Washington Escrow Practice Test

Free Washington Escrow Practice Sample Questions & Answers

Question 1.
A buyer deposits earnest money under a purchase and sale agreement, and the transaction later fails to close. The buyer and seller disagree about who should receive the funds. What should the escrow holder generally do?

A. Release the money to the buyer because the buyer originally deposited it
B. Release the money to the seller because the seller owns the property
C. Handle the disputed funds according to the applicable agreement and Washington requirements rather than choosing a party based solely on preference
D. Give half of the funds to each party automatically

Correct Answer. C

Explanation:
An escrow holder is not free to award disputed funds simply because one party initially deposited the money or owns the property. When the parties disagree, the escrow holder must follow the purchase agreement, applicable escrow instructions, and Washington requirements governing the handling and release of funds. The escrow professional should not make an independent determination of which party deserves the money unless authorized to do so under applicable law and the transaction documents.

Question 6.
A buyer and seller have signed a purchase and sale agreement, but a required document has not yet been received by the escrow office. The scheduled closing date is approaching. What is the best course of action?

A. Close the transaction without the document
B. Create a replacement document without authorization
C. Identify the missing requirement and obtain the necessary documentation before completing the transaction
D. Ignore the missing document because the parties have already signed the agreement

Correct Answer. C

Explanation:
Escrow transactions depend on complete and properly authorized documentation. If a required document is missing, the escrow professional should identify what is needed and follow the appropriate process for obtaining it before completing the closing. Signing the purchase agreement does not automatically eliminate other documentation requirements. Closing with incomplete documentation can create problems involving title, funds, ownership, or compliance.

Question 7.
A buyer asks an escrow professional to explain why property taxes appear as an adjustment on the closing statement. Which explanation is most appropriate?

A. Property taxes are always paid entirely by the buyer at closing
B. The adjustment may allocate taxes between the buyer and seller according to the period each party is responsible for
C. Property tax adjustments are unrelated to the closing date
D. Property taxes are refunded to both parties after closing

Correct Answer. B

Explanation:
Property tax adjustments can be used to allocate expenses between the buyer and seller based on the applicable period of ownership and the terms of the transaction. The closing statement may therefore show a credit or charge to one party depending on when the transaction closes and how the taxes are handled. The exact calculation depends on the transaction documents, tax period, and applicable requirements. Understanding prorations and adjustments is important when reviewing settlement figures.

Question 8.
An escrow holder receives funds intended for a real estate transaction. Which practice is most appropriate when handling those funds?

A. Deposit the funds into the escrow professional’s personal account temporarily
B. Keep transaction funds separate and handle them according to applicable escrow requirements and instructions
C. Use the funds to pay another client’s closing expenses
D. Release the funds whenever either party requests them verbally

Correct Answer. B

Explanation:
Escrow funds must be handled carefully and according to applicable laws, regulations, transaction instructions, and recordkeeping requirements. Mixing client or transaction funds with personal money or using one transaction’s funds for another purpose is inappropriate. The escrow professional should maintain proper control and documentation and release funds only when the applicable conditions and authorization have been satisfied.

Question 9.
A title insurance commitment identifies an exception that the buyer does not understand. What is the most appropriate response from the escrow professional?

A. Guarantee that the exception will never affect the buyer
B. Remove the exception from the title commitment without authorization
C. Explain the escrow process within the scope of the professional’s role and direct title-specific questions to the appropriate title professional
D. Tell the buyer to ignore all title exceptions

Correct Answer. C

Explanation:
Title exceptions can involve legal or ownership issues that require specialized interpretation. An escrow professional should not make unauthorized legal conclusions or promise that an exception will have no effect. The appropriate response is to explain procedural matters within the escrow role and direct title-specific questions to the title company or qualified professional responsible for interpreting the title commitment. This helps keep each participant within the proper scope of responsibility.

Question 10.
A transaction is ready to close, but the names on one of the closing documents do not match the names shown in the purchase and sale agreement. What should the escrow professional do?

