Chapter 10: Transaction Process and Closing

What additional information is required for getting a loan on a commercial or industrial transaction?

- A Dun and Bradstreet Inc., report - audited financial and and profit-and-loss statements for both current and previous years

Closing Disclosure

- An accounting of the parties debits and credits - must be received by the consumer 3 days before closing

What 5 things are credit scores based on

1) borrowers history of payment (35%) 2) amount owed (30%) 3) length of credit history (15) 4) new credit (10%) 5) number of credit cards/credit cards maxed out, etc. (10%)

Contract to closing checklist

1. Offer to purchase including any contingencies, amendments, and/or addenda signed and initialed where necessary by both buyers and sellers. Offer becomes a sales contract. 2. Earnest money deposited by broker according to state law. 3. Copy of contract sent to closing agent to initiate title work. 4. Buyer makes formal application for financing as described in sales contract. (may have presented preapproval letter with orig offer to purchase.) 5. Lender provides borrower with Loan Estimate w/in 3 days of app. 6. Lender orders credit report & appraisal. 7. Buyer orders any property inspections as required by contingency to contract. 8. buyer or seller orders termite report. 9. Copy of inspection report with list of requested repairs provided to seller. 10. Final loan approval letter received from lender. 11. Seller makes arrangements for any repairs required 12. Closing agent orders title search & survey, if required. 13. defects in title are brought to the seller for resolution. 14. Closing agent obtains title insurance policies for lender & new owner. 15. Buyer arranges for homeowners insurance w copy sent to closing agent. 16. Definite closing date, time & place are set with notice to buyer & seller. 17. Lender prepares mortgage documents & sends to closing agent. 18. Closing agent obtains payoff figures for any existing mortgages. 19. Closing agent prepares deed & Closing Disclosure is delivered 3 days prior to closing. 20. Buyer confirms closing figures on Closing Disclosure with closing agent. 21. Buyer arranges for utilities hook-up, confirms with movers & post office. 22. Buyer makes walk-through inspection of premises. 23. Buyer arranges for cashier's check or certified funds to bring to closing. 24. Closing takes place

Once the buyer objects, the seller must cure the objections of the buyer or any third-party lender within ____ days after the seller receives the objections.

15 days

Under the Commitment clause, the seller has to provide the buyer a commitment for title insurance, restrictive covenants and exception documents within ____ days after the title company receives the contract

20 days - but the time period for providing the documents can be extended up to 15 days or 3 days before closing whichever is earlier.

debit

A charge, an amount the party owes and must pay by closing

tri-merge credit report

A credit report that contains credit information and credit scores from all three major credit reporting agencies. - when scores are different, middle one is used

underwriter

A person who evaluates and classifies risks to accept or reject them on behalf of the insurer.

bring down

A second title search that is made after the closing and before any new documents are filed.

Who might attend a closing? A) All of these B) Real estate agents C) Buyer's attorney D) Mortgage officer

A) All of these

Where could a face-to-face closing be held? A) Any of these B) The lending institution's office C) The title company's office D) The office of an attorney for one of the parties

A) Any of these

If a buyer and seller were to close on August 17, which of the following items would the title company prorate? A) Rents B) Origination fees C) Escrow fees D) None of these

A) Rents

For how many years must a broker maintaining a trust account retain a documentary record of each deposit or withdrawal from the account? A) 1 B) 4 C) 10 D) 20

B) 4

Who should attend a face-to-face closing? A) The real estate sales agents B) All of these C) The seller D) The buyer

B) All of these

When does a title company start the title work? A) At the time the seller's broker instructs them to do so. B) At the time the contract is sent to the title company. C) At the time the listing agreement is executed. D) At the time the contract is executed.

B) At the time the contract is sent to the title company.

