Ch. 12- Closing and settlement words and quiz

Paul is selling his house for $267,500. He's paying 5.75% commission. In addition to the required excise tax, he has other closing costs of $270. He owes $112,800 on his existing mortgage. He's already paid the property taxes, which are prorated for settlement at $765.62. The buyer paid a due diligence fee of $1,200. What is Paul's net cash to seller for this transaction, rounded to the nearest dollar?

$138,079 - First, add up Paul's debits: Commission of $15,381.25 ($267,500 x 0.0575) + excise tax of $535 ($267,500 / $500 = $535) + $270 closing costs + $112,800 existing loan + $1,200 due diligence fee = $130,186.25 total debits. Subtract that from the sales price: $267,500 - $130,186.25 = $137,313.75. To that, add his credit for the property taxes he paid: $137,313.75 + $765.62 = $138,079.37 net cash to seller Paul.

Seller Jack has agreed to sell his property to Sara for $249,650. He is paying 6% commission, split between the listing broker and the selling broker. What is the total brokerage commission Jack will owe at closing?

$14,979

Seller Jack has agreed to sell his property to Sara for $249,650. Jack owes $85 for deed preparation and $30 in courier fees to return the payoff of his existing mortgage loan to his lender. Considering the commission and excise tax you've already calculated, what are Jack's total costs so far?

$15,594 - You should have noted that Jack owes $14,979 in commission and $500 in excise tax. To that, add $85 for deed preparation and $30 in courier fees. Jack's expenses so far are $15,594. Make sure you have all of these individual expenses noted on the Settlement Costs Worksheet as DEBITS for seller Jack.

The sale of a property closes on May 10. HOA fees are $360 per year and paid in advance. What is the buyer's share of the fee, based on a calendar year (assume it's not a leap year and the seller owns the day of closing)?

$232.65 - To find the daily rate: $360 annual HOA fee / 365 days in a year= $0.99 (rounded). The buyer owns the property for 235 days (May=21 + Jun=30 + Jul=31 + Aug=31 + Sep=30 + Oct=31 + Nov=30 + Dec=31 = 235). To find the buyer's share: 235 x $.99 daily rate = $232.65 buyer debit/seller credit.

The sale of a property closes on May 10. Taxes are $3,600 per year and have not been paid. What is the seller's share of taxes, based on a 365-day year (assume it's not a leap year and the seller owns the day of closing)?

$1,281.80

Sara is responsible for the following expenses: Closing attorney fee of $650, courier fee of $30 to return the loan documents to the lender, home inspection fee of $325, lender's title insurance policy of $505.40, owner's title insurance policy of $64.60, pest inspection fee of $65, survey fee of $400, recording fee for the deed of $56, and recording fee for the deed of trust of $26. If Sara paid the inspection fees before closing, what are her debits for these settlement expenses?

$1,732 - Borrowers usually pay the fees for a pest inspection and a home inspection prior to settlement, so we won't count that $390 ($325 + $65) as debits. The other expenses, totaling $1,732, are usually paid at settlement ($650 + $30 + $505.40 + $64.60 + $400 + $56 + 26). On your Settlement Costs Worksheet, make sure you note these costs as DEBITS for buyer Sara. You can note the home inspection and pest inspection fees on the Settlement Costs Worksheet as "paid before closing" or "paid outside of closing" if you like, but those numbers will NOT be included in our final calculation.

Sara's lender requires her to make an upfront purchase of an annual homeowner's insurance policy for $684 and private mortgage insurance for $840. Both of these expenses require monthly payments going forward, so the lender is also requiring Sara to pay two months of homeowner's insurance and mortgage insurance into the escrow account as reserves. What is the total of these upfront and escrow expenses?

$1,778

The sale of a property closes on July 29. The unpaid tax bill is $4,626. Buyer and seller will pay their share of the taxes at closing. How will the taxes be paid at closing using a statutory year, assuming the seller owns the closing day?

$1,940.35 Debit Buyer / $2,685.65 Debit Seller

An owner pays condominium fees of $275.50 on the first of every month to cover that month. The transaction closes on July 17. Using a 365-day year, with the buyer responsible for the day of closing, what is the appropriate proration on the settlement statement.

