Chapter 22 Closings

Escrow Process

1. Deliver the Purchase Contract 2. Open the Escrow 3. Complete the Task List 4. Close the Escrow

the licensee should handle the following activities:

1. Make sure that the escrow instructions prepared by the escrow agent accurately reflect all of the terms of the purchase and sale agreement. If the licensee has the responsibility to order inspections, he or she should do so in a timely manner. If the responsibility belongs to someone else, the licensee should check on the completion and the delivery of the reports to the proper parties. The licensee needs to help the client through the process of approving or disproving the reports, asking for repairs and seeing that those repairs are completed and re-inspected. 2. Check with the lender to see how loan approval is coming along. 3. Check the appraisal results and help the client decide how to proceed if it comes in low. 4. Keep track of any special provisions included in the sale, such as items of personal property. 5. When the title report comes in, find out if there are any problems that need to be addressed. 6. Make sure the buyers have obtained homeowner's insurance and see to it that a copy has been delivered to the escrow agent or lender. 7. Check to be sure the sellers have everything in order for moving out, such as arrangements for trash hauling or scheduling of a cleaning crew to come in and clean before the buyers move in. 8. If buyers are moving in before closing, make sure the rental agreement is ready and signed.

actual notice

A person who has received actual notice has actual knowledge of something. Receiving actual notice means learning of something through direct experience or communication. In proving real estate ownership, a person provides actual 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.

Closing Disclosure - Confirm Receipt

A place for the borrowers to sign confirming receipt of the Closing Disclosure document. Signing the document does not indicate acceptance of the loan.

Computerized Loan Originations

A real estate firm may offer a computerized loan origination system (CLO) that: Provides a prospective borrower information about mortgage loan products Prequalifies a borrower Initiates a loan application process for a fee However, RESPA allows only the borrower to pay the fee for such a service. In addition, the broker must disclose the fact that there are competing mortgage products that are not part of the system.

marketable title

A seller is required to deliver a marketable title at closing. A marketable title is one that is so free of defects that the buyer is certain he or she will not have to defend the title. In order to deliver a marketable title, the seller must have proof of ownership of the property, also known as evidence of title.

Standard Coverage Title Insurance

A standard policy may be issued to a lender only, a buyer only or jointly to lender and buyer (called a joint-protection standard coverage policy). The standard policy covers items of record as well as some risks that are not of record, such as: Forgeries Acts of minors and incompetents Failure of delivery of a prior deed Federal estate tax liens Acts of an licensee whose authority has terminated Items not included in a standard policy include: Defects known to the insured but not disclosed to the title insurer Easements, encumbrances and liens not shown in the public record Rights or claims of persons in physical possession of the property Unrecorded claims that could be discovered by physical inspection or correct survey Taxes or assessments that are not yet liens Mining claims Reservations in patents Water rights Zoning ordinances

encumbrance

A utility right-of-way Neighbor's fence or garage encroaching Driveway easement through the property

Disbursement of Funds

After all the closing documents have been signed, the settlement agent arranges for the recording of the grant deed and security instrument. After recording, the settlement agent: Disburses funds as required by the contract, including funds due to the seller. Pays off any amounts due for an existing mortgage loan or other liens on the property. Arranges for a title insurance policy to be issued to the purchaser. Several weeks after the closing, the purchaser should receive the original deed and title insurance policy. Note: If problems arise from the walk-through inspection of the property prior to closing, monies from the seller's proceeds may be left in escrow until the purchaser is satisfied that required repairs or replacements have been made. After the purchaser signs off that the work has been completed, any remaining funds are disbursed to the seller.

Escrow

After the borrower and the property have been qualified to the lender's satisfaction and while the preliminary title report is being researched and prepared, the escrow process gets into full swing. The term escrow is defined as the process in which a disinterested third party holds all money and documents relating to a transaction until all of the terms and conditions of the escrow instructions have been satisfied.

IRS Reporting Requirements

All real estate sales must be reported to the Internal Revenue Service after closing. The sale must be reported on a Form-1099. The responsibility for filling out and submitting the form generally falls to the person who conducted the closing, which could be any one of the following persons. Closing officer Lender Selling/Listing broker Buyer's broker The form could also be filed by a U.S. Treasury designee. There is no charge to the buyer for submitting this form to the IRS.

