller
  • B. A payment toward the buyer's closing costs made to the lender
  • C. A deposit held by a neutral third party, credited to the buyer at closing
  • D. A portion of the real estate commission paid in advance

8.

A financing contingency on a particular form requires the buyer to deliver written notice by the deadline in order to terminate. The buyer's loan is denied two days after the deadline and no notice was sent. Which statement is most accurate?

  • A. The contingency automatically protects the buyer because the loan was genuinely denied
  • B. The buyer's protection under that provision may have lapsed; the consequences are governed by the contract and by state law
  • C. The lender's denial letter revives the contingency
  • D. The seller must return the deposit because the buyer acted in good faith

9.

Appraisal-gap coverage is:

  • A. An agreement by the lender to lend against the contract price despite a low appraisal
  • B. Mortgage insurance covering the difference between price and value
  • C. A promise by the buyer to pay some or all of a shortfall in cash
  • D. A seller's agreement to reduce the price if the appraisal is low

10.

Which of the following is a sales concession rather than a financing concession?

  • A. The seller pays \$4,000 of the buyer's closing costs
  • B. The seller pays for a temporary interest-rate buydown
  • C. The seller conveys a \$15,000 boat with the property
  • D. The listing broker credits the buyer \$2,000 toward prepaid items

11.

The maximum loan-to-value on a file is 95%. The appraisal comes in \$12,000 below the contract price. The additional cash the buyer must produce is approximately:

  • A. \$12,000
  • B. \$11,400
  • C. \$600
  • D. \$9,600

12.

A loan officer reviewing an executed purchase agreement notices that the financing section caps the interest rate at 6.500%, and today's pricing for this borrower's profile is 6.875%. The correct action is to:

  • A. Say nothing; rates change and it may improve
  • B. Advise the borrower to sign an amendment raising the cap
  • C. Notify the borrower and the buyer's agent immediately, in writing, of the pricing fact
  • D. Lock the borrower at 6.500% and absorb the difference

13.

Which of the following may a loan officer do with respect to a purchase contract?

  • A. Sign it as an interested party
  • B. Draft an amendment extending the closing date
  • C. Interpret the default provisions for the borrower
  • D. Read it and tell the borrower what its dates require the loan to do

14.

A seller agrees to credit the buyer \$18,000 toward closing costs. The buyer's total closing costs and prepaid items are \$13,400. Ignoring any contribution cap, what happens to the \$4,600 difference?

  • A. It is paid to the buyer at closing as cash back
  • B. It is applied to the buyer's down payment
  • C. It cannot be used; the credit must be reduced or the transaction restructured
  • D. It is applied as a principal reduction on the new loan

15.

Which contingency protects a buyer whose lender declines the loan?

  • A. The inspection contingency
  • B. The appraisal contingency
  • C. The financing contingency
  • D. The title contingency

16.

On the Linden Street file, the contract was executed on day 4 and named a day-45 closing. The 30-day rate lock was taken on day 12. When did it expire relative to the named closing date?

  • A. Three days after
  • B. Three days before
  • C. On the same day
  • D. Fifteen days before

17.

A borrower asks a loan officer whether they should waive the appraisal contingency. The best response is to:

  • A. Advise them based on how likely the property is to appraise
  • B. Tell them the arithmetic of what a shortfall would require, and route the waiver decision to their agent and, if legal, to counsel
  • C. Decline to discuss the file at all
  • D. Recommend waiving it if the market is competitive

18.

An interested party includes all of the following EXCEPT:

  • A. The seller
  • B. The listing broker
  • C. The builder
  • D. The buyer's employer

19.

Which of the following would most reliably strengthen a buyer's offer without any misrepresentation?

  • A. A pre-approval letter written for \$25,000 above what the file supports
  • B. A promise to close in fourteen days
  • C. A fully underwritten pre-approval with income, assets, and credit verified
  • D. A guarantee that the appraisal will be waived

20.

A loan officer receives a call from a listing agent asking about the buyer's file. No borrower authorization is on file. The loan officer should:

  • A. Share only the pre-approval amount
  • B. Decline to discuss the file, citing privacy obligations
  • C. Share the credit score but not the income
  • D. Confirm or deny whether the buyers are "solid"

21. — short answer

Explain, in three sentences, why a contribution limit exists at all. Your answer should describe what unlimited contributions would let the parties do to the price.

22. — short answer

State the shortfall rule as a formula, then apply it to a \$725,000 contract that appraises at \$690,000 with a 75% maximum loan-to-value.

23. — short answer

Name three deadlines commonly found in a purchase agreement that can expire without anyone taking any action, and state why that is the single most dangerous structural feature of a contract for a loan officer to understand.

24. — short answer

A borrower asks: "The contract says the seller is paying \$3,000 of my closing costs — is that free money?" Answer them in the words you would use, in under sixty words.

25. — short answer

List the four elements of the Linden Street contract summary that determine the loan structure, with their values, and state the one number that does not appear in the contract but must be written down beside them.

26. — short answer

A closing date is extended by six days. Name six distinct things in the loan file that must be re-examined as a result.