$133.35 Credit Seller / $133.35 Debit Buyer

The property tax bill on this property in the amount of $2,471 was paid by seller Jack on September 1. If closing is held on November 23, how will the property taxes be prorated between seller Jack and buyer Sara? Assume a statutory year and that the seller owns the day of closing.

$253.96 Debit Buyer / $253.96 Credit Seller - Since the taxes have already been paid by the seller, buyer Sara will owe seller Jack for the days that she owned the property. First, determine the number of days the buyer owned the property: Nov=7 days (November 24, 25, 26, 27, 28, 29, 30) + Dec=30 days = 37 days. Next, determine the daily rate of the property tax: $2,471 / 360 days = $6.8638 / day. 37 days x $6.8638 = $253.96. This is a double-entry item, a CREDIT to seller Jack and a DEBIT to buyer Sara. Make sure you update the Settlement Costs Worksheet with this information.

Maggie bought a house in a subdivision, with settlement scheduled for August 31. Seller Sam paid the annual association fee of $780 at the beginning of the year. On the settlement statement, how will this fee be handled (assuming a 365-day year with the seller owning the day of closing)?

$260.70 Credit Seller / $260.70 Debit Buyer

Buyer Sara is getting a loan for $212,000. Sara's loan is a 30-year fixed rate mortgage with an interest rate of 6.5% for which she's paying the following financing-related expenses: A .75% loan origination fee, one discount point, and an application fee of $280. The appraisal fee is $450. The credit report fee is $55. What are Sara's total financing-related debits?

$3,990

Sara is getting a loan of $212,000 to purchase Jack's property for $249,650. It is a 30-year, fixed rate loan with an interest rate of 6.5%. Closing is November 23. How much will the lender require Sara to pay as interim mortgage interest? Assume a statutory year, and when calculating interim mortgage interest, let's say the buyer owns the day of closing.

$306.22

The annual property taxes on the property Sara is purchasing are $2,471 and have been paid by the seller. At closing on November 23, the lender requires Sara to deposit four months of property taxes into the escrow account as reserve. How would you track this settlement expense?

$823.66 debit Sara - This is not a prorated expense. If the annual property tax is $2,471, that makes it $205.9167 a month. Four months of reserves would be $823.66 that Sara needs to pay at settlement. Make sure you note this as a DEBIT to Sara on your Settlement Costs Worksheet.

The Closing Disclosure must be given to the borrower in the transaction at least _________ prior to closing.

3 business days

Which statement about the Closing Disclosure is TRUE?

A seller-only Closing Disclosure may be prepared that excludes the buyer's loan details.

Item on a settlement statement for which the cost has been incurred, but the expense has not yet been paid. Such expenses are considered to be paid in arrears.

Accrued Expense (paid in arrears)

The amount of money a buyer must bring to settlement to close the transaction after all credits and debits have been reconciled.

Cash to Close

The net amount of money a seller receives from a real estate transaction at settlement after all costs and expenses have been paid.

Cash to Seller

An account maintained by a lender for the deposit of borrowers' extra 1/12 monthly deposits to cover next year's insurance and tax payments.

Escrow Reserves

Buyer Sara was required to pay a due diligence fee to seller Jack at the time the purchase contract was executed.

False

Seller Jack would MOST LIKELY be required to pay for the home inspection and the survey?

False

The payoff of Jack's existing mortgage is counted as a credit to him on the Closing Disclosure.

False

Prior to closing, Sara paid an earnest money deposit of $3,500. This is a credit to buyer Sara and a debit to seller Jack.

False - Unlike a due diligence fee, an earnest money deposit is not paid directly to the seller. So while the earnest money deposit is indeed a CREDIT to buyer Sara, since the broker holding these funds releases them at settlement, it is a single-entry item that does not affect seller Jack.

_________________ can be found on page 1 of the Closing Disclosure.

Loan terms and projected payments - Transaction Details, Loan Terms, Projected Payments=Page 1; Closing Cost Details=Page 2; Cash to Close, Summaries of Transactions=Page 3; Additional Information about the Loan=Page 4; Loan Calculations, Other Disclosures, Contact Information=Page 5

Expense items on a settlement statement the seller has already paid in advance, usually at the beginning of a month for the rest of the month, or at the beginning of the year for the rest of the year or longer.