Close the Escrow

Also referred to as closing or settlement, this is the process of signing and transferring all documents and distributing the funds. At the property closing: 1. The buyers complete their financing arrangements (referred to as closing the loan). The buyers deposit the down payment and closing costs into escrow. 2. The sellers transfer the title. The sellers pay off any mortgage or other outstanding liens on the property. 3. Both the buyers and sellers pay the necessary taxes, fees and other charges.

abstract of title

An abstract of title is 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. A title abstractor or title company analyst conducts the search of public records, the title search, needed to produce an abstract. Insurers and lenders generally require the search to identify title defects and ascertain the current status of encumbrances. In today's real estate world, an abstract done by an abstractor is not considered an official document. The abstractor is responsible for only what appears in the records, so he or she cannot be held liable for any defect that was not found in the records. Things such as encroachments or forgeries would not be revealed in the public records search. If a lender wants a more expert analysis of the title, the lender will request an opinion of the abstract from a lawyer. But even a lawyer issuing an opinion does not issue a guarantee or insure against possible defects. An attorney's opinion of abstract states that the attorney has examined a title abstract, and gives the attorney's opinion of the condition and marketability of the title. As we said, an opinion is not a proof or guarantee of clear title. Further, it offers no protection in the event title turns out to be defective.

extended coverage policy

An extended coverage policy insures against many of the items excluded in the standard policy. Lenders require their mortgagee polices to be extended coverage policies. Owner's policies are typically standard coverage policies, but lately more and more buyers have stated an interest in having the extended coverage policies. A buyer can purchase an owner's policy that provides the extended coverage or a provision can be added to the purchase and sale agreement that says the sellers will agree to pay for the extra coverage. This extended coverage policy includes: Unrecorded liens Off-record easements Mining claims Water rights Rights or claims of persons in physical possession of the property Unrecorded claims that could be discovered by physical inspection or correct survey

Buyers and Sellers

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 is closed and then each party pays all the appropriate fees associated with his or her side of the transaction. The buyer pays the purchase price for the property and 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

As we mentioned earlier in this chapter, both the buyer and the lender should have title insurance. Many lenders require it. The buyer pays for the lender's policy, and the buyer typically pays for the title search. The title search and lender's policy typically cost upwards of $350.

Coop or Condo Fees (buyer cost)

As we said on a previous page, condominiums have special assessments due to the homeowner's association for maintenance of common areas. The buyer may owe the seller for services that were prepaid by the seller but will be used by the buyer.

Lender's Role

As with a broker, much of what the lender does relating to the closing happens long before the closing date comes. The lender is primarily interested in protecting its interest in the property. In order to do that, lenders typically require at the very least a title insurance policy and a homeowner's insurance policy. Depending on the individual circumstances, a lender might also ask for a survey and inspections. Lenders can also require the borrower to maintain an escrow account for property taxes and insurance, so that the lender is sure money will be available for the payments. These are referred to as reserves. Depending on the type of loan being issued, the lender may also require private mortgage insurance.

Broker's Commission

As you know, the broker's commission could be a percentage of the selling price, a flat fee, or some other arrangement. In most cases, it is a percentage of the sale price. The commission is paid at the closing, usually by the seller.

Closing Disclosure - Loan Disclosures

Assumption - Indicates whether or not the lender will allow a loan assumption on a future sale or transfer Demand feature - Indicates whether or not the loan has a demand feature, which would allow the lender to require early repayment Late payment - States what late fee the lender will charge Negative amortization - Indicates whether or not the loan has a negative amortization feature, which could result in the loan amount becoming larger than the original loan amount, resulting in a decrease of the equity the borrower has in the property Partial payments - Indicates whether or not the lender would accept partial payments on the loan Security interest - Lists the address of the property securing the loan Escrow account - Breaks down what is and what is not included in the escrow account

Others who may attend the closing

Attorneys for the parties - Examine the documents to ensure that the best interests of the clients are being met Lender representative - Examines documents and makes sure the property getting the loan has clear title Real estate licensee - Collects commission Title company representative - Reviews documents and answers questions about the title

title search

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.

Seller's Debits

Broker's commission Delinquent taxes Document preparation fees Loan balance Pest inspection Soil test Survey Termite treatment Transfer tax Unpaid utility bills

some of the other documents that may also be required:

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

primary attendees at the closing

Buyer - Pays for the property and receives clear title. Seller - Conveys the property and receives payment. Closing agent - Prepares all the documents that need to be signed at the closing, including the actual settlement statements that show all the debits and credits assigned to the buyer and seller in the transaction.

Private Mortgage Insurance (PMI), if applicable

Buyers can sometimes get loans with a lower down payment if they agree to pay private mortgage insurance. The lender purchases the insurance from a private mortgage insurance company and then passes the cost to the borrower by charging a fee at closing plus an additional monthly fee while the insurance is in force. The lender will terminate the PMI payments once the loan has been repaid to a certain level. Federal law requires that any loans originated after July of 1999 must have the PMI terminated after the borrower has accumulated 22% of equity in the property and is current with all loan payments.

