Unit 22
In Pennsylvania
Buyers are responsible for determining that they are taking good title to the property
Assume a sale is to be closed on September 17. To compute this proration using the actual number of days in the accrued period, the following method is used:
The accrued period from January 1 to September 17 runs 260 days (January's 31 days plus February's 28 days and so on, plus the 17 days of September). $3,600 ÷ 365 days = $9.863 per day $9.863 × 260 days = $2,564.38
A building was bought for $185,000, with 10% down and a loan for the balance. If the lender charged the buyer two discount points, how much cash did the buyer need at closing to pay the down payment and the loan fees?A) $21,830 B) $22,950 C) $18,500 D) $8,700
The answer is $21,830. The borrower needs to bring the 10% down payment and another $3,330 for points for a total of $21,830. $185,000 × 0.90 × 0.02 = $3,330 + $18,500 = $21,830.
A debit
is a charge—an amount that the party being debited owes and must pay at closing
A credit
is an amount entered in a person's favor—an amount that has already been paid, an amount being reimbursed, or an amount the buyer promises to pay in the form of a loan.
TILA-RESPA Integrated Disclosure Rule (TRID)
A rule that took effect on October 3, 2015 and applies to transactions for which the creditor or mortgage broker receives an application on or after that date.
One example of a prepaid item is a water bill. Assume that the water is billed in advance by the city. The six months' billing is $120 for the period ending October 31 ($120 ÷ 6 = $20 per month). The sale is to close on August 3. Because the water bill is paid through October 31, the prepaid time must be computed. To figure this proration based on the actual days in the month of closing, the following process would be used:
$20 per month ÷ 31 days in August = $0.645 per day August 4 through August 31= 28 days 28 days × $0.645 = $18.060 2 months × $20 = $40.000 $18.06 + $40 = $58.060
Loan Estimate (LE)
A Loan Estimate is a three-page form that is receive after applying for a mortgage. The Loan Estimate contains important details about the loan requested.
Closing Disclosure
A five-page form that provides final details about the mortgage loan selected. It includes the loan terms, projected monthly payments, and how much will be paid in fees and other costs to get a mortgage (closing costs).
Affiliated Business Arrangement (AfBA)
A package of business arrangements between real estate brokerage firms and affiliated mortgage companies or other settlement service providers, when there is more than a 1% common ownership between the companies. RESPA requires that consumers be informed of the availability and costs of other lenders.
Closing
An event where promises made in a sales contract are fulfilled and mortgage loan funds (if any) are distributed to the buyer.
Prorations
Expenses, either prepaid or paid in arrears, that are divided or distributed between buyer and seller at the closing.
Assume a sale is to be closed on September 17. Using a 360-day year, prorate the current real estate taxes of $3,600 for the accrued period of 8 months, 17 days.
First determine the prorated cost of the real estate tax per month and day: $3,600 ÷ 12 = $300 per month $300 ÷ 30 = $10 per day Next, multiply these figures by the accrued period and add the totals to determine the prorated real estate tax: $300 × 8 months = $2,400 $10 × 17 days = $170 $2,400 + 170 = $2,570 Thus, the accrued real estate tax for 8 months, 17 days is $2,570.
Accurate prorating involves the following four considerations:
Nature of the item being prorated Whether the item is accrued and requires the determination of an earned amount Whether the item is prepaid and requires the determination of an unearned amount (i.e., a refund to the seller) What arithmetic processes must be used
The Closing Disclosure (CD) is formatted similarly to the Loan Estimate so that consumers can easily compare their LE with the final terms of the loan. Here is a brief summary of each of the five pages:
Page 1: similar to page 1 of the Loan Estimate, recapping loan terms, projected payments and costs at closing Page 2: itemizes the loan costs and other costs to arrive at the total costs paid by the buyer, the seller, and those paid by others Page 3: calculates cash to close, summaries of the transactions and the amount due to the seller and from the buyer Page 4: more loan disclosures, including the fact that the property costs may change and escrow payments may change Page 5: disclosures about the total amount that the borrower will repay; if an appraisal was required, the lender must provide the appraisal at no cost at least three days before closing; the contact information for all of the parties involved in the transaction; and a place to sign to confirm receipt of the form.