Which of the following items would be prorated at closing? A) Provisional fees B) Option fees C) Furnace fuel bills D) Warranty deed fees

C) Furnace fuel bills

Which of the following provides potential borrowers with information about closing costs? A) RESPA's closing information booklet B) Lender Services Booklet C) Loan Estimate D) Mortgage Information and Closing Procedures Booklet

C) Loan Estimate

Which of the following items is not prorated at closing? A) Water taxes B) General real estate taxes C) Loan amount D) Mortgage interest on an assumed mortgage

C) Loan amount

Which of the following fees would most likely be prorated at closing? A) Discount points B) Home warranty premiums C) Taxes D) Buy-down fees

C) Taxes

Which of the following is the best example of a contract? A) A buyer signs and presents an offer to the seller, and the seller signs it without notifying the buyer. B) A buyer makes an offer on a property. C) A seller counters an offer on a property. D) A buyer and seller agree in writing to all the terms of an offer, and the acceptance has been communicated

D) A buyer and seller agree in writing to all the terms of an offer, and the acceptance has been communicated

Which of the following fees would most likely be prorated at closing? A) Attorney fees B) Title insurance fees C) Loan discount fees D) Homeowners association fees

D) Homeowners association fees

Flood insurance is required for any property within _______________ declared flood zones

Federal Emergency Management Agency (FEMA) declared flood zones

According to state law, who deposits the earnest money and offer to purcchase

Listing broker or selling broker

If the seller provides an existing survey, it must include a _____ Affidavit

T-47 Affidavit - states that there have been no changes to the property since it was surveyed except for the listed changes - Promulgated by the Texas Department of Insurance

home inspectors are licensed by

TREC

If capital gain is less than $250,000 for an individual or $500,000 for a couple, it may not be necessary to file a Form 1099-S due to

Tax Payer Relief Act of 1997

When must the loan estimate be given to the purchaser?

Within three days of submitting the application

If the escrow agent's examination of the title discloses liens, _________________ can be withheld from the seller.

a portion of the purchase price - used to pay off liens

Mortgage Servicing Disclosure Statement

a statement that tells the borrower whether the lender intends to service the loan or to transfer it to another lender.

credit

an amount entered in a persons 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.

Under the TREC-promulgated Third Party Financing Addendum, a satisfactory appraisal is included as one of the lenders underwriting requirements in the Property Approval clause in the Approval of Financing paragraph. Under this provision, property approval is deemed to be obtained when the property meets the lender's underwriting requirements for the loan, which includes (but is not limited to)

appraisal, insurability, and lender-required repairs.

Uniform Residential Loan Application form used by most lenders. The application form lists all assets and liabilities of the borrower in order to determine the applicant's net worth.

assets and liabilities of the borrower in order to determine the applicant's net worth.

When must the closing disclosure be delivered to the purchaser

at least three days before closing

Assuming that the buyer indicates in the contract that he will be obtaining third party financing, the Third Party Financing Addendum should be attached to the contract. The addendum states that financing approval means that the buyer must get both

buyer approval and property approval.

Section 10 of RESPA prohibits

lenders from requiring excessive escrow account deposits, money set aside to pay taxes, hazard insurance, and other charges related to the property

The financing contingency protects the purchaser, for a limited amount of time, from

losing the earnest money in case the contract falls through due to an inability of the buyer to obtain financing.

Face-to-face closings

may be held at the office of the title company, the lending institution, an attorney for one of the parties, the broker, the county recorder, or the escrow company. Those attending a closing may include: - the buyer - the seller - the real estate sales agents or brokers (both the buyer's and the seller's agents) - the seller's and the buyer's attorneys - representatives of the lending institutions involved with the buyer's new mortgage loan, the buyer's assumption of the seller's existing loan, or the seller's payoff of an existing loan - a representative of the title insurance company.

Homeowners insurance has become more complicated to obtain because of

natural disasters- tornadoes, earthquakes, hurricanes, etc.

The selection of the escrow agent is determined by

negotiation, custom, or state law.

In most cases, the role of the closing agent is to

represent the terms of the contract—not the personal interests of either the buyer or the seller.