Torrens System

Certain states and counties use the Torrens System of recording. The 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. To enter a property in the Torrens system, a court action must first clear title by giving notice to all potential interest holders that they must express their claims. At the end of the proceeding, the court decrees that the title is accepted into Torrens registration. The Torrens registry retains the original registration documents and provides copies to the recorder or other appropriate office. All subsequent transactions affecting title must follow the proper Torrens recording procedures and requirements.

Chain of title

Chain of title refers to the succession of property owners of record dating back to the original grant of title from the state to a private party. 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. To remove the cloud, an owner may need to initiate a suit to quiet title, which clears the title record of any unrecorded claims. The two forms of evidence most used in this process are the abstract of title with attorney's opinion and the title insurance policy.

Proration Math

Closing agents and lenders typically use one of two methods when calculating items that need to be prorated. The 12-month/30-day method calculates the amounts due based on a 360-day year and a 30-day month. The steps of this method are as follows. Identify an item and the amount needing to be prorated. Divide by 12 to get the monthly rate. Divide by 30 to get a daily rate. Multiply the monthly rate by the number of months the seller owned the property before closing to get the months-amount due. 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. Add the two amounts to get the prorated amount for the seller. Subtract the seller's prorated amount from the starting amount to get the buyer's prorated amount.

Closing Disclosure - Calculating Cash to Close

Closing costs are only part of the cash a borrower needs to bring to closing. The top of page 3 shows how the final costs of the loan compare to the Loan Estimate the lender originally provided to the borrower and then calculates the amount of cash the borrower will need at closing. This calculation includes such items as costs paid before closing, down payment, deposits, seller credits, adjustments, and other credits.

Constructive notice

Constructive notice, or legal notice, is knowledge of a fact that a person could have or should have obtained. The foremost method of imparting constructive notice is by recordation of ownership documents in public records, specifically, title records. Since public records are open to everyone, the law generally presumes that when evidence of ownership is recorded, the public at large has received constructive notice of ownership. By the same token, the law presumes that the owner of record is in fact the legal owner. Thus, if John Doe records the deed of conveyance, he has given constructive notice of ownership.

Buyer's Debits

Contract sales price Credit report Recording of deed and mortgage documents Homeowner's insurance Other expenses, such as loan origination fee, closing fee, recording fee, attorney fees

Seller's Credits

Contract sales price Items paid for in advance, such as insurance premiums

Repairs

Depending on the contingency terms, the buyers may have the option to disapprove the report and terminate the transaction. However, in most cases the contingency terms state that the buyers will identify the unsatisfactory parts of the report and ask the sellers to make the repairs. If the lender ordered the inspection, the repairs may be a condition of loan approval. Hopefully, the buyers and sellers previously agreed on who would pay for the repairs, but if not, more negotiation may be in order for the sale to go forward. In most cases the repairs have to be made and the property re-inspected before the sale can close.

Closing Disclosure - Loan Calculations

Details the total amount of all payments on the loan, the dollar amount of the finance charges over the life of the loan, the amount financed, the annual percentage rate (APR), and the total interest percentage (TIP)

Complete the Task List

During the escrow period, a number of activities will be taking place. Activities include: 1. Getting an appraisal - The appraisal report will be sent to the lender. If the buyers or sellers want to know the results, their licensees must contact the lender. 2. Ordering pest control and other inspection reports - Reports will be sent to the buyers through their agent, who may provide a copy to the lender. If repairs are needed, the buyers and sellers may have to negotiate - as we discussed when we talked about contingencies in an earlier unit. If the lender required any repairs, the sellers will have to prove to the lender they were made. 3. Arranging and approving financing - When the lender approves the buyers' loan, the lender will outline the exact terms of the loan and set an expiration date for the loan commitment. The lender will also give the buyers a good faith estimate of their closing costs. The lender will send all of the documents to the escrow agent who will set up a time with the buyers to review and sign the documents, which will then go back to the lender to arrange the funding. 5. Ordering the complete title search and title insurance - As we mentioned earlier, the escrow agent will order a preliminary report, which will be sent to the lender and the buyers for approval. 6. Obtaining property insurance - The escrow agent will verify that the property is insured up to its replacement value. 7. Getting all paperwork in order - The escrow agent will prepare the final settlement statements for the closing meeting.

Buyer's Credits

Earnest money or deposit Loan amount

Deliver the Purchase Contract

Either the buyers' lender or the real estate agent will deliver a copy of the purchase contract to the escrow agent.

