Chapter 11: Title Closing & Costs

Earnest Money Deposit (EMD)

A deposit of funds to show good faith; money paid by a buyer when making an offer to demonstrate his willingness to fulfill the contract in earnest and good faith. Generally, these funds are held in an escrow account managed by the buyer's real estate agent or the title company. The deposit is then applied to your closing costs or returned to you at closing. These funds are usually applied to a loan's closing costs or to the down payment.

Transfer Tax (Real Estate)

A tax imposed on any deed or instrument which conveys interest in real property in New York State. The amount of the tax is based on how much money the seller gets in the transaction. - ALSO CALLED: "conveyance tax" or "revenue stamps." - If the seller's mortgage is being assumed by the buyer, New York will subtract the amount of the assumed loan from the sale price of the property before the tax is computed. - Even though the seller typically pays the tax, it is common for builders to require the buyer to pay the tax on new construction. The tax is due at the time of the filing of the deed or instrument and is collected by county clerks throughout the state.

Clouded Title

A title that is encumbered or burdened with defects (non-marketable). - To remove the cloud, an owner may need to initiate a suit to quiet title, which clears the title record of any unrecorded claims.

Marketable Title

A title that is so free of defects that the buyer is certain he or she will not have to defend the title. - The seller is required to provide this at closing. - In order to deliver this, the seller must have proof of ownership of the property, also known as evidence of title. - Before a lender will agree to lend money on a property, the lender will order a title search to be sure there are no liens on the property. - The buyer is responsible for paying the fee for the title search.

Abstract of Title

A written, chronological summary of the property's title records and other public records affecting rights and interests in the property. It includes the property's chain of title and all current recorded liens and encumbrances, by date of filing. - An abstract done by an abstractor is not considered an official document.

Role of Broker (Closing)

Many times he/she is involved in: - Ordering inspections, surveys, or appraisals. - Helping the buyer find a mortgage lender or help schedule needed repairs to the property. Just prior to closing, he/she should conduct a walk through or final inspection of the property with the buyer. On the date of closing, he/she may be the closing agent, may be present to collect the commission check, or may not be present at all.

Accrued Expenses (proration)

Other items are those expenses that the seller incurred but have not yet been billed for at the time of closing. - These items are paid in arrears. - For example, the buyer will receive the sewer bill for September. The charges from September 1-18 belong to the seller, but the buyer will be paying the bill. - The buyer will get a credit and the seller will get a debit.

Property Transfer Transaction

Reported to the IRS by the closing agent.

TRID (TILA-RESPA Integrated Disclosure)

Requires lenders to give borrowers the correct figures pertaining to their closing costs. - "Know before you Owe"

Deed

The most important document at closing, since it transfers the property to the purchaser. It's usually prepared by the seller's attorney, who uses the old one as a template to prepare the new one.

Inspections

This is a cost to the buyer that costs from $250 to $400. If the buyer had any other inspections done, such as pest or termite inspections, water quality or radon testing, the buyer will pay those additional costs at closing.

Appraisal and Credit Report Fees

This is a cost to the buyer that is usually required by the lender. It typically costs from $250 to $400. The credit investigation the lender does also is charged to the buyer and can cost from $10 to $35.

Real Estate Settlement and Procedures Act (RESPA)

A federal law requiring mortgage lenders to give potential borrowers a government publication describing the closing process and providing clear, advance disclosure of all closing costs to home buyers. APPLIES TO: - Purchases of residential property (one-to-four family homes, cooperatives, and condominiums) - Purchases involving first or second mortgages - Purchases financed by a federally-related loan (loans that are insured by a federal agency), those that are insured or guaranteed by VA or FHA, HUD-administered loans, or those that will be sold to Fannie Mae, Freddie Mac, or Ginnie Mae DOES NOT APPLY TO: - Seller-financed loans or loan assumptions (unless the lender has changed the terms of the assumed loan or charges more than $50 for the assumption).

ESCROW ACCOUNT

Money in a bank account held in trust to pay taxes and insurance when due. ALSO CALLED: a "Trust Account."

