2026 Licensing & Certification Curricula (Securities, Cloud, IT, Real Estate, Bar & CPA) are now live

CA Finance & appraisal

California real estate finance and appraisal study cards

Use these cards to review deed-of-trust financing, discount points, and the valuation approaches used to price a California home.

Take the free practice test Read the exam study guide

Source-linked learning

Study the rule, not a guess.

For financing, notice the security instrument and who holds title. For appraisal, name the approach before you pick an answer.

Card 01

A California buyer negotiates a fixed-rate residential purchase-money loan secured by the home. Which type of trust deed arrangement is most commonly used to secure the debt in California?

  1. A promissory note held unsecured by the lender
  2. A deed of trust conveying a security interest to a trustee who holds it for the beneficiary
  3. A mortgage that immediately transfers fee title to the lender
  4. A lease-option that gives the lender possessory rights
Reveal answer and explanation

Correct answer: A deed of trust conveying a security interest to a trustee who holds it for the beneficiary

In California, purchase-money financing is customarily secured by a deed of trust. The borrower conveys a security interest in the property to a trustee, who holds it for the beneficiary (the lender); the trust deed is reconveyed when the note is paid off. As a title (deed of trust) state, California does not transfer fee title to the lender at the outset.

California Department of Real Estate — California Real Estate Finance Outline — Deed of trust as the customary California security instrument; roles of trustor, trustee, and beneficiary. Source checked 2026-09-05. Review by 2027-03-01.

Card 02

An appraiser values a California home by comparing it to several similar properties sold recently in the same area. Which valuation approach is being used?

  1. The income approach
  2. The cost approach
  3. The sales comparison approach
  4. The discounted cash-flow approach
Reveal answer and explanation

Correct answer: The sales comparison approach

The sales comparison (market data) approach estimates value by comparing the subject property with recently sold, comparable properties and making adjustments for differences. It is the approach most commonly relied on for the appraisal of single-family homes.

California Department of Real Estate — Appraisal Concepts and Methods — Sales comparison approach as the standard method for comparing recent sales of similar properties. Source checked 2026-09-05. Review by 2027-03-01.

Card 03

A California borrower wants to buy down the interest rate by paying points at closing. If one discount point equals one percent of the loan amount, about how much would one point cost on a $400,000 loan?

  1. $400
  2. $4,000
  3. $40,000
  4. It depends only on the property's assessed tax value
Reveal answer and explanation

Correct answer: $4,000

One discount point is one percent of the loan amount. One percent of $400,000 is $4,000. Paying points typically buys a lower interest rate, and the buyer should weigh the upfront cost against the monthly savings.

California Department of Real Estate — Financing basics and the cost of credit — One discount point equals one percent of the mortgage loan amount. Source checked 2026-09-05. Review by 2027-03-01.

Card 04

In a California Deed of Trust, who are the three statutory parties, and what legal role does each perform?

  1. Trustor (Borrower who grants naked legal title), Beneficiary (Lender who holds promissory note), and Trustee (Neutral third party who holds power of sale)
  2. Trustor (Lender), Beneficiary (Borrower), and Trustee (Escrow Officer)
  3. Mortgagor (Seller), Mortgagee (Buyer), and Assignee (Broker)
  4. Grantor (County Recorder), Grantee (Title Company), and Holder (Bank)
Reveal answer and explanation

Correct answer: Trustor (Borrower who grants naked legal title), Beneficiary (Lender who holds promissory note), and Trustee (Neutral third party who holds power of sale)

In California, the Deed of Trust is the primary security instrument. The Trustor is the borrower who conveys 'naked legal title' to the Trustee. The Trustee holds the power of sale for the benefit of the Beneficiary (the lender). If the loan is satisfied, the trustee reconveys title; if in default, the trustee executes non-judicial foreclosure.

California Civil Code — Deeds of Trust and Mortgages — Civil Code § 2924: Roles of trustor, beneficiary, and trustee under deed of trust. Source checked 2026-09-05. Review by 2027-03-01.

Card 05

What is the statutory timeline for a non-judicial foreclosure under a Deed of Trust in California after the Trustee records a Notice of Default (NOD)?

  1. The trustee must wait at least 3 months after recording the Notice of Default before publishing a Notice of Trustee's Sale, which must be published for at least 20 days prior to the sale
  2. The property can be sold at public auction 10 days after recording the Notice of Default
  3. A non-judicial foreclosure requires a minimum of 2 years of judicial court proceedings
  4. The borrower has 12 months after the auction sale to redeem the property
Reveal answer and explanation

Correct answer: The trustee must wait at least 3 months after recording the Notice of Default before publishing a Notice of Trustee's Sale, which must be published for at least 20 days prior to the sale

Under California Civil Code § 2924, non-judicial foreclosure requires: (1) Recording a Notice of Default (NOD), followed by a mandatory 3-month waiting period, and (2) Recording and publishing a Notice of Trustee's Sale (NOTS) for at least 20 days before the auction. Total minimum statutory timeframe is approximately 111 days.