Section 9 of RESPA prohibits

sellers from requiring that homebuyers buy title insurance from a particular company. - Buyers may sue the seller for such a violation; violators are liable for up to three times the amount of all charges paid for the title insurance.

the One to Four Family Residential Contract (Resale) or another TREC-promulgated contract form is used. Under those contractual documents, who is required to deposit the money with the escrow agent (usually a title company) after the contract is formed and executed by both seller and buyer?

the buyer, not the license holder

who has the authority to examine the title evidence?

the escrow agent

If the closing agent does not notify the IRS, the responsibility for filing the 1099-S form falls on

the mortgage lender, although the brokers or the parties to the transaction ultimately could be held liable

In most states, including Texas, who owns the property on the day of closing

the seller

negotiations concerning repairs that the buyer might want the seller to do must be done before

the termination period ends

If the seller agrees to any repairs, the Completion of Repairs and Treatments clause states that the seller must

use a licensed person to do the repairs, or if a license is not necessary, the seller must hire someone commercially engaged in the trade.

tasks the buyer must complete in the few days before closing

- Arrangements must be made for transferring utilities to the buyer's name. If the buyer is new to an area, a deposit may be required from the utility company. - A change of address needs to be filed, along with transfer of cable or television systems - The buyer conducts a walk-through, or final inspection, to verify that all necessary repairs have been made, that the property has been well maintained, and that all systems and fixtures are in substantially the same condition that they were in at the time the contract was finalized. The walk-through should be done shortly before closing. Any problems uncovered will be handled at the settlement table. - The Closing Disclosure will be sent to the parties three days prior to closing and should be reviewed. The third page of the Closing Disclosure compares the actual cost to the cost on the Loan Estimate provided at application. - Obtain a cashier's check or certified funds to bring to closing.

Lenders may revise a loan estimate only if:

- Changed circumstances (such as a natural disaster or fire) that occur after the Loan Estimate is issued increase estimated settlement charges beyond the tolerances allowed in the rule - Changed circumstances that occur after the Loan Estimate is provided to the consumer affect the consumer's eligibility for the terms for which the consumer applied (for example, no documented proof of overtime, bonus, or other income) or the value of the security for the loan (the home appraised at less than sales price) - The consumer requests changes to the credit terms or the settlement - The interest rate was not locked when the Loan Estimate was provided, and locking the rate causes the points or lender credits disclosed on the Loan Estimate to change - The initial Loan Estimate expires (10 business days after the Loan estimate is provided to the consumer) before the consumer accepts the terms of the loan - The loan is for new construction, and settlement is delayed by more than 60 calendar days, if it is clearly stated in the original Loan Estimate that at any time prior to 60 calendar days before closing, the lender may revise the Loan Estimate

List of 0 tolerance charges

- Fees paid to the lender, mortgage broker, or an affiliate of either - Fees paid to an unaffiliated third party if the lender did not let the consumer shop for a third-party service provider for a settlement service - Transfer taxes

The only 3 changes to closing disclosures that would require a new 3-day review period

- Increasing the annual percentage rate (APR) by more than one-eighth of a percentage point for a fixed-rate loan or one-fourth of a percentage point for an adjustable-rate loan (decreasing the interest rate or fees does not cause a delay) - The addition of a prepayment penalty - Changes in the loan product (from a fixed-rate to an adjustable-rate loan, for example

What settlements does RESPA NOT apply to

- Loans on large properties (more than 25 acres) - Loans for business or agricultural purposes - Construction loans or other temporary financing - Vacant land (unless a dwelling will be placed on the lot within two years) - A transaction financed solely by a purchase-money mortgage taken back by the seller - An installment contract (contract for deed) - A buyer's assumption of a seller's existing loan (if the terms of the assumed loan are modified, or if the lender charges more than $50 for the assumption, the transaction is subject to RESPA regulations

To claim the capital gain exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:

- Owned the home for at least 2 years (the ownership test), and - Lived in the home as your main home for at least 2 years (the use test).

Arrangements seller must make in the few days before closing

- Pack and confirm moving day and time. - Remove any items that are not to convey. - Put in a change of address. - Collect instruction booklets and/or warranties on appliances to give purchaser. - Collect all keys to the property to be turned over to the buyer. - Verify that all conditions required by inspection or other contingencies have been met. - Arrange for a thorough cleaning of the property before the walk-through. - Review the Closing Disclosure, if available.