Annual Escrow Statement

Required by RESPA, this disclosure on the amounts needed to cover escrow disbursements is due annually. - This statement summarizes all inflows and outflows in the prior 12-month period. The statement must also disclose shortfalls or overages in the account and how the discrepancies will be resolved.

Proration

The division of expenses between buyer and seller in proportion to the actual usage of the item represented by a particular expense. ALSO CALLED: "Adjustment." The most common items that fall into this category include: - Real estate taxes - Insurance - Fuel - Water and sewer charges - Rent - Security deposits These items are shown on the settlement statement as a debit to one party and a credit to the other party for the same amount.

Title Closing

A real estate transaction in which the title changes hands from seller to buyer. At this meeting: - The buyer completes his or her financing arrangements (referred to as closing the loan). - The seller transfers the title. - Both the buyer and seller pay the necessary taxes, fees, and other charges. As the primary parties, the buyer and seller have critical roles at the closing. They must verify that each of them has fulfilled the contract terms as stated. Once this is verified: - The mortgage loan, if any, is closed. - Any existing liens on the property are satisfied. - The buyer pays the purchase price for the property. - This payment is often a combination of the mortgage funds and the buyer's own funds. - Each party pays all the appropriate fees associated with his or her side of the transaction. - The seller delivers the title. - Then the parties sign the myriad of documents required to finalize the transaction. - Finally, the closing agent will do whatever the local laws require to arrange for the recording of the transaction.

Title Insurance

A type of insurance that protects the buyer if problems with the title are found later. Both the buyer and the lender should have this type of insurance. - Combines the abstracting process with an insurance program. - Guarantees the validity and accuracy of the title search. - The insurance company warrants to "make good" any loss arising from a defect in the title or from any liens or encumbrances on the property. - This is paid for one time when the property passes from one owner to another and stays in effect until the property sells again. Generally, the insurance policy that the title company issues will protect the policyholder against losses that arise from such "hidden" defects as: - Forged documents, such as deeds or mortgages - Undisclosed heirs - Mistaken legal interpretation of a will - Misfiled documents - Confusion arising from similarity of names - Incorrectly stated marital status - Mental incompetence

Private Mortgage Insurance (PMI)

A type of insurance used to protect lenders if a borrower puts less than 20% down on a home purchase.

Computerized Loan Originations (CLO)

Accessing lender loan programs via computer. - Provides prospective borrower information about mortgage loan products. - Prequalifies a borrower. - Initiates a loan application process for a fee.

Recording Acts

All states have statutory rules to resolve the Priority of Claims relating to Real Property and to give the public Constructive Notice of recorded items.

Constructive Notice

Also called "legal notice," and refers to knowledge of a fact that a person could have or should have obtained. - imparted through recordation of ownership documents in public records, specifically, title records.

Closing Statement

Also referred to as the "settlement statement" and is a detailed accounting of the transaction that is prepared before closing by the closing agent. The statement shows all cash received, all charges and credits made and all cash paid out. Buyers have the right to review this statement three days before closing. This statement has a list of the debits and credits for both the buyer and the seller. - A debit is money that the buyer or seller needs to pay at closing. - A credit is money that the buyer or seller receives at closing, either because it was already paid, it's being reimbursed or there is a promise to pay.

Closing Documents

Always includes: - Deed (most important document) - Survey Depending on the transaction, other documents that may also be required include: - Broker's commission statement - Certificate of occupancy - Flood insurance policy - Homeowner's insurance - Lead-based paint disclosure - Lease - Lien waivers - Mortgage documents - Property inspection - Settlement statement - Title insurance policy

Title Search

An examination of documents recording title to the property to ensure the owner has a clear title. - Usually paid for by the buyer. - Required to produce an abstract. - Insurers and lenders generally require the search to identify title defects and ascertain the current status of encumbrances.

FIRPTA Certificate (Foreign Investment in Real Property Tax Act)

Any seller who is not a US citizen must deliver this to the buyer. The buyer must withhold estimated taxes equal to 10% of the sale price in any sale or exchange of property owned by a foreigner.