Answer key — open only after you have written your answers **1. C.** The buyer and the seller. The lender is not a party, the agents are generally signing only to acknowledge their role where the form provides for it (and are not parties to the purchase), and the closing agent may acknowledge receipt of the deposit without being a party to the purchase agreement. The load-bearing point: **the loan officer's signature appears nowhere.** **2. C.** 38. March 8 to April 15: 23 days remaining in March plus 15 in April = 38. The offer named "45 days" and seven of them were consumed by negotiation. This is the two-clocks problem in §20.2. **3. D.** The lesser of the sales price or the appraised value. Note the consequence: a low appraisal *shrinks the contribution allowance* on the same day it *raises* the cash requirement. **4. A.** Closing costs, prepaid items, and financing concessions such as discount points, within a limit that varies by occupancy, loan-to-value, and program. **No program permits an interested party to fund the borrower's own required down payment or minimum investment.** **5. B.** \$320,000. Loan-to-value is computed on the *lesser* of price or value. The lesser is \$400,000; 80% of \$400,000 is \$320,000. The higher appraisal is good news for the buyer's equity and changes nothing about the loan. **6. B.** \$28,000. Maximum loan falls from 80% of \$540,000 (\$432,000) to 80% of \$505,000 (\$404,000). Required down payment rises from \$108,000 to \$136,000. Check with the shortfall rule: 0.80 × \$35,000 = \$28,000. Choice A is the shortfall, not the cash; choice C is the difference between the two, which is exactly the trap. **7. C.** A deposit held by a neutral third party, credited to the buyer at closing. It is the buyer's money throughout, and it is forfeitable only on buyer default. **8. B.** The buyer's protection under that provision may have lapsed, and the consequences are governed by the contract and by state law. Note what makes A and D wrong: on many forms the contingency protects action taken by a deadline, not the underlying misfortune. Also note that a correct answer here is a *hedged* one — this is a contract question, and a loan officer who answers it confidently has left their lane. **9. C.** A promise by the buyer to pay some or all of a shortfall in cash. It binds the buyer. It does not bind the lender, which still lends on the lesser of price or value. **10. C.** The \$15,000 boat. Non-realty items conveyed with the property are sales concessions and generally come off the value used for loan-to-value. A, B, and D are financing concessions — interested-party contributions subject to the cap. **11. B.** \$11,400. The shortfall rule: 0.95 × \$12,000 = \$11,400. The high-LTV borrower — the one with the least cash — is the one most exposed to a low appraisal. **12. C.** Notify the borrower and the buyer's agent immediately, in writing, of the pricing fact. That is the loan officer's job: read the contract, flag what governs the loan, deliver it early. B is contract advice and outside the license. D is a promise you cannot keep and, depending on how it is done, a compensation problem (Chapter 26). **13. D.** Read it and tell the borrower what its dates require the loan to do. Everything else on that list belongs to the parties, their agents, or counsel. **14. C.** It cannot be used. A credit may not exceed the borrower's actual costs and prepaids; there is no cash back to the borrower from an interested-party contribution. The excess must be reduced or the transaction restructured — and in the real world this is discovered in the last week, when restructuring is hardest. **15. C.** The financing contingency. **16. B.** Three days before. A 30-day lock taken on day 12 expires on day 42; the contract named day 45. The lock was short from the moment it was taken. The discipline in §20.2: **choose the lock term against the contract's closing date plus a buffer, not against today.** **17. B.** Give them the arithmetic; route the decision. A and D are contract advice. C overcorrects — the borrower is entitled to know what their loan would require, and that is squarely yours to tell them. **18. D.** The buyer's employer. An interested party is someone with a financial interest in the *sale* — seller, builder, developer, the agents and brokers, and their affiliates. (An employer contribution has its own treatment under the guidelines; the point here is that it is not an interested party to the sale.) **19. C.** A fully underwritten pre-approval. A is a misrepresentation to a third party who will rely on it. B is a scheduled failure unless your operation genuinely delivers it. D cannot be guaranteed — an appraisal waiver is an output of the automated findings on a specific property, not something a loan officer can promise before an offer exists. **20. B.** Decline to discuss the file, citing privacy obligations. Application information is nonpublic personal information; its handling is governed by the Gramm-Leach-Bliley Act and your firm's privacy policy. A, C, and D are all disclosures. **21.** A contribution is economically equivalent to a price increase: the seller nets the same money whether they cut the price by \$14,000 or pay \$14,000 of the buyer's costs on a price \$14,000 higher. Without a limit, the parties could inflate the contract price to the ceiling of the buyer's borrowing capacity and finance the buyer's costs into a loan secured by a house that is not worth the contract number. The cap exists because the investor's money is at risk against that collateral, and because this specific mechanic contributed to losses in the run-up to 2008. **22.** Additional cash = maximum LTV × (contract price − appraised value). Here: 0.75 × (\$725,000 − \$690,000) = 0.75 × \$35,000 = **\$26,250**. The buyer's down payment rises from \$181,250 to \$207,500, and \$207,500 − \$181,250 = \$26,250. Both routes agree. **23.** Any three of: the financing contingency deadline; the appraisal contingency deadline; the inspection period's end; the repair-response deadline; the title objection deadline; the earnest money delivery deadline. It is the most dangerous feature because **the buyer's protection can end without a phone call, an email, or a notice** — nothing announces it. A loan officer who understands this delivers bad news about the loan *before* deadlines rather than after, which is the single most valuable thing they do on a purchase transaction. **24.** Something like: "It's not free, and it's not nothing. It's \$3,000 the seller agreed to put toward your costs instead of toward the price — it's real, it's already in your cash-to-close number, and it saved you about \$2,800 more at the table than a \$3,000 price cut would have. Whether it was the best trade in the negotiation is a question for your agent." **25.** Price **\$385,000**; earnest money **\$5,000**; seller credit **\$3,000**; closing date **day 45**. The number that does not appear in the contract: **41** — the days actually remaining at execution. (Full credit also for naming the financing type, conventional, as a fifth structural element.) **26.** Any six of: the rate lock and its expiration; the Closing Disclosure timing; per-diem prepaid interest; the escrow deposit's month count; the age of the credit report; the age of employment and income verifications; the age of asset statements; the appraisal's validity period; homeowners insurance effective date; the payoff or prorations the closing agent has calculated; whether an executed amendment exists in the file at all.