Title insurance must be offered at a lower rate when previous title insurance was issued within A) 5 years. B) 10 years. C) 3 years. D) 15 years.
The answer is 10 years.
What is the name of the government agency that is responsible for making closings more understandable? A) Housing and Urban Development (HUD) B) Department of Justice (DOJ) C) Federal Housing Administration (FHA) D) Consumer Financial Protection Bureau (CFPB)
The answer is Consumer Financial Protection Bureau (CFPB). Under the reforms mandated by Dood-Frank, a new agency was created, the Consumer Financial Protection Bureau (CFPB). It has taken over functions from Housing and Urban Development (HUD).
Title insurance rates in Pennsylvania are set by A) the Real Estate commission. B) Pennsylvania Title Insurance Rating Bureau. C) the market, depending on the competition. D) Philadelphia Housing Authority.
The answer is Pennsylvania Title Insurance Rating Bureau. Title insurance rates, set by the Pennsylvania Title Insurance Rating Bureau, cover the initial title search, the later search to bring down the title to the closing date, and the title insurance policy.
All of the following generally levy taxes in Pennsylvania EXECPT A) municipal governments. B) Philadelphia Housing Authority. C) county governments. D) school districts.
The answer is Philadelphia Housing Authority. In Pennsylvania, three taxing bodies levy general real estate taxes: county governments, municipal governments, and school districts.
A mortgage reduction certificate is executed by A) a grantor. B) an attorney. C) an abstract company. D) a lending institution.
The answer is a lending institution. When a buyer assumes a seller's existing mortgage, the buyer asks the lender for a mortgage reduction certificate that certifies the amount owed on the mortgage loan, the interest rate, and the last interest payment made.
A lender approached a real estate company and offered a prize of a trip to Las Vegas. Anyone who sent a buyer to the lender was eligible to enter for the drawing. Most of the salespeople referred buyers to this lender. This contest is A) legal because not everyone in the office participated. B) no big deal since the entry level was only to send buyers to the lender. C) a great incentive to drum up business. D) a violation of RESPA affiliated business arrangements.
The answer is a violation of RESPA affiliated business arrangements. RESPA permits an AfBA as long as a consumer is clearly informed of the relationship among the service providers, that participation is not required, and that other providers are available.
A debit is A) a refund. B) a proration. C) an expense. D) an adjustment for an expense paid outside of closing.
The answer is an expense. A debit is a charge—an amount that the party being debited owes and must pay at closing.
In a closing statement, an accrued item is A) an item that is unpaid but is due. B) a proration. C) an item paid in advance. D) a prepaid expense.
The answer is an item that is unpaid but is due. Accrued items are expenses to be prorated that are owed by the seller (such as water bills and interest on an assumed mortgage) but will be paid later by the buyer.
At the closing, the seller's attorney informed him that he would be giving credit to the buyer, for certain accrued items. These items represent A) all the seller's outstanding bills. B) all the buyer's outstanding bills. C) bills related to the real estate that have not been paid as of the time of the closing. D) bills related to the real estate that have already been paid by the seller.
The answer is bills related to the real estate that have not been paid as of the time of the closing. Accrued items are expenses to be prorated that are owed by the seller (such as water bills and interest on an assumed mortgage) but will be paid later by the buyer. The seller, therefore, pays for these items by giving the buyer a credit at closing.
At the closing, the seller's attorney gave credit to the buyer for certain accrued items. These items were A) bills relating to the property that will have to be paid by the buyer. B) all the buyer's real estate bills. C) bills relating to the property that have already been paid by the seller. D) all the seller's real estate bills.
The answer is bills relating to the property that will have to be paid by the buyer. A credit given by the seller to the buyer for certain accrued items (those items owed but not yet paid) would be entered on the Closing Disclosure to account for bills relating to the property that will be paid by the buyer after closing.
Security deposits should be listed on a closing statement as a credit to the A) broker. B) lender. C) seller. D) buyer.
The answer is buyer. A credit is an amount entered in a person's favor on the settlement statement. The amount is due to be paid to the party. Tenant security deposits are entered as a credit to the buyer.