Prepaid Expenses

Seller Jack has agreed to sell his property to Sara for $249,650. Of these expenses, which is LEAST LIKELY to be an expense that seller Jack would pay?

Seller Jack has agreed to sell his property to Sara for $249,650. Of these expenses, which is LEAST LIKELY to be an expense that seller Jack would pay? wrong answers: brokerage commission / deed preparation / excise tax

In the absence of any agreement, the day of closing traditionally belongs to the

Seller.

Buyer Belva is purchasing a property for $187,000, with settlement scheduled for May 7. She has been approved for an 80% loan-to-value conventional loan. Her lender is charging a total of 2.5 points for all mortgage-related fees. She has to purchase an annual homeowner's insurance policy for $852, and the lender requires her to deposit two months of the insurance premiums into an escrow account for reserve. Annual property taxes for the property are expected to be $2,652, and they have not been paid. The lender requires Belva to deposit four months of property taxes into the escrow account for reserve. Her other closing costs total $1,740. Belva paid a $3,000 earnest money deposit and a $1,800 due diligence fee. For these prorations, use a 360-day statutory year and assume that the seller owns the day of closing. What is Belva's necessary cash to close this transaction, rounded to the nearest dollar?

$39,022 - Let's start with the secondary calculations necessary to total the buyer's debits. Belva's getting a loan for $149,600 ($187,000 x 0.80). The loan fees are $3,740 ($149,600 x 0.025). The escrow reserves for homeowner's insurance is $142 ($852 / 12 x 2). The escrow reserves for property tax is $884 ($2,652 / 12 x 4). Total the debits: $3,740 + $852 + $142 + $884 + $1,740 = $7,358. Add the debits to the sale price: $187,000 + $7,358 = $194,358. Now let's do the secondary calculation necessary to total Belva's credits. Since the property tax has not been paid, she will have to pay that when it's due, and the seller owes her for the time the seller owned the property. First, determine the daily rate of the taxes: $2,652 / 360 = $7.3667. Next, determine how many days the seller owned the property if settlement is May 7: Jan=30 days + Feb=30 days + Mar=30 days + Apr=30 days + May=7 days = 127 days. Multiply that by the daily rate: 127 x $7.3667 = $935.57. Now add up Belva's credits: $149,600 (loan amount) + $3,000 (earnest money) + $1,800 (due diligence fee) + $935.57 (prorated taxes) = $155,335.57. Subtract that from the total due: $194,358 - $155,335.57 = $39,022.43, rounded to $39,022 cash from buyer Belva.

Seller Jack has agreed to sell his property to Sara for $249,650. She is getting a loan for $212,000. How much will seller Jack owe in North Carolina excise tax?

$500.00 - Excise or transfer tax is based on the transaction value, not the loan amount. The tax is $1 per $500 of transaction value or fraction thereof. $249,650 / $500 = $499.3. To account for the "fraction thereof," you need to round up to the nearest dollar, or $500. Make note of this DEBIT for seller Jack.

Seller Jack owes $138,425 on his existing mortgage. That loan has an interest rate of 5.75%. At closing on November 23, Jack must pay off his existing loan as well as the accrued interest. How much does Jack owe in accrued interest? Assume a statutory year and when calculating this accrued mortgage interest, the seller owns the day of closing.

$508.52 - First, find the annual interest rate by multiplying the loan balance by the interest rate ($138,425 x 0.0575 = $7,959.4375.). Divide that by 360 to find the daily interest rate ($7,959.4375 / 360 = $22.1095). There are 23 affected days (November 1 to 23) for which interest from the seller is due. Multiply the daily interest rate by 23 days ($22.1095 x 23 = $508.5185, rounded to $508.52). On your Settlement Costs Worksheet, make sure you indicate both the loan payoff and the accrued interest as DEBITS to seller Jack.