Closing Disclosure - Contact Information

Gives firm names, addresses, license numbers, contact names, email addresses, and phone numbers for persons involved in the transaction

FIRPTA Certificate

In 1985, Congress passed the Foreign Investment in Real Property Tax Act (FIRPTA) to eliminate the problem of collecting delinquent taxes from foreigners who owned and sold property in the US and left the country without paying the taxes due on the sale. The seller must deliver a FIRPTA Certificate to the buyer. In general, FIRPTA requires a buyer to withhold estimated taxes equal to 10% of the sale price in any sale or exchange of property owned by a foreigner (not a US citizen). The IRS keeps this 10% to ensure that any capital gains on the sale are paid. The liability for this withholding is shared by both the buyer and the broker. If the 10% is not withheld, the broker could be held liable for the full amount of any taxes not paid. Note: Residential property that sells for under $300,000 and will be used as the buyer's personal residence is exempt from the FIRPTA requirement.

escrow agent

In addition to holding and disbursing the items, the "disinterested third party" - also known as the escrow agent or closing agent - oversees the preparation and recording of all the legal documents, prorates the settlement costs, prepares the settlement statements and does various other tasks. Depending on an individual state's laws, the entities or individuals that can act as escrow agents include: Attorneys Banks Credit unions Federally-approved lenders Insurance companies Persons acting under court supervision (such as probate administrators) Title companies Trust companies Savings and loan associations

Servicing the Loan

In some cases, the original lender services the loan. In other cases, the loan is sold and a different financial institution may become responsible for the servicing. In either case, the servicing entity: Notifies the borrower of the appropriate mailing address to send the payment. Restates the terms and conditions of the loan. Verifies the amount of the payment to include principal, interest, taxes, insurance and any mortgage insurance required. Mortgage loan notes are fully negotiable and may be sold many times over the life of the loan, although the servicing often remains with the original lender.

Closing Disclosure - Closing information

Includes date issued, closing date, disbursement date, settlement agent, file number, property address, and sale price

Closing Disclosure - Transaction information

Includes names and addresses for both the borrowers and sellers and the lender's name

Closing Disclosure - Loan information

Includes the loan term, purpose of the loan, product type, loan type and loan ID number

Both the buyer and the lender should have title insurance

Insurance for the buyer ensures a clear title and protects his or her investment. Insurance for the lender protects the lender's interest in the property. Usually as a condition of the loan, the lender will require the buyers to purchase a mortgagee's policy for the lender. The purchase and sale agreement usually indicates who will provide an owner's policy for the buyers. Title insurance is paid for one time, when the property passes from one owner to another. It stays in effect until the property sells again.

Proration Math Examples

Jim and Beth have sold their single-family residence to Tim and Sue and are closing on May 17. The real estate taxes for the property are $1,950. What is Jim and Beth's share of the taxes? What is Tim and Sue's share? Total amount: $1,950.00 Monthly amount ($1,950 ÷ 12) = $162.50 Daily amount ($162.50 ÷ 30) = $5.42 Sellers' share = $742.14 $162.50 x 4 months (January through April) = $650 $5.42 x 17 days (May 1 through 17) = $92.14 $650 + $92.14 = $742.14 Buyers' share = $1,207.86 $1,950 - $742.14 = $1,207.86 In the example above, the prorated amounts were sellers' share = $742.14 and buyers' share =$1,207.86. Since the buyers pay the taxes at the end of the year, the sellers' share of $742.14 will be shown as a debit to the seller and a credit to the buyer.

Disclosures After Settlement

Loan servicers must provide borrowers with an annual escrow statement which 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.

Disclosures After Settlement (RESPA)

Loan servicers must provide borrowers with an annual escrow statement which 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.

Attorney Fees

Many sellers choose to have an attorney represent them at the closing. The fee depends on how much work the attorney actually does.

Mortgage Recording Fees

Many states assess a mortgage recording tax for any mortgages recorded in their state. Typically the tax is made up of several taxes added together and are based on the taxes that are in effect in the county or city where the property is located.

Transfer Tax

Many states have what's known as a real estate transfer tax. This tax is imposed on any deed or instrument which conveys interest in real property in that state. The amount of the tax is based on how much money the seller gets in the transaction. In some states, if the seller's mortgage is being assumed by the buyer, the state will subtract the amount of the assumed loan from the sale price of the property before the tax is computed. Oklahoma transfer tax = $0.75/$500 The transfer tax is also known as a conveyance tax or as revenue stamps. 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.

homeowner's insurance

Most basic homeowner policies, known as HO-2 policies, provide coverage for: Fire or lightning Hail or windstorm Explosion Riot or civil commotion Damage from aircraft Vehicle damage Smoke damage Vandalism Theft Glass breakage Falling objects Weight of ice, snow and sleet Accidental discharge or overflow of water or steam Sudden accidental tearing apart of heating, air conditioning or hot water systems Freezing of plumbing, heating, air conditioning systems or household appliances Sudden accidental damage from artificially-generated electrical current Property lost that was removed from the premises when in danger from fire or other hazards Some liability coverage for personal injury and property damage caused by the policy holder

Inspections

Most buyers condition the culmination of the sale on one or more inspections of the property by one or more experts. Often lenders will make some type of inspection a condition of approving the buyers' loan. So inspections and their results are an important aspect of the closing process. For every kind of inspection ordered, the reports must be approved or rejected by the buyers or the lender, any repairs must be done and then re-inspected, and the buyers and lender must get notification of the final results. For this reason it's critical that the inspections be ordered very early in the process, so the completion of any required repairs doesn't interfere with the closing.