The annual real estate taxes amount to $1,800 and have been paid in advance for the calendar year. If closing is set for June 15 with taxes prorated as of the date of settlement, which of the following is TRUE? A) Credit seller $1,800; debit buyer $825 B) Credit seller $825; debit buyer $975 C) Credit seller $975; debit buyer $975 D) Credit buyer $975; debit seller $975
The answer is credit seller $975; debit buyer $975. If real estate taxes amount to $1,800 per year ($150 per month) and have been paid in advance for the year, the seller is entitled to be reimbursed for the period from June 15 to the end of the year. The buyer is responsible for this time period. Therefore, the seller receives a credit for $975 ($150 per month times 6.5 months). This amount is debited to the buyer.
The earnest money on deposit with the broker is a A) credit to the buyer. B) balancing factor. C) credit to the seller. D) debit to the buyer.
The answer is credit to the buyer. The earnest money belongs to the buyer; at closing, it is a credit to the buyer.
An item prepaid by the seller is A) evenly divided between the buyer and the seller. B) credited to the seller. C) debited to the seller. D) credited to the buyer.
The answer is credited to the seller. Because the seller has already paid for the item, but not used the item, the amount is shown as a credit to the seller and a debit to the buyer, who will use the item.
At closing, the listing broker's commission is usually shown as a A) debit to the seller. B) credit to the buyer. C) debit to the buyer. D) credit to the seller.
The answer is debit to the seller. Typically, the seller hired the broker in a listing agreement, agreeing to pay the broker for finding a buyer. The amount is a debit to the seller. The listing broker may choose to split this commission with another agency that actually found the buyer.
Which property does the Consumer Financial Protection Bureau require that the Closing Disclosure be used? A) Construction loans B) Federally related loan for a single-family home C) Loan for agricultural purposes D) Installment contract
The answer is federally related loan for a single-family home. RESPA regulations apply to first-lien residential mortgage loans made to finance the purchases of one- to four-family homes, cooperatives, and condominiums, for either investment or occupancy, as well as second or subordinate liens for home equity loans when a purchase is financed by a federally related mortgage loan.
example of a kickback that is prohibited by RESPA is a A) flower arrangement that a salesperson sends to the buyer as a housewarming gift. B) share of the commission paid by broker A to her salesperson. C) fee paid by broker A to broker B for referring a buyer to broker A. D) fee paid by a closing agent to a broker for suggesting the agent.
The answer is fee paid by a closing agent to a broker for suggesting the agent. RESPA's Section 8 prohibits kickbacks and fee-splitting for referrals of settlement services and unearned fees for services not actually performed.
What is the purpose of the walk-through? A) Title is clear B) Determine decorating ideas C) Fixtures remain in place D) Find new things for the seller to fix
The answer is fixtures remain in place. The buyers usually reserve the right to make a final inspection, often called a walk-through, shortly before the closing takes place. The purpose is to verify that the fixtures are in place, repairs have been made, and that the property has been well maintained.
Almost always, the interest on a mortgage loan is paid A) in arrears. B) prematurely. C) early. D) in advance.
The answer is in arrears. On almost every mortgage loan, the interest is paid in arrears, that is after the money has been used for a period of time, typically a month.
Under RESPA, what is the maximum cushion for taxes and insurance that may be escrowed at any given time? A) One month of estimated amounts B) No more than one-sixth of annual taxes and insurance C) Any amount that the lender feels appropriate D) Up to six months of estimated amounts
The answer is no more than one-sixth of annual taxes and insurance. RESPA permits lenders to maintain a cushion equal to one-sixth of the total estimated amount of annual taxes and insurance (i.e., two months). However, if state law or mortgage documents allow for a smaller cushion, the lesser amount prevails.
Which of the following is a seller concern? A) Pay off the mortgage B) Verify title evidence C) Review the survey D) Verify that liens have been removed
The answer is pay off the mortgage. The settlement cannot proceed until the seller has paid off the mortgage. This is usually done with the buyer's new money, brought to closing.
The process by which expenses are handled at the settlement of a real estate transaction so that both the buyer and the seller pay their respective portions of the debts is called A) balancing. B) reconciliation. C) proration. D) assessment.
The answer is proration. Prorations are a division of financial responsibility between the buyer and the seller for such items as loan interest, taxes, rents, fuel, and utility bills and are necessary to ensure that expenses are divided fairly between the seller and the buyer.