Costs and charges that may be increased by lenders with no tolerance limits

- Prepaid interest; property insurance premiums; amounts placed into an escrow, impound, reserve, or similar account - For services required by the creditor if the lender lets the consumer shop and the consumer chooses a third-party service provider not on the lender's written list of service providers - Charges paid to third-party service providers for services not required by the lender

Controlled business arrangement

- RESPA permits 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.

Escrow accounts

- RESPA prohibits lenders from requiring borrowers to depositing amounts in escrow accounts for taxes and insurance that exceed a certain limit - prevents the lenders from taking advantage of the borrowers - some gov loan programs require escrow accounts as a condition of the loan. RESPA places limit on the amount a lender may require - On a monthly basis, the lender may require only one-twelfth of the total of the disbursements for the year, plus an amount necessary to cover a shortage in the account. - No more than one-sixth of the year's total disbursements may be held as a cushion (a cushion is not required). - Once a year, the lender must perform an escrow account analysis and return any amount over $50 to the borrower.

Certain charges are subject to a 10% cumulative tolerance (the total sum of the charges in the Closing Disclosure does not exceed by more than 10% the sum of the charges disclosed in the Loan Estimate). These charges include the following:

- Recording fees - Charges for third-party services where the charge is not paid to the lender or the lender's affiliate and the lender lets the consumer shop for the third-party service, and the consumer selects a third-party service provider on the lender's written list of service providers.

The loan documents are prepared by the lender but will need to be reviewed. Additional information that will be needed for the Closing Disclosure includes the following:

- The final pay-off figure for any existing loan, effective date of closing, the unpaid amount of principal, the interest due through the date of payment, the fee for issuing the certificate of satisfaction or release deed, credits (if any) for tax and insurance reserves, and the amount of any prepayment penalties. The same procedure is followed for any other liens that must be released. - The exact balance of the loan as of the closing date, if the buyer will assume the seller's existing mortgage loan. Usually, the lender is required to provide the buyer with a mortgage reduction certificate, which certifies the amount owed on the mortgage loan, the interest rate, and the date and amount of the last interest payment. - Proration of property taxes and condominium or homeowners association fees - Any credits or other adjustments made between buyer and seller

escrow closing

- a disinterested third party is authorized to act as escrow agent (escrow holder) and to coordinate the closing activities. The escrow agent may be: - an attorney, a title company, - a trust company, - an escrow company - the escrow department of a lending institution.

A closing agent may be

- a representative of the title company - the lender - the real estate broker - the buyer's or seller's attorney.

The commitment will show

- basic information about the property and the transaction (Schedule A) - what will not be covered (Schedule B) - any problems related to title that need to be addressed before closing for the property to be insured, such as liens (Schedule C).

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 - second or subordinate liens for home equity loans when a purchase is financed by a federally related mortgage loan.

Section 8 of RESPA prohibits kickbacks and fee-splitting for referrals of settlement services, and unearned fees for services not actually performed. Settlement services include activities such as

- mortgage loans - title searches - title insurance - attorney services - surveys - credit reports - appraisals. Violations are subject to criminal and civil penalties, including fines up to $10,000 and/or imprisonment up to 1 year. - consumers may privately pursue a violator in court - violator may be liable for 3x charges paid for service

Certain real estate closings must be reported to the IRS on Form 1099-S. The affected properties include

- sales or exchange of land (improved or unimproved), including air space - sales or exchange of an inherently permanent structure, including any residential, commercial, or industrial building - sales or exchange of shares in a cooperative housing corporation - sales price - property tax reimbursement credited to the seller - Sellers social security number

what does the buyer usually deposit with the escrow agent?

- the balance of the cash needed to complete the purchase, usually in the form of a certified check - loan documents (if the buyer secures a new loan) - proof of hazard or homeowners insurance, including (where required) flood insurance - other necessary documents, such as inspection reports required by the lender.

what does the seller usually deposit with the escrow agent?