Coinsurance Clause

Most homeowner's polices also have what's called a coinsurance clause. This clause requires that the homeowner have insurance that is equal to 80% of the home's replacement value. This does not include the price of the land. If an owner has this type of policy, he or she could make a claim for the full cost of the repair or replacement without deduction for depreciation. If the owner does not carry this type of insurance - he or she carries less than the 80% figure - any claim will be handled in either of these two ways: The loss will be settled for actual cash value. The loss will be prorated. For example, if a person's home is insured for only 70% of its replacement value and the owner suffers a loss of $15,000, the insurance will pay $13,125. (70% ÷ 80% = .875 x $15,000 = $13,125)

Property Insurance

Most lenders require the buyers to purchase property insurance, so that their interest in the property is also protected.

Escrow Analysis

Most lenders today require the borrower to include 1/12th of the annual taxes and insurance as part of the monthly mortgage payment in addition to that portion dedicated to principal, interest and mortgage insurance. These escrow or impound funds (also called reserves) must be analyzed periodically to be sure that adequate funds will be available at the time they are due. If there is either a shortage or a surplus of funds, the lender adjusts the monthly payment.

Role of the Real Estate Licensee

Much of what the agent does to facilitate a closing happens during the period between the signing of the agreement of sale and the actual closing date. Many times the agent is involved in ordering inspections, surveys or appraisals. The agent can also help the buyer find a mortgage lender or help schedule needed repairs to the property. NOTE: Brokers and real estate agents have many contacts in the world of lenders, property inspectors, surveys, insurance agents and the like. Often these people offer fees to the brokers and agents to get their referrals. Caution: Licensees must not recommend specific individuals or companies to their clients. Accepting referral fees could be a violation of state licensing laws and the Real Estate Settlement Procedures Act, which we will discuss shortly.

Broker's Role

Much of what the broker does to facilitate a closing happens during the period between the signing of the agreement of sale and the actual closing date. Many times the broker is involved in ordering inspections, surveys, or appraisals. The broker can also help the buyer find a mortgage lender or help schedule needed repairs to the property. Whether providing a lot of assistance or a little, the broker's role is to check on the progress of activities along the way so that the actually closing will go as smoothly as possible. Just prior to closing, the broker or licensee should conduct a walkthrough or final inspection of the property with the buyer to ensure that no damage has been done and no fixtures have been removed since the contract was signed. On the date of closing, the broker may be the closing agent, may be present to collect the commission check, or may not be present at all. The commission for the transaction is usually paid in one check. After closing, the broker will deposit the check into an escrow account and disburse the money to the appropriate cooperating licensees. After the closing, the broker, or whoever acted as the closing licensee, has the task of reporting the transaction to the IRS.

Attorney Fees (buyer costs)

Not only do the buyers pay for their own attorney if they have one, but they also pay for the lender's attorney. Depending on how much work is involved, each of these attorneys could charge $650 or more.

Inspection Reports

Once the inspection is complete, the inspector will prepare a report of the findings. It will state the areas of concern and which problems the inspector believes should be repaired. The report will include information about poor workmanship and deterioration. The report should also include information about projected repairs and identify problems that would occur if the property were remodeled. For example, if the existing septic system is adequate for the current three-bedroom home, the report may state that the system will need to be upgraded if a fourth bedroom is added.

lien

Outstanding property tax bills Mortgage loans Court-ordered judgments

Closing Disclosure - details of the closing costs

Page 2 of the disclosure gives the details of the closing costs. The page is divided into four columns: Column 1 - Description of the costs Column 2 - Costs paid by the borrower - designated as being paid either "at closing" or "before closing" Column 3 - Costs paid by the seller - designated as being paid either "at closing" or "before closing" Column 4 - Costs paid by others (As you can see in this example, the appraisal fee was paid by someone other than the borrower or the seller.)

Flood Insurance

Private companies offer flood insurance that is subsidized by the federal government. This insurance protects the owner from damage caused by floods or tidal waves. Lenders that are regulated by the government require insurance on any property located within areas identified by the Federal Emergency Management Agency (FEMA) as being flood prone. The government requires the lenders to initiate, maintain and renew flood insurance. This makes the lenders very conservative in applying the criteria for properties that fall into the flood-prone category. Even a condominium owner on the 50th floor of a shorefront property could be required to have flood insurance. Flood insurance is not included in a basic homeowner's policy. Therefore, any homeowner who does not purchase this insurance for a property identified as being in a flood plain will not be eligible for any financial assistance.