The TILA RESPA Integrated Disclosure requires that, within three days of loan application, lenders A) bill for the cost of the appraisal and credit report. B) provide a Loan Estimate. C) provide a written explanation of why the loan was denied. D) approve or deny the loan.
The answer is provide a Loan Estimate. Lenders are obligated to provide the Loan Estimate within three business days of the application.
The Loan Estimate and Closing Disclosure must be used to illustrate all settlement charges for A) residential transactions financed by federally related mortgage loans. B) every real estate transaction. C) all transactions involving commercial property. D) transactions financed by VA and FHA loans only.
The answer is residential transactions financed by federally related mortgage loans. RESPA requirements apply when a purchase is financed by a federally related mortgage loan. The regulations apply to first lien residential mortgage loans made to finance the purchase of one- to four-family homes, cooperatives, and condominiums for either investment or occupancy.
How are rents adjusted on the day of closing? A) Buyer gets the rents but the seller pays for the day of closing B) Buyer gets the rents and pays expenses for the day of closing C) Seller gets the rents but the buyer pays for the day of closing D) Seller gets the rents and pays expenses for the day of closing
The answer is seller gets the rents and pays expenses for the day of closing. Rents are usually adjust on the basis of the actual number of days in the month of closing; usually the seller receives the rent and pays all the costs on the day of closing.
The seller collected rent of $400, payable in advance, from the tenant on August 1. At the closing on August 15, the A) buyer owes the seller $200. B) seller owes the buyer $200. C) buyer owes the seller $400. D) seller owes the buyer $400.
The answer is seller owes the buyer $200. When the August rent of $400 was paid to the seller on August 1 and the property sale closed on August 15, the seller owed the buyer the amount of rent from the closing date to the end of the month, or $200.
All encumbrances and liens shown on the report of title, other than those waived or agreed to by the purchaser and listed in the contract, must be removed so that the title can be delivered free and clear. The removal of such encumbrances is the duty of the A) broker. B) buyer. C) seller. D) title company.
The answer is seller. Unless the buyer has agreed to take title subject to certain liens or encumbrances, the seller will be expected to satisfy or remove the liens or encumbrances in order to convey clear title to the property.
Which of the following is TRUE of real estate closings in Pennsylvania? A) Closings are generally conducted by real estate salespersons. B) The buyer pays for title evidence. C) The buyer usually receives the rents for the day of closing. D) The seller pays the brokers' fees.
The answer is the buyer pays for title evidence. Both the buyer and the buyer's lender want assurance that title to the property being conveyed complies with terms of the transfer. Buyers are responsible for determining that they are receiving good title to the property. Title evidence, such as an abstract of title or title insurance, is normally a charge paid by the buyer.
Real estate firms are often affiliated with title insurance companies or mortgage brokers. These business arrangements are permitted by RESPA as long as A) consumers are unaware of these arrangements. B) the companies pay referral fees between them. C) consumers are required to use the services of the affiliated companies. D) the companies make a written disclosure of their relationship with one another.
The answer is the companies make a written disclosure of their relationship with one another. RESPA permits an affiliated business arrangement (AfBA) as long as a consumer is clearly informed of the relationship among the service providers, that participation is not required, that other providers are available, and that the only thing of value received by one business entity from others, in addition to permitted payments for services provided, is a return on ownership interest or franchise relationship.
If a seller collected rent of $900, payable in advance, on August 1, which statement is TRUE at the closing on August 15, if the closing date is an expense to the seller? A) The buyer owes the seller $450. B) The seller owes the buyer $450. C) The seller owes the buyer $900. D) The buyer owes the seller $900.
The answer is the seller owes the buyer $450. The seller received the August rent of $900 on August 1 for the entire month of August. However, the buyer owns the house from August 15; therefore, the seller must pay $450 to the buyer, who is then responsible for any expenses after August 15.
Under the new rules, if the annual percentage rate (APR) has increased prior to closing, for how many days, if any, is settlement delayed? A) Two days B) No delay C) Three business days D) Five business days
The answer is three business days. The lender must provide a revised Loan Estimate within three business days after the rate is locked.