California Civil Code — Non-Judicial Foreclosure Procedure — Civil Code § 2924: 3-month notice of default and 20-day notice of trustee sale. Source checked 2026-09-05. Review by 2027-03-01.

Card 06

Up until what statutory deadline does a California borrower have the legal right to 'reinstate' a defaulted deed of trust by curing all back payments, late fees, and costs without paying the entire accelerated loan balance?

  1. Up to 5 business days prior to the scheduled Trustee's Sale date
  2. Only within 24 hours of recording the Notice of Default
  3. Any time within 1 year following the auction sale
  4. California law does not permit reinstatement; the full loan balance is immediately due
Reveal answer and explanation

Correct answer: Up to 5 business days prior to the scheduled Trustee's Sale date

Under California Civil Code § 2924c, the trustor has the statutory right of reinstatement up to 5 business days prior to the date set for the trustee's sale. During this period, the borrower can stop the foreclosure by paying only the delinquent amounts, allowable fees, and costs rather than the full loan principal.

California Civil Code — Cure of Default and Reinstatement — Civil Code § 2924c: Reinstatement right up to 5 business days before trustee sale. Source checked 2026-09-05. Review by 2027-03-01.

Card 07

Under California Code of Civil Procedure Section 580b (anti-deficiency law), what protection is granted to a borrower who defaults on a purchase-money loan used to buy an owner-occupied 1-to-4 unit residential property?

  1. The lender is barred from obtaining a deficiency judgment against the borrower if foreclosure proceeds are insufficient to satisfy the debt
  2. The lender may seize all of the borrower's personal bank accounts and wages immediately
  3. The borrower is granted a free grant deed to the property
  4. The lender must pay the borrower a 10% relocation fee
Reveal answer and explanation

Correct answer: The lender is barred from obtaining a deficiency judgment against the borrower if foreclosure proceeds are insufficient to satisfy the debt

California CCP § 580b prohibits deficiency judgments on purchase-money mortgages secured by owner-occupied residential properties of 1 to 4 units. If the borrower defaults and the property is sold via foreclosure for less than the debt, the lender must absorb the loss and cannot sue the borrower for the deficiency.

California Code of Civil Procedure — Anti-Deficiency Protections — CCP § 580b: Prohibition of deficiency judgments on purchase-money residential loans. Source checked 2026-09-05. Review by 2027-03-01.

Card 08

How do FHA-insured loans differ from VA-guaranteed loans in financing residential property in California?

  1. FHA loans require a minimum 3.5% down payment and charge Upfront and Annual Mortgage Insurance Premiums (MIP); VA loans allow 0% down payment for eligible veterans and require no monthly mortgage insurance
  2. FHA loans are guaranteed by the Department of Veterans Affairs, while VA loans are insured by HUD
  3. VA loans require a 20% down payment, whereas FHA loans require 10%
  4. Both FHA and VA loans are funded directly from federal tax reserves, not private lenders
Reveal answer and explanation

Correct answer: FHA loans require a minimum 3.5% down payment and charge Upfront and Annual Mortgage Insurance Premiums (MIP); VA loans allow 0% down payment for eligible veterans and require no monthly mortgage insurance

FHA loans (Federal Housing Administration) insure private lenders against loss, allowing low down payments (minimum 3.5%) but requiring both Upfront MIP and annual MIP. VA loans guarantee private lenders against default for qualified veterans and surviving spouses, allowing up to 100% financing (0% down) with no monthly mortgage insurance premium.

California DRE — Reference Book: Government Financing Programs — Chapter 13: FHA Insurance vs. VA Loan Guarantee Comparison. Source checked 2026-09-05. Review by 2027-03-01.

Card 09

Under the Truth in Lending Act (TILA / Regulation Z), which of the following advertising terms is classified as a 'Trigger Term' that mandates full disclosure of all loan credit terms including APR?

  1. General statements such as 'Easy financing terms available'
  2. A specific financing term such as 'Only 5% down payment' or '$1,800 monthly payment'
  3. Descriptive phrases such as 'Low closing costs'
  4. Statements indicating 'VA loan accepted'
Reveal answer and explanation

Correct answer: A specific financing term such as 'Only 5% down payment' or '$1,800 monthly payment'

Under Reg Z § 1026.24, mentioning specific credit numbers—such as down payment percentage or dollar amount, monthly payment amount, number of payments, or finance charge—acts as a 'trigger term'. Once a trigger term is stated, the ad must disclose the down payment, repayment terms, and the Annual Percentage Rate (APR).