Tori is selling her property for $468,400. She has an outstanding mortgage balance of $376,950. Annual property taxes are $12,640. Closing is set for August 27. Tori and buyer Bob will pay their share of the annual $6,336 property tax bill at closing. Tori has agreed to pay 3.5% commission to the listing broker and 3% commission to the seller's subagent. She also owes the required excise tax. Tori agreed to purchase a home warranty for the buyer at a cost of $365. The buyer paid an earnest money deposit of $12,000 and a due diligence fee of $2,400. Tori's other closing costs total $490. Assume a statutory year and that the seller owns the day of closing. What is the net cash to seller Tori on this transaction?

$52,641 - Let's find Tori's debits. She owes total commission of 6.5% on a sale price of $468,400, which is $30,446. Excise tax is $937 ($468,400 / $500 = $936.80, rounded up). She'll pay the property tax for the period in which she owned the property, which is 237 days (Jan=30 + Feb=30 + Mar=30 + Apr=30 + May=30 + Jun=30 + July=30 + Aug=27), at a daily rate of $17.60 ($6,336 / 360), which comes to $4,171.20. The due diligence fee is also a debit (but not the earnest money), as is the home warranty. So all debits total $415,759.20 ($376,950 outstanding loan + $30,446 commission + $937 excise tax + $4,171.20 property tax + $2,400 due diligence fee + $490 closing costs + $365 home warranty). Subtract that from the sale price: $468,400 - $415,759.20 = $52,640.80. Tori has no credits on this transaction, so her net cash received is $52,641 (rounded).

A house is rented for $980 a month, paid on the first day of each month. The house sells and closes escrow April 15. Using a statutory year and buyer owning the day of closing, what is the proration?

$522.72 Debit Seller / $522.72 Credit Buyer - When rents are paid in advance, the seller owes. Using a statutory year, $980 / 30 days = $32.67 per day. If the buyer owns the day of closing, the seller owes the buyer for 16 days. 16 x $32.67 = $522.72 debit seller/credit buyer.

Paul is taking out a $158,000 loan to purchase a house for $195,000. He's paying a 5% interest for a 30-year loan. Settlement is June 27. How will the prorated interim mortgage interest show up on the settlement statement? For this example, assume a statutory year and that the seller owns the day of closing?

$65.83 Debit Buyer

Mark agrees to buy Sharon's duplex for $246,000. Closing day is June 14. Both tenants paid rent of $975 on June 1. Mark is getting a loan for $170,000. He's paying 2 points in fees. The annual property taxes on the property are $3,456 and have not been paid. Mark paid the seller a $1,600 due diligence fee and gave the broker a $3,000 earnest money deposit check. Closing costs are $2,680. The lender requires 4 months of property taxes to be deposited in the escrow account, in addition to 2 months of property insurance in escrow. The annual property insurance premium is $810 and must be paid at closing. For the prorations, use a 360-day statutory year and assume that the seller owns the day of closing. What is Mark's necessary cash to close this transaction, rounded to the nearest dollar?

$76,963 - Let's start with the debit calculations. Mark's loan fees are $3,400 ($170,000 x 0.02). The escrow for taxes is $1,152 ($3,456 / 12 x 4). The escrow for property insurance is $135 ($810 / 12 x 2). So all debits total $8,177: $3,400 (loan fees) + $1,152 (tax escrow) + $810 (annual insurance) + $135 (insurance escrow) + $2,680 (closing costs) = $8,177. Total owed is $254,177. Next, let's do the credit proration calculations. The rent paid is $1,950, or $65 per day, and Mark should get a credit for 16 days, so $1,040. The property tax is $9.60 per day ($3,456 / 360), and Mark should get a credit for 164 days (Jan=30 + Feb=30 + Mar=30 + Apr=30 + May=30 + Jun=14), so $1,574. Total credits are $177,214: $170,000 (loan) + $1,040 (rent proration) + $1,574 (tax proration) + $1,600 (due diligence fee) + $3,000 (earnest money deposit) = $177,214. Subtract that from the total owed to find cash to close: $254,177 - $177,214 = $76,963.

The lender miscalculated the final Cash to Close on a buyer's Closing Disclosure although all of the listed expenses were correct. Which statement is TRUE?