RESPA specifically prohibits any payment or receiving of fees or kickbacks

RESPA specifically prohibits any payment or receiving of fees or kickbacks when a service has not been rendered. For example, an insurance company cannot pay a kickback to a real estate agent or to a lender for referring a client to their agency. Referral fees are strictly forbidden for these services: Title search Title insurance Inspection Survey Appraisal Loan Credit report Attorney RESPA permits sharing commissions and the payment of referral fees among cooperating brokers or multiple-listing services. R E S P A K (a memory tool to help you remember that RESPA prohibits KICKBACKS to real estate licensees.)

Recording Acts

Recording the deed to a property gives an owner protection from any other titles to the property that are not recorded in the public record. This is done through constructive notice.

insurability criteria

Several events have made insurance companies look at their insurability criteria. Increase in hurricane and tornado damage. Problems with rotting walls as a result of improper installation of exterior synthetic stucco finish, known as EIFS. Mold growth caused by interior water damage.

Co-op and Condo Fees

Some cooperatives have what is called a flip tax that is paid by the seller when the property transfers. Condominiums have special maintenance fees due to the homeowner's association. These fees are called assessments. If the seller owes of these fees, he or she will pay them at closing. If the seller has prepaid these fees, an adjustment will be made at closing.

Prorated Settlement Charges

Some expenses paid at closing must be prorated or divided proportionately between the buyer and the seller. The most common items that fall into this category include: Taxes Insurance Mortgage interest Utilities Any item that is prorated is shown on the settlement statement as a debit to one party and a credit to the other party for the same amount. Some items are those that were paid for in advance, so the buyer will owe the seller part of the payment. For example, let's say the seller paid insurance for the entire year in advance and the transaction will close on September 18. The buyer will owe the seller the portion of the insurance payment that applies from September 19 to December 31. Or if the seller paid for the rental of a propane tank for the calendar year, the buyer will owe the seller the prepaid rent on the tank from September 19 to December 31. For items paid in advance, the buyer will receive a debit and the seller will receive a credit. 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. So on the settlement statement, the buyer will get a credit and the seller will get a debit.

Recording Documents to Clear Title

Sometime a seller may have to file a satisfaction of mortgage document or a document showing satisfaction of other judgments. If so, the seller's attorney will file the documents, which will be recorded in the county clerk's office.

Closing Disclosure - Other Disclosures

States other important information for the borrower to know including whether or not the borrower would have any protection from liability for the unpaid balance in the event of a foreclosure

The 365-day method

The 365-day method calculates the amounts on the basis of a 365-day year. Identify an item and the amount needing to be prorated. Divide by 365 to get the daily rate. (Divide by 366 in a leap year.) Multiply the daily rate by the number of days the seller owned the property before closing to get the seller's share. Subtract the seller's prorated amount from the starting amount to get the buyer's prorated amount. Let's look at an example using this method. Buyers Greg and Jane have arranged to take over Kathy and Al's insurance policy. The premium is $550 per year paid in advance on March 1. Closing on the property is set for June 11. What is Kathy and Al's share of the insurance cost? Total amount: $550.00 Daily amount ($550 ÷ 365) = $1.51 Sellers' share = $155.53 $1.51 x 103 days (March 1 through June 11) = $155.53 Buyers' share = $394.47 $550 - $155.53 = $394.47 Since Greg and Jane paid the premium in advance, Kathy and Al's share of $394.47 will be credited to the sellers and debited to the buyers.

TILA/RESPA Integrated Disclosure (TRID) Rule

The Real Estate Settlement Procedures Act (RESPA) is administered by the Consumer Financial Protection Bureau (CFPB). Previously, RESPA required lenders to provide a HUD "Guide to Settlement" booklet and a Good Faith Estimate (GFE) of all costs related to settlement to borrowers within three days of loan application. RESPA also required the use of the HUD-1 settlement statement at closing plus a final good faith estimate and Truth-in-Lending Statement. Effective October 3, 2015, the real estate industry has new requirements as specified in the TILA/RESPA Integrated Disclosure (TRID) Rule. According to the TRID rule: Lenders must give a copy of the booklet, "Your home loan toolkit" to every person at the time of application for a loan. Lenders must provide a Loan Estimate of settlement costs at the time of loan application or within three business days of application. A Closing Disclosure, a form designed to detail all financial particulars of a transaction, must be delivered to the borrower at least three days before closing. The actual time frame is based on the method of delivery. The settlement agent must also provide the seller with the Closing Disclosure, which may be done at consummation.