- the deed conveying the property to the buyer - title evidence (abstract and attorney's opinion of title, certificate of title, title insurance, or Torrens certificate) - existing hazard or homeowner insurance policies - a letter or mortgage reduction certificate from the lender stating the exact principal remaining (if the buyer is assuming the seller's loan) - affidavits of title (if required) - a payoff statement (if the seller's loan is to be paid off), and - other instruments or documents necessary to clear the title or to complete the transaction.

things that can change in the days leading up to closing that would not require a new 3-day review period

- typos on the form - problems discovered on walk through - most changes made to payments made at closing

Contract to closing checklist continued

25. Deficiencies determined by the walk-through inspection to be resolved at the settlement table or closing rescheduled for a later date. 26. Closing agent records deed & loan documents. 27. Closing agent makes pay-off on existing loans 28. Closing agent distributes funds to seller and brokers.

If property approval is not obtained how long does the buyer have to notify the seller in order to terminate the contract and receive the earnest money deposit back

3 days

If the cost of lender-required repairs is more than ___% of the sales prices, the buyer has the option of terminating the contract and receiving the earnest money.

5%

Currently, to be eligible for an FHA loan with a 3.5% down payment, an applicant must have a minimum FICO score of

580. An applicant with a credit score below 580 will have to pay a larger down payment.

If there are differences between the amounts disclosed in the Loan Estimate and the charges to the consumer disclosed in the Closing Disclosure, within how many days is the lender required to refund the money?

60 days

Affidavit of Title

A statement, in writing, made under oath by seller or grantor, acknowledged before a Notary Public in which the affiant identifies himself or herself and affiant's marital status certifying that since the examination of title on the contract date there are no judgments, bankruptcies or divorces, no unrecorded deeds, contracts, unpaid repairs or improvements or defects of title known to affiant and that affiant is in possession of the property. - gives the title insurance company a basis on which to sue the sellers should their statements in the affidavit be incorrect.

What are the primary objectives of closing? A) Both to close the loan and to convey the title B) To close the loan C) To pay commission to the real estate agent D) To convey the title

A) Both to close the loan and to convey the title

What paperwork must the closing agent complete in preparation for closing? A) Closing Disclosure B) All of these C) Appraisal D) Loan documentation

A) Closing Disclosure

Section 8 of RESPA prohibits which of the following actions? A) Kickbacks B) Fraud C) Unconscionable actions D) Misrepresentation

A) Kickbacks

Which of the following is NOT a document that the seller usually deposits with the title company for closing? A) Loan documents, such as lender required inspections B) Title evidence C) Deed conveying the property D) Loan payoff statement

A) Loan documents, such as lender required inspections

To which of the following do RESPA regulations apply? A) One-to-four-family purchases B) Purchases of more than 25 acres C) Agricultural purchases D) Seller-financed purchases

A) One-to-four-family purchases

In order to make a loan decision, the lender will require A) all of these. B) the buyer's credit report, employment verification, and income verification. C) clear title on the property. D) the appraisal on the property.

A) all of these.

Which of the following items are typically prorated at closing? A) Earnest money B) Loan interest on an assumed loan C) All of these D) Commission fees

B) Loan interest on an assumed loan

Prior to closing, what should the buyer do with the Loan Estimate? A) File it with the county registrar B) Review it and compare it to the Closing Disclosure C) Write it D) Present it to the seller

B) Review it and compare it to the Closing Disclosure

Which of the following is TRUE about the Loan Estimate? A) There is no requirement to use a good-faith estimate whenever the transaction involves government financing. B) The estimate must be provided within three days of the loan application. C) The estimate must be at least five pages in length. D) The language in the estimate can be of the lender's choice as long as the content is legally congruent.

B) The estimate must be provided within three days of the loan application.