The lender must issue an updated Closing Disclosure; no additional waiting period is required.

A tax levied on the transfer of a piece of real property from one person to another; it could be levied by the state, the county, or the municipality; in North Carolina, called Excise Tax.

Transfer Tax

Of the following, which is LEAST LIKELY to be an expense that buyer Sara's lender will require her to pay at closing as a reserve for the escrow/impound account?

title insurance premiums - Title insurance is a one-time fee paid at settlement. The lender does not collect it over the life of the loan nor keep any of the premium in an escrow account. The other expenses, however, may be required to be kept in reserve. wrong answers: property taxes / mortgage insurance premiums / homeowner's insurance premiums

In this scenario, you determined that buyer Sara had the following debits: $280 (loan application fee) + $1,590 (origination fee) + $2,120 (discount points) + $650 (closing attorney) + $505.40 (lender's title insurance) + $64.60 (owner's title insurance) + $400 (survey) + $56 (deed recording fee) + $26 (deed of trust recording fee) + $30 (courier fee) + $306.22 (interim mortgage interest) + $840 mortgage insurance + $684 (homeowners insurance) + $114 (homeowners insurance reserve) + $140 (mortgage insurance reserve) + $823.66 (property tax reserve) + $253.96 (prorated property tax) = $8,883.84 total debits. The sale price of the property is the starting point for calculating the cash to close, so ADD the total debits to that: $249,650 + $8,883.84 = $258,533.84. Now total all of buyer Sara's credits for the loan amount and the earnest money deposit: $212,000 + $3,500 = $215,500. Finally, subtract the credits from the total due to find buyer Sara's CASH TO CLOSE: $258,533.84 - $215,500 = $43,033.84.

True

In this scenario, you determined that seller Jack had the following debits: $14,979 (commission) + $85 (deed preparation) + $30 (courier) + $500 (excise tax) + $138,425 (existing loan payoff) + $508.52 (accrued mortgage interest) = $154,527.52. The sale price of the property is the starting point for calculating the net cash to the seller, so SUBTRACT the total debits from that: $249,650 - $154,527.52 = $95,122.48. To that, you need to ADD the one credit on Jack's side of the ledger, the prorated amount for the property tax he paid: $95,122.48 + $253.96 = $95,376.44. This is seller Jack's CASH TO SELLER.

True

Which expense found on the Closing Disclosure would LEAST LIKELY be prorated between buyer and seller?

a title insurance policy

Buyer Sara is getting a loan for $212,000. Sara's loan is a 30-year fixed rate mortgage with an interest rate of 6.5% for which she's paying the following financing-related expenses: Origination fee, discount points, application fee, appraisal fee, credit report fee. Which of Sara's financing costs were MOST LIKELY paid in advance prior to settlement?

appraisal fee and credit report fee

The seller must receive the Closing Disclosure

at settlement. - Although the seller generally receives the Closing Disclosure prior to settlement, there is no requirement for that. A seller simply has to be given a Closing Disclosure at settlement.

When calculating prorations on a Closing Disclosure, unpaid real estate taxes are entered as a ______ to the seller and a _____ to the buyer.

debit / credit

Of these expenses, which is LEAST LIKELY to be an expense that buyer Sara would owe in order to close the transaction?

existing loan payoff' wrong answers: appraisal fee / pest inspection / survey

Of these, which expense would be a debit to the seller and a credit to a buyer?

homeowners association fees not yet paid wrong answers: homeowners association fees already paid / property taxes already paid / rent not yet paid

Which of buyer Sara's expenses is LEAST LIKELY owed to her lender?

pest inspection wrong answers: discount points / credit report / appraisal fee

If it can be transferred to the new owner, a homeowner's insurance policy premium would be an example of a(n)

prepaid item on a settlement statement.

Debits and credits work together to reconcile the settlement statement. The baseline for all reconciliation is the ____________.

purchase price

To find the net cash to seller,

subtract debits from the sales price and add credits.

The purpose of the Closing Disclosure is to

summarize the financial aspects of a real estate transaction.

Of these, who is responsible for ensuring that the buyer receives the Closing Disclosure?

the lender