The condition of the seller's title is generally determined from a A) physical inspection of the property by the buyer. B) closing statement prepared by an escrow agent. C) escrow report prepared by an attorney. D) title commitment or title insurance policy.
The answer is title commitment or title insurance policy. In Pennsylvania, the buyer is responsible for determining that he or she is taking good title to the property. Either the abstract of title or a title commitment from a title insurance company will disclose any liens, encumbrances, easements, conditions, or restrictions that appear on the record that affect the seller's title.
Which of the following would a lender generally require to be produced at the closing? A) Application B) Credit report C) Title insurance policy D) Market value appraisal
The answer is title insurance policy. The application, credit report, and appraisal are required by a lender before committing funds for the loan. The lender will require a title insurance policy at closing in order to protect their interest in the property.
ll of the following are often prorated EXCEPT A) taxes. B) rents. C) fuel oil on the property. D) title insurance.
The answer is title insurance. The buyer is responsible for purchasing the title insurance. The buyer owes the seller for fuel oil left in the tank on the day of closing, but the seller gets to keep the rent income for the day of closing.
Legal title always passes from the seller to the buyer A) on the date of execution of the deed. B) when the deed is delivered and accepted. C) when the closing statement has been signed by the parties. D) when the deed is recorded.
The answer is when the deed is delivered and accepted. Transfer of title to real estate occurs when a deed is delivered to and accepted by a grantee. The settlement statement is the final accounting of financial arrangements between the parties. A grantor may execute (sign) the deed prior to settlement, and recording occurs subsequent to the closing to give constructive notice of the grantee's interest.
Real Estate Settlement Procedures Act (RESPA)
The federal law that requires certain disclosures to consumers about mortgage loan settlements. The law also prohibits the payment or receipt of kickbacks and certain kinds of referral fees.
Borrowers have the right to compare the Loan Estimate to the Closing Disclosure one week before the closing. True or False?
The statement is false. Borrowers have the right to compare their Loan Estimate to the Closing Disclosure three business days before closing.
When a purchase is financed by a private mortgage loan, requirements of the TRID apply. True or False?
The statement is false. TRID requirements apply when a purchase is financed by a federally related mortgage loan. Federally related loans means loans made by banks, savings and loan associations, or other lenders whose deposits are insured by federal agencies. Loans insured by the FHA or guaranteed by the VA; loans administered by HUD; and loans intended to be sold by the lenders to Fannie Mae, Ginnie Mae, or Freddie Mac are also federally related loans.
The seller is usually responsible for paying loan costs for the buyer. True or False?
The statement is false. The buyer is typically responsible.
The buyer is typically responsible for paying the real estate commission. True or False?
The statement is false. The seller is typically responsible for paying the real estate commission; the listing agent typically splits the commission with the buyer agent, if any.
Items customarily charged to the buyer include recording the satisfaction of mortgages, quitclaim deeds, and affidavits. True or False?
The statement is false. The seller usually pays for recording charges (filing fees) necessary to clear all defects and furnish the purchaser with clear title according to the terms of the contract. Items customarily charged to the seller include recording the satisfaction of mortgages, quitclaim deeds, affidavits, and satisfaction of mechanic's lien claims.
Certain real estate closings must be reported to the Internal Revenue Service (IRS) on Form 1099-S. True or False?
The statement is true. Certain real estate closings must be reported to the IRS on Form 1099-S. IRS regulations state the types of property transactions that are affected by this requirement and the information that must be reported. If the closing agent does not notify the IRS, the responsibility for filing the form then falls on (in the following order) the mortgage lender, the seller's broker, the buyer's broker, or other persons as designated in the IRS regulations.
Closings may be held at a number of locations, including the office of the title company, the real estate broker, or the recorder of deeds. True or False?
The statement is true. Closings may be held at a number of locations, including the office of the title company, the lending institution, one of the parties' attorneys, the real estate broker, or the recorder of deeds.
On the day of closing, the fuel oil left in the tank is a credit to the seller. True or False?
The statement is true. Prepaid items are expenses to be prorated (such as fuel oil in a tank) that have been prepaid by the seller but not fully used. They are, therefore, credits to the seller.