A. Change the names without notifying anyone
B. Proceed because the difference is probably insignificant
C. Have the discrepancy reviewed and corrected or properly documented before completing the transaction
D. Ask the buyer to sign using the seller’s name

Correct Answer. C

Explanation:
Name discrepancies can create problems with the validity and recording of transaction documents and may indicate an issue with identity, ownership, or the parties involved. The discrepancy should be investigated and resolved through the appropriate parties before closing. An escrow professional should not independently alter documents or ask someone to sign under an incorrect name. Accurate documentation is essential to a properly completed real estate transaction.

Question 2.
During a Washington real estate closing, the title examination reveals an outstanding lien that must be addressed before the buyer can receive clear title. What is the primary purpose of resolving the lien before closing?

A. To increase the property’s assessed value
B. To ensure the title condition satisfies the transaction requirements before ownership is transferred
C. To eliminate the buyer’s mortgage obligation
D. To change the agreed purchase price automatically

Correct Answer. B

Explanation:
An outstanding lien can affect the seller’s ability to convey the title required by the purchase and sale agreement. Resolving the lien before closing helps ensure that the title condition meets the transaction requirements and that the buyer receives the appropriate title interest. The existence of a lien does not automatically change the purchase price or eliminate a buyer’s financing obligation. Title examination is an important part of identifying interests or claims that may need to be addressed before completion of the transaction.

Question 3.
A settlement statement shows the buyer’s purchase price, earnest money deposit, loan proceeds, prepaid items, and various closing charges. The buyer wants to know why the final amount due is different from the original deposit amount. What should the escrow professional explain?

A. The earnest money deposit is always the buyer’s complete closing payment
B. The final amount reflects the applicable credits, deposits, financing, charges, adjustments, and other transaction amounts shown in the settlement figures
C. The buyer’s deposit is returned separately in every transaction
D. Closing costs are never included in the final amount due

Correct Answer. B

Explanation:
The amount a buyer must provide at closing is determined by the complete financial picture of the transaction. The settlement figures may include the purchase price, earnest money already deposited, loan proceeds, closing costs, prorations, credits, prepaid expenses, and other applicable adjustments. Therefore, the final amount due will not necessarily equal the original earnest money deposit. Reviewing the settlement statement helps the parties understand how the transaction’s financial components produce the final amount required at closing.

Question 4.
A Washington escrow professional receives instructions from one party that conflict with the written instructions already provided by the parties to the transaction. What should the escrow professional do?

A. Follow the newest instruction automatically
B. Follow whichever instruction results in the fastest closing
C. Determine whether the conflicting instruction is properly authorized and handle the matter according to the transaction documents and applicable requirements
D. Ignore all written instructions and rely on verbal directions

Correct Answer. C

Explanation:
Escrow professionals must handle transaction instructions carefully because they are responsible for carrying out authorized directions involving documents and funds. A later instruction does not automatically override existing instructions simply because it was received more recently. The escrow professional should determine whether the instruction is properly authorized and whether it is consistent with the transaction documents and applicable requirements. When instructions conflict, the issue may need to be clarified with the appropriate parties before the transaction can proceed.

Question 5.
A seller in a Washington real estate transaction is a foreign person for purposes of federal tax withholding rules. Which federal requirement should the escrow professional be prepared to consider?

A. Fair Labor Standards Act
B. Foreign Investment in Real Property Tax Act (FIRPTA)
C. Americans with Disabilities Act
D. Federal Deposit Insurance Act

Correct Answer. B

Explanation:
FIRPTA establishes federal tax withholding requirements associated with certain dispositions of U.S. real property by foreign persons. Because these requirements can affect the funds and documentation involved in a real estate closing, FIRPTA is an important subject in escrow and settlement preparation. The escrow professional should follow the applicable federal requirements and transaction procedures rather than assuming that ordinary closing procedures are sufficient in every situation. Washington’s real estate curriculum specifically includes FIRPTA within its escrow and settlement topics.