Chapter 21: Closings

Settlement process: Debits and Credits

*Debit:* amount that 1 party must pay at closing or has already paid prior to closing. -excess of the buyer's debits over the buyer's credits = amount buyer must bring to closing. *Credit:* amount that a party must receive at closing or has already been received prior to closing. -excess of seller's credits over seller's debits = amount the seller will receive.

Items paid in arrears

-At time of closing, seller has incurred certain expenses that have not been billed or paid at the time of closing and buyer will have to pay later. -Typical items: real estate taxes, utility bills, and interest on an assumed mortgage. -*Buyer receives a credit and the seller receives a debit.*

12-month/30-day period (Computing prorations)

-Determines average daily amount based on 12-month year and 30-day month. *see exhibits for annual and monthly items steps.

Charging share

-If the seller has paid the buyer's share of an item, *charge the buyer for the buyer's share of the period.* -If the buyer will pay the seller's share of an item, *charge the seller for the seller's share of the period* -If the seller has received the buyer's share of an income item, *charge the seller for the buyer's share of the period.*

Lender closing requirements

-Refers to the quality of collateral from borrower in return for the mortgage loan. *Requires:* survey; property inspection; hazard insurance; title insurance policy; reserve account for taxes and insurance; private mortgage insurance.

Reporting Requirements: a closed real estate transaction

-Stated in Tax Reform Act of 1986. -*Who must report:* "real estate broker," buyer's or seller's broker, settlement agent, mortgage lender, or other IRS-designated party. -*What must be filed:* Form 1099-S Information return, statements to each party, and tax reporting and withholding if FIRPTA applies (non-resident alien).

Good Faith

-measured by calculating the difference between *the estimated charges originally provided in the Loan Estimate* and the *actual charges paid by or imposed on the consumer in the Closing Disclosure.* -If charges paid or imposed on consumer are more than the amount originally disclosed in the Loan Estimate = *Not in good faith*

Prorated items

-settlement items that the buyer and seller share part of the responsibility. -some are expense items paid in advance -- buyer owes seller part of the expense. -some are income items the seller received in advance, and seller owes buyer part of the income. -some are items buyer has to pay in arrears, the seller owes the buyer part of the expense. -Items include: Real estate taxes, insurance premiums, mortgages interest, and rents. -expense seller paid in advance, *buyer receives debit and seller receives credit.* -income the seller received in advance, *the buyer receives a credit and the seller receives a debit.*

Real Estate Settlement Procedures Act (RESPA)

1974. Purpose is to clarify settlement costs and eliminate kickbacks and fees that increase settlement costs. -residential property -1st or 2nd mortgage -federally-related assumption -assumption modifying loan terms of over $50.

Types of charges on Loan Estimate

Charges: -Prepaid interest -Charges for services required by the creditor -Charges paid to third-party service providers (10% tolerance charges).

Closing Disclosure

Closing Disclosure (H-25) to disclose settlement costs to the buyer. Form covers all costs that the buyer will have to pay at closing, whether to lender or to other parties. *Consumer must receive form *no later than 3* days before closing, and revised copy 1 day before closing.

Broker's role in closings

Continues to provide service between the signing of the sale contract and the closing by making arrangements for pre-closing activities: -inspections; surveys; appraisals and repairs; ensure accuracy and timely delivery of the closing documents to the principal parties.

TILA/RESPA Integrated disclosure

Effective Oct. 3, 2015 Mandatory: -Lenders provide "Your Home Loan Toolkit" to consumer *at time of loan application.* -Lenders must deliver *Loan Estimate* (H-24) to consumer *no later than 3 business days* after application. -Lenders provide *Closing Disclosure* (H-25) to consumer *at least 3 business days* before dispersing loan.

Mortgage Servicing disclosure

Lender must disclose whether they will be servicing the loan or conveying to another lender for servicing. Disclosure must include information as to how the buyer can resolve complaints.

Information booklet

Lender must provide HUD booklet within 3 days of loan application. Booklet describes loans, closing costs, and closing disclosure form.

Loan Estimate

Lender must provide a Loan Estimate (H-24) within 3 days of application. Estimate is usually based on comparable transactions completed in the area.

Disclosures after settlement

Lenders must provide annual escrow statement summarizing inflows and outflows in the prior 12-month period. Discloses shortfalls or overages in the account, and how discrepancies will be resolved.

Referral fees and kickbacks

RESPA prohibits referral fees and kickbacks. Business relationships between firms involved in the transaction must be disclosed.

Limits on escrow accounts

Section 10 of RESPA places ceiling on amounts lenders require borrowers to place in escrow.

Transfer of Title

Seller gives evidence of marketability: -title abstract or title insurance commitment -may also need affadavit stating no new encumberances incurred -seller must remove encumberances or liens prior to the specified date -if seller is paying off mortgage lien, lender provides a payoff statement

Settlement process: Identify selling terms and closing costs.

Selling terms: -price of the property -buyer's deposit and downpayment -terms and mounts of the buyer's financing arrangements. Closing costs: -Final expenses that buyer or seller must pay at closing to complete the transaction. -include: brokerage fees, mortgage-related fees, title-related expenses, and real estate taxes.

The closing process

Verify contract fulfillment; exchange consideration and title; pay expenses; sign final documents; arrange for recording the transaction.

Non-prorated items

settlement costs incurred by only one party.