Consumer Financial Protection Bureau — Regulation Z (Truth in Lending) — 12 CFR § 1026.24: Advertising trigger terms and required disclosures. Source checked 2026-09-05. Review by 2027-03-01.

Card 10

Under Section 8 of the Real Estate Settlement Procedures Act (RESPA), which of the following practices between a California real estate broker and a title company is strictly prohibited?

  1. A broker receiving an unearned $250 referral fee or kickback from a title company for directing client escrow business to that firm
  2. A title company providing standard educational market seminars to licensees
  3. A broker disclosing affiliated business arrangements in writing to the buyer
  4. A title insurer publishing standard schedule rate sheets
Reveal answer and explanation

Correct answer: A broker receiving an unearned $250 referral fee or kickback from a title company for directing client escrow business to that firm

RESPA Section 8 (12 U.S.C. § 2607) explicitly prohibits giving or accepting any fee, kickback, or thing of value pursuant to any agreement or understanding that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

Consumer Financial Protection Bureau — RESPA Section 8 — 12 CFR § 1024.14: Prohibition against kickbacks and unearned fees. Source checked 2026-09-05. Review by 2027-03-01.

Card 11

A buyer purchases a home for $800,000 and secures a conventional first mortgage of $720,000. What is the Loan-to-Value (LTV) ratio, and when is the lender generally required to cancel Private Mortgage Insurance (PMI) automatically under federal law?

  1. LTV is 90%; PMI must be automatically canceled when the mortgage principal balance is scheduled to reach 78% of the original property value under the Homeowners Protection Act
  2. LTV is 80%; PMI is never canceled on conventional loans
  3. LTV is 95%; PMI cancels after exactly 12 calendar months
  4. LTV is 72%; PMI is not required because the loan is under $1,000,000
Reveal answer and explanation

Correct answer: LTV is 90%; PMI must be automatically canceled when the mortgage principal balance is scheduled to reach 78% of the original property value under the Homeowners Protection Act

LTV = Loan Amount ($720,000) / Purchase Price ($800,000) = 90%. Because LTV exceeds 80%, conventional lenders require PMI. Under the federal Homeowners Protection Act of 1998, lenders must automatically terminate PMI when the loan balance reaches 78% of the original value based on the amortization schedule.

Consumer Financial Protection Bureau — Homeowners Protection Act — 12 U.S.C. § 4901: Automatic cancellation of PMI at 78% LTV. Source checked 2026-09-05. Review by 2027-03-01.

Card 12

When an appraiser applies the Sales Comparison Approach (Market Data Approach) to value a single-family home in California, how are adjustments made between the Subject property and a Comparable sale?

  1. Adjustments are always made to the Subject property's features
  2. Adjustments are made exclusively to the Comparable sale's price: subtract value if the comp has a feature superior to the subject; add value if the comp is inferior to the subject
  3. The appraiser averages the gross sale prices of all comps without adjustments
  4. Adjustments are made only if the properties are in different counties
Reveal answer and explanation

Correct answer: Adjustments are made exclusively to the Comparable sale's price: subtract value if the comp has a feature superior to the subject; add value if the comp is inferior to the subject

In appraisal practice, the subject property's value is the unknown target, so adjustments are applied to the comparable sales. Under the CBS/CIA rule: if the Comp is Better/Superior, subtract value from the comp's price; if the Comp is Inferior, add value to the comp's price to bring it into alignment with the subject.

California DRE — Reference Book: Appraisal Approaches and Methods — Chapter 15: Sales Comparison Approach Adjustment Mechanics. Source checked 2026-09-05. Review by 2027-03-01.

Card 13

In the Cost Approach to real estate valuation, what is the fundamental valuation formula applied by an appraiser?

  1. Property Value = (Cost to replace improvements New - Accrued Depreciation) + Land Value
  2. Property Value = Gross Scheduled Income * Gross Rent Multiplier
  3. Property Value = Net Operating Income / Capitalization Rate - Mortgage Debt
  4. Property Value = Historical acquisition price adjusted for inflation
Reveal answer and explanation

Correct answer: Property Value = (Cost to replace improvements New - Accrued Depreciation) + Land Value

The Cost Approach formula is: Reproduction/Replacement Cost of building improvements New MINUS Accrued Depreciation PLUS the estimated market value of the Land (valued separately via sales comparison, because land does not depreciate). This approach is ideal for unique properties like churches, schools, or brand-new construction.

California DRE — Reference Book: Cost Approach to Value — Chapter 15: Principles of the Cost Approach and Depreciation Deduction. Source checked 2026-09-05. Review by 2027-03-01.