Real Estate Settlement Procedures Act (RESPA)

The Real Estate Settlement and Procedures Act (RESPA) is of great benefit to consumers during the settlement process. RESPA requires that the parties to certain transactions receive the correct figures pertaining to their closing costs. RESPA applies to purchases: Of residential property - that is, one-to-four family homes, cooperatives and condominiums. Involving first or second mortgages. Financed by a federally-related loan - that is, 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. RESPA does not apply to seller-financed loans. It also does not apply to a loan assumption, unless the lender has changed the terms of the assumed loan or charges more than $50 for the assumption.

Inspections (buyer costs)

The buyer will pay for the structural inspection of the home. These inspections cost 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.

Deed (Closing Documents)

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

Open the Escrow

The escrow agent will open an escrow in the names of the parties involved. Along with the purchase agreement, the escrow agent will need information about such items as: The length of escrow Terms of loans Commissions Instructions about inspections, such as termite reports Personal property included in the sale Legal description of the property Earnest money deposit The escrow agent will use the purchase agreement and all the supporting documentation to compile the escrow instructions for the buyers and sellers to sign. All of the conditions and deadlines in the instructions must match the terms of the purchase agreement.

Recording

The fees associated with recording the deed.

Closing Disclosure - Loan Costs

The first section deals with the loan costs: A. Origination charges - Items such as points, application fee, and underwriting fee B. Services the borrower did not shop for - These are items the lender requires for the loan, such as appraisals and credit reports. C. Services the borrower did shop for - These are items the borrower can get on his own, such as pest inspections, survey fees, and title insurance. D. The total of the costs of A, B, and C above

Closing Disclosure - Other Costs

The next section deals with other costs: E. Taxes and other government fees - Items such as recording fees and transfer taxes F. Prepaids - These are items paid for in advance, such as homeowner's insurance and property taxes. G. Initial escrow payment at closing - An escrow account is an account where money is held for certain payments until they are paid out - typically for insurance and taxes. The lender gives the borrower a statement that tells how much money it requires the borrower to put into the account each month. H. Other costs not covered elsewhere on the disclosure - Items such as HOA fees, home warranty fees, home inspection fees, and real estate commission I. The total of the costs of E, F, G, and H above Section J gives the total closing costs to the borrower (D + I from above). This total will be moved to the bottom of page 1 under the heading "Costs at Closing - Closing Costs."

Preliminary Title Report

The person preparing the closing documents usually orders a preliminary title report to start the title search. This report shows the condition of the title before the loan or sale transaction. This report should be ordered as early as possible in the closing process, so that there will be time to resolve any issues that come up. For example, if the report indicates that there is a judgment lien against the property, the sellers will either have to clear away the lien or prove that there was some mistake and no lien actually exists. Buyers must acknowledge receipt of the preliminary report which contains: The owner's name and property description A list of any outstanding assessments, such as taxes or bonds Any covenants, conditions or restrictions Recorded liens or encumbrances that must be removed before a loan can go through

Survey (Closing Documents)

The purchaser, purchaser's lender, or title company may require a survey to verify the location and size of the property. The survey also identifies any easements, encroachments, or flood plain hazard.

settlement statement

The settlement 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. In order for the buyer to know how much money to bring to closing and the seller to know how much he or she will receive at closing, the entries on the settlement statement must be calculated. The escrow agent will subtract the total of the buyer's credits from the total debits and the result will be what the buyer needs to bring to closing. Personal checks are usually not accepted at closing, so the buyer will need to bring a certified check or cashier's check. Similarly, the agent will subtract the seller's total debits from the total credits to arrive at what the seller will receive at closing.

title closing

The title closing is the culmination of the real estate transaction. At the title closing: 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.

title search

The title search reveals: The legal description of the property The owners of record Any outstanding liens or encumbrances on the property

Satisfy Existing Liens

The title to a property cannot be transferred until any existing liens have been paid off. There is a fee associated with satisfying the liens which is calculated based on the amount of the lien.

Delivery of the Deed

The title to the property has transferred when the deed is delivered and accepted by the buyer. Delivery and acceptance must occur during the lifetime of the seller. The seller must sign the deed, which must have the names of the seller and buyer, the words of conveyance and the correct legal description. It is not a legal requirement that a deed be recorded in the County Clerk's office. However, recording the deed could offset any future problems.

scoring instruments

The trend in today's insurance market is for insurers to use scoring instruments to determine the insurability of both the property and the property owner. Factors that will determine whether the company will issue a policy and what premium they will charge include: Current condition of the property Claim history on that property Owner's claim history Owner's credit history