Using this general principle, there are two methods of calculating prorations:
The yearly charge is divided by a 360-day year (called a banking or statutory year), or 12 months of 30 days each. The yearly charge is divided by 365 (a calendar year) to determine the daily charge. Then the actual number of days in the proration period is determined, and this number is multiplied by the daily charge.
affidavit of title
This affidavit is a sworn statement in which the sellers ensure the title insurance company (and the buyer) that no other defects in the title have occurred since the date of the title examination (e.g., judgments, bankruptcies, divorces, unrecorded deeds or contracts, or unpaid repairs or improvements that might lead to mechanics' liens). The affidavit gives the title insurance company a basis on which to sue the sellers should their statements in the affidavit be incorrect.
One example of a prepaid item is a water bill. Assume that the water is billed in advance by the city. The six months' billing is $120 for the period ending October 31 ($120 ÷ 6 = $20 per month). The sale is to close on August 3. Because the water bill is paid through October 31, the prepaid time must be computed. Using a 30-day basis, the pre-paid period is the 27 days left in August plus two full months
To compute one day's cost, divide $20 by 30, which equals $0.666 per day. The computation is as follows: 27 × $0.666 per day = $17.982 2 months × $20= $40.000 $57.982 or $57.98 This is a prepaid item; it is credited to the seller and debited to the buyer.
The attorney's opinion of title is
a statement of the quality of the seller's title, and it lists all liens, encumbrances, easements, conditions, and restrictions that appear on the record and to which the seller's title is subject. The attorney's opinion is not a guarantee of title.
the sellers may be required to execute an
affidavit of title
Certain real estate closings must be reported to the Internal Revenue Service (IRS) on Form 1099-S. The affected properties include sales or exchanges of
and (improved or unimproved), including air space; an inherently permanent structure, including any residential, commercial, or industrial building; a condominium unit and its appurtenant fixtures and common elements (including land); or shares in a cooperative housing corporation.
Prepaid items
are expenses to be prorated (such as fuel oil in a tank) that have been prepaid by the seller but not fully used. They are, therefore, credits to the seller.
Accrued items
are expenses to be prorated that are owed by the seller (such as water bills and interest on an assumed mortgage) but will be paid later by the buyer. The seller, therefore, pays for these items by giving the buyer a credit at closing.
Either the abstract of title or a title commitment from a title insurance company will
disclose whatever liens, encumbrances, easements, conditions, or restrictions that appear on the record that affect the seller's title.
survey
provides information about the exact location and size of the property. Typically, the survey indicates the location of all buildings, driveways, fences, and other improvements located on the premises. The survey should also indicate any existing easements and encroachments. The cost of the survey is negotiated in the contract.
The seller usually pays for
recording charges (filing fees) necessary to clear all defects and furnish the purchaser with clear title according to the terms of the contract. Items customarily charged to the seller include recording the satisfaction of mortgages, quitclaim deeds, affidavits, and satisfaction of mechanic's lien claims.
The buyer pays for
recording charges that arise from the actual transfer of the title, such as the deed the buyer received and the mortgage the buyer executed. Usually, such items include recording the deed that conveys title to the purchaser and a mortgage or deed of trust executed by the buyer.
On Pennsylvania licensing examinations
tax prorations are usually based on a 30-day month (360-day year), unless specified otherwise. In practice, however, it is customary to base prorations on a 365-day year (366 days in leap years). Many title insurance companies provide proration charts that detail tax factors for each day in the year.
walk-through
the buyer verifies that necessary repairs have been made, the property has been well maintained, all fixtures are in place, and no unauthorized removal or alteration of any part of the improvements has taken place. It is not an opportunity to reopen negotiations.
Closing involves two major events:
the promises made in the sales contract are fulfilled and the mortgage funds are distributed to the buyer.
Both the buyer and the buyer's lenders must be sure that the seller can deliver the title that was promised in the purchase agreement and that the property is now in essentially the same condition it was in when the buyer and the seller agreed to the sale. This involves inspecting
the title evidence; the seller's deed; any documents demonstrating the removal of undesired liens and encumbrances; the survey; the results of any inspections, such as termite or structural inspections, or required repairs; any leases, if tenants reside on the premises.
The lender must mail or deliver the Loan Estimate (LE) to the borrower no later than
three business days after the loan application.
In the real estate contract, the buyer usually reserves the right to make a final inspection, often called a
walk-through