Card 14

A luxury residential home in Los Angeles has 5 bedrooms but only 1 full bathroom. What type of appraisal depreciation does this architectural imbalance represent?

  1. Physical deterioration
  2. Functional obsolescence
  3. Economic (External) obsolescence
  4. Environmental contamination
Reveal answer and explanation

Correct answer: Functional obsolescence

Functional obsolescence is a loss in value caused by internal design deficiencies, outdated architecture, or inadequate functional utility (such as poor layout, inadequate plumbing, or low ceilings) within the property boundaries. Physical deterioration refers to wear and tear; economic obsolescence refers to external neighborhood factors.

California DRE — Reference Book: Three Forms of Depreciation — Chapter 15: Functional Obsolescence vs. Physical Deterioration vs. Economic Obsolescence. Source checked 2026-09-05. Review by 2027-03-01.

Card 15

A residential neighborhood suffers a 20% decline in home values after the municipal airport expands a new runway with jet flight paths directly overhead. What type of depreciation is this, and is it generally curable or incurable?

  1. Functional obsolescence; curable
  2. Economic (External) obsolescence; incurable
  3. Physical deterioration; curable
  4. Title encumbrance; incurable
Reveal answer and explanation

Correct answer: Economic (External) obsolescence; incurable

Economic obsolescence (also called external obsolescence) is caused by adverse factors occurring outside the subject property's boundaries (e.g. flight paths, industrial pollution, toxic facilities). Because the property owner has no control over these external neighborhood forces, it is universally classified as incurable.

California DRE — Reference Book: Economic Obsolescence — Chapter 15: External Influences and Incurable Depreciation. Source checked 2026-09-05. Review by 2027-03-01.

Card 16

A duplex in San Diego generates a total monthly gross rental income of $5,000 ($60,000 annually). A comparable duplex in the immediate neighborhood recently sold for $750,000 with monthly gross rent of $5,000. What is the Gross Rent Multiplier (GRM), and what is the estimated value of a subject duplex generating $5,500 monthly rent?

  1. GRM is 150; estimated value is $825,000 ($5,500 * 150)
  2. GRM is 12.5; estimated value is $687,500
  3. GRM is 200; estimated value is $1,100,000
  4. GRM cannot be determined without net operating expenses
Reveal answer and explanation

Correct answer: GRM is 150; estimated value is $825,000 ($5,500 * 150)

GRM = Sales Price / Gross Monthly Rent. Comp GRM = $750,000 / $5,000 = 150. Estimated Subject Value = Monthly Rent ($5,500) * GRM (150) = $825,000. Gross rent multipliers use gross figures without deducting operating expenses, making them a fast preliminary valuation tool for residential rental units.

California DRE — Income Approach and Gross Rent Multipliers — Chapter 15: Gross Rent Multiplier Calculations. Source checked 2026-09-05. Review by 2027-03-01.

Card 17

An apartment building generates $200,000 in Gross Scheduled Income, has an allowance of $10,000 for vacancy and credit loss, and incurs $70,000 in operating expenses. If market capitalization rates for comparable apartment buildings are 6.0%, what is the estimated property value using the Capitalization Rate approach?

  1. $2,000,000
  2. $3,166,667
  3. $1,200,000
  4. $2,500,000
Reveal answer and explanation

Correct answer: $2,000,000

Effective Gross Income (EGI) = Gross Scheduled Income ($200k) - Vacancy ($10k) = $190,000. Net Operating Income (NOI) = EGI ($190k) - Operating Expenses ($70k) = $120,000. Property Value = NOI ($120,000) / Cap Rate (0.06) = $2,000,000.

California DRE — Income Capitalization Approach — Chapter 15: Capitalization Rate and Net Operating Income Formulation. Source checked 2026-09-05. Review by 2027-03-01.

Card 18

If an investor observes that prevailing capitalization rates for commercial retail properties in a California metro market are rising from 5.0% to 7.5%, what is the mathematical effect on property values, assuming Net Operating Income remains constant?

  1. Property values decline significantly
  2. Property values increase proportionately
  3. Property values remain completely unchanged
  4. Operating expenses automatically drop to zero
Reveal answer and explanation

Correct answer: Property values decline significantly

Capitalization Rate and Property Value have an inverse relationship (Value = NOI / Cap Rate). As capitalization rates rise (reflecting higher perceived risk or higher borrowing interest rates), the divisor in the formula increases, which causes property market values to fall.

California DRE — Reference Book: Cap Rate Mechanics — Chapter 15: Inverse Relationship Between Cap Rates and Property Value. Source checked 2026-09-05. Review by 2027-03-01.