Inspection Types

There are a number of different types of inspections that buyers can request. 1. Standard home inspection - A standard inspection covers a home's major mechanical systems — electrical, plumbing, heating, and cooling — and its construction from roof to foundation, exterior to interior. 2. Pest inspection - A pest inspection is a check for damage caused by wood-eating insects like termites, carpenter ants or beetles. 3. Soil Inspection - A soil inspection is the examination of the soil conditions on the property to determine if there is any settling or drainage problems. 4. Structural inspection - A structural inspection is a visual inspection of the foundation elements, bearing walls, beams and columns, floor slabs, framing, crawlspace areas, and drainage. The inspector observes these components for signs of movement, distress, damage, and/or the ability to adversely affect the rest of the structure. 5. Environmental inspection - This inspection looks at environmental issues such as radon, asbestos, lead-based paint, underground storage tanks or contaminated water. If your buyers do not have someone in mind to do the inspections, they may ask you for a recommendation. It's a good idea to give the buyers at least three names to choose from. Your broker may have a list in the office that the agents can use for this purpose.

Lender Fees

There could be several fees the lender will charge the buyer. Here are just some of them - not all of which will be charged by every lender on every mortgage. Application fee - What the lender charges to process the application. Underwriting fee - What the underwriter charges for reviewing the loan application and approving the loan. Loan processing fee - What the bank charges to process the loan. Origination fee - What the lender charges for finding the loan - is equal to 1% of the loan amount. Loan lock fees - What the lender charges to lock in a specific interest rate for a specific period of time. Tax service fee - What the lender charges to monitor the escrowed payments of property taxes.

Closing Disclosure - Summaries of Transactions

This section is divided into two columns. The left column summarizes the borrower's transaction and includes: K. Due from the borrower at closing - This includes the sale price of the property and any adjustments for items paid by the seller in advance. L. Paid already by or on behalf of borrower at closing - This includes deposit, loan amount, loan assumptions, seller credits, other credits, and adjustments for items unpaid by the seller. The calculation at the bottom of the left column subtracts the totals already paid by the borrower from the total due from the borrower and results in the Cash to Close due from the borrower at closing. This total is the same figure that you see on the bottom of page 1 under the heading "Costs at Closing - Cash to Close." The right column of page 3 summarizes the seller's transaction and includes: M. Due to seller at closing - This includes the sale price of the property and any adjustments for items paid by the seller in advance. N. Due from seller at closing - This section includes closing costs the seller will pay, payoff of any first or second mortgages, seller credit, and adjustments for items unpaid by the seller. The calculation at the bottom of the right column subtracts the total due from the seller from the total due to the seller and results in the Cash to Seller, which is the amount the seller will receive from the borrower at closing. Note: This last line on page 3 is important because it shows how much cash the borrower needs to bring to closing and how much cash the seller will receive at closing.

Closing Disclosure - Loan Terms

This section of page 1 gives the exact figures for the loan amount, interest rate, and monthly principal and interest payment, and indicates with a "yes" or "no" whether any of those amounts can increase after closing. It also indicates whether or not there is a prepayment penalty or balloon payment with the loan, and if so, gives the specifics that apply to that feature.

Closing Disclosure - Projected Payments

This section of page 1 shows the actual payments the borrower will make for principal & interest and mortgage insurance, an estimated amount for the escrow payment, and the total estimated monthly mortgage payment. These calculations are given for years 1-7 and then for years 8-30 of the loan term. This section also gives an estimated monthly amount for taxes, insurance, and assessments and specifies whether or not the money for these payments will be in escrow. The last section of page 1 shows the borrowers' total costs as closing costs (which are detailed on page 2) and the total amount the buyers need to bring to closing (which includes the closing costs and other amounts that are detailed on page 3).

items that the buyer usually pays

Unless custom (or the sales agreement) dictates otherwise, buyer expenses usually include: Appraisal and credit report fees Inspections Mortgage recording fees Title insurance Attorney fees Lender fees Recording Private Mortgage Insurance (PMI), if applicable Special fees, such as coop or condo fees

items that the seller usually pays

Unless custom (or the sales agreement) dictates otherwise, seller expenses usually include: Transfer taxes (state and local) Broker commission Attorney fees Recording documents to clear the title Satisfaction of existing liens Special fees, such as coop or condo fees

Appraisal and Credit Report Fees

When the lender does the appraisal on the property, the fee is charged to the buyer. An appraisal 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.

check on the progress of activities along the way

Whether providing a lot of assistance or a little, the licensee's role is to check on the progress of activities along the way so that the actual closing will go as smoothly as possible. This includes the following: Communicate with the client. Make sure the client knows what is happening every step of the way. Communicate with the other party's agent. The licensee needs to promote his or her client's interests, but everyone wants the sale to close. So it's important to work with the other agent to see that the transaction closes successfully.

Where Held

any one of a number of office locations: Title company Lender Attorney Closing agent County recorder

Title Insurance

protect the policy holder 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 Additionally, the title company agrees to defend the title in court against any lawsuits that may arise from the defects covered in the policy.