365-Day Method (proration math)

Calculates the amounts on the basis of a 365-day year. 1) Identify an item and the amount needing to be prorated. 2) Divide by 365 to get the daily rate. (Divide by 366 in a leap year.) 3) Multiply the daily rate by the number of days the seller owned the property before closing to get the seller's share. 4) Subtract the seller's prorated amount from the starting amount to get the buyer's prorated amount.

Accepting Referral Fees

Could be a violation of state licensing laws. - It is illegal under RESPA for anyone to pay or receive a fee, kickback or anything of value because they agree to refer settlement service business to a particular person or organization. For example, your mortgage lender may not pay your real estate broker $250 for referring you to the lender.

Torrens System

Differs from other title recording systems in that title passes only when the conveyance has been duly registered on the title certificate itself. - Encumbrances likewise have no legal effect until they are recorded. - In effect, the Torrens title record is the title itself. It is not necessary to search public records to ascertain the status of title; it is all reflected on the title certificate. - Suffolk County, New York, uses this system.

Listing Agent Commission

In New York, the split between broker and agent typically ranges from 40/60 to 65/35. The percentage an agent receives largely depends on the amount of business they bring into the brokerage. The more homes you sell the bigger your percentage split becomes. - Agents in New York also pay the state income tax that's tiered based on annual earnings.

Broker's Commission

Largest cost in selling a home. This fee could be a percentage of the selling price, a flat fee or some other arrangement (although in most cases, it is a percentage of the sale price). This is paid at the closing, usually by the seller. - The vast majority of deals in New York are "co-broke", which means a 50/50 split between the listing agent and buyer agent.

Actual Notice

Learning of something through direct experience or communication. In proving real estate ownership, a person provides this type of notice by producing direct evidence, and the other party receives actual notice by seeing direct evidence, such as by reviewing the deed, reading title records, or physically visiting the property to see who is in possession.

Homeowner's Insurance

Protects against most types of property losses and liabilities related to home ownership. Most lenders require the buyers to purchase this type of insurance so that their interest in the property is also protected.

Prepaid Expenses (proration)

Some items are those that were paid for in advance; so, the buyer will owe the seller part of the payment. - For example, if the seller paid for the rental of a propane tank for the calendar year and the transaction will close on September 18, the buyer will owe the seller the prepaid rent on the tank from September 19 to December 31. - The buyer will receive a debit and the seller will receive a credit.

Chain of Title

The succession of conveyances, from some accepted starting point, whereby the present holder of real property derives title. - If there is a missing link in the chronology of owners, or if there was a defective conveyance, the chain is said to be broken, resulting in a clouded title to the property.

Closing Disclosure (CD)

This 5-page document is the official settlement statement used by settlement agents and title companies to itemize all charges for a borrower and seller. This form gives a picture of the closing transaction and provides each party with a complete list of incoming and outgoing funds. "Buyers" are referred to as "borrowers" on this form even if no loan is involved. - ALSO CALLED: "closing statement" or a "settlement form." - This document is required by TRID for all federally-related mortgage loans. - Informs the borrower about everything pertinent about the loan; all costs associated with the transaction, just like the closing statement. - The lender must disclose everything about the loan so the borrower has a concise look at what they are getting into. - This form is a little redundant as it has information found on different forms throughout the loan documents. - Must be delivered to the borrower at least three days before closing (the actual time frame is based on the method of delivery).

Mortgage Recording Fees

This is required on mortgages in NY and is a tax made up of several taxes added together. It's based on the taxes that are in effect in the county or city where the property is located. The minimum tax rate is $.75 for each $100 of the amount secured by the mortgage. The maximum amount is $2.75 for each $100.

12-Month/30-day Method (proration math)

This method calculates the amounts due based on a 360-day year and a 30-day month. The steps of this method are as follows. 1) Identify an item and the amount needing to be prorated. 2) Divide by 12 to get the monthly rate. 3) Divide by 30 to get a daily rate. 4) Multiply the monthly rate by the number of months the seller owned the property before closing to get the months-amount due. 5) Multiply the daily rate by the number of days the seller owned the property in the closing month to get the amount due for the closing month. 6) Add the two amounts to get the prorated amount for the seller. 7) Subtract the seller's prorated amount from the starting amount to get the buyer's prorated amount.