In an escrow closing, which of the following will the seller NOT deposit? A) A payoff statement (if the seller's loan is to be paid off) B) Existing hazard or homeowner insurance policies C) Affidavits of estoppel (if required) D) A letter or mortgage reduction certificate from the lender stating the exact principal remaining (if the buyer is assuming the seller's loan)

C) Affidavits of estoppel (if required)

What is the purpose of a final walk-through? A) Verify that all necessary repairs have been made B) Verify that the property has been well maintained C) All of these D) Verify that all systems and fixtures are in substantially the same condition that they were in at the time the contract was finalized

C) All of these

What required disclosure provides the borrower with preliminary approximations about settlement costs? A) RESPA's Special Information Booklet B) Information About Buyer's Settlement (IABS) C) The CFPB's Loan Estimate form D) Settlement Statement

C) The CFPB's Loan Estimate form

In an escrow closing, which of the following items is typically deposited by the buyer? A) All of these B) The title policy C) The balance of the cash needed to complete the purchase D) Proof of residency in Texas

C) The balance of the cash needed to complete the purchase

When checking the title on a property, the title company discovered a lien that had not been properly released on the property. Who has the obligation to correct the problem? A) The real estate broker B) The buyer C) The seller D) The escrow officer

C) The seller

When prorating taxes, which of the following is used if the current real estate tax cannot be determined definitely? A) The taxes will be based on a 2.34% per dollar of taxable value and reported using the mill rate. B) The taxes will be based on the buyer's after tax income. C) The taxes will be based on the last obtainable tax bill. D) The taxes will be based on the median average tax rates of properties in the surrounding area.

C) The taxes will be based on the last obtainable tax bill.

Whose job is it at the lender's office to approve or deny a loan? A) The processor B) The loan officer C) The underwriter D) The president of the company

C) The underwriter

The Real Estate Settlement Procedures Act prohibits all of the following EXCEPT A) unearned fees for services not actually performed. B) kickbacks. C) referral fees to out-of-state brokers. D) fee-splitting for referrals of settlement services.

C) referral fees to out-of-state brokers.

How long does closing last

Can take anywhere from a few weeks to a few months depending on the complexity of the transaction. - Usually involves both a closing on the loan and the conveyance of title to the property

What is a debit? A) An amount that a party receives at closing B) When the seller nets a negative amount at closing C) An amount being reimbursed D) An amount that a party owes and must pay at closing

D) An amount that a party owes and must pay at closing

Prior to closing, what should the buyer do with the Closing Disclosure? A) Present it to the seller B) Write it C) File it with the county registrar D) Review it and compare it to the Loan Estimate

D) Review it and compare it to the Loan Estimate

What type of valuation method is typically used to appraise residential property? A) Income approach B) Loan to value approach C) Cost approach D) Sales comparison approach

D) Sales comparison approach

The acronym CLO stands for A) computerized lending offer. B) computerized loan offer. C) capitol lender offer. D) computerized loan origination.

D) computerized loan origination.

The closing agent must represent the A) seller. B) lender. C) buyer. D) terms of the contract.

D) terms of the contract.

A seller hires a third party to coordinate the closing activities. This third party is most likely A) the designated broker. B) the mortgage officer. C) none of these. D) the escrow agent.

D) the escrow agent.

If the broker is in receipt of the earnest money, he Rules of the Real Estate Commission say it must be deposited in the broker's trust account or with the escrow agent by when?

by the close of business on the second working day after the contract is fully executed. - A broker maintaining a trust account must retain for four years a documentary record of each deposit or withdrawal from the account.

once the loan has been approved by the underwriter, the package is sent to the lenders...

closing department. - various loan documents are prepared and sent to the closing agent - escrow or impound account for the collection of property taxes and insurance is set up

the most common type of inspection required by the buyer is a

home inspection

Foreign Investment in Real Property Tax Act (FIRPTA)

if the seller is a foreign person, the buyer must withhold 15% of the sales proceeds and pay that amount to the Revenue Service. The Federal Tax Requirements paragraph of the TREC-promulgated contract form states that the buyer will withhold the appropriate tax from the proceeds if the seller is a foreign person as defined in the applicable law or if the seller fails to deliver an affidavit to the buyer that the seller is not a foreign person.`

The Objections clause gives the buyer the ability to

object to defects, exceptions, or encumbrances to title that are disclosed on the survey and commitment other than the exceptions listed in the Title Policy clause, or that prohibit a specified use or activity