Closing the Real Estate Transaction

At the time of loan application: At the time of loan application: When borrowers apply for a mortgage loan, mortgage brokers and/or lenders must give the borrowers:

*a RESPA Settlement Cost Booklet,* which contains consumer information regarding various real estate settlement services. (Required for purchase transactions only) and *a Good Faith Estimate (GFE)* of settlement costs, which lists the charges the buyer is likely to pay at settlement. This is only an estimate and the actual charges may differ. If a lender requires the borrower to use a particular settlement provider, then the lender must disclose this requirement on the GFE. *a Mortgage Servicing Disclosure Statement,* which discloses to the borrower whether the lender intends to service the loan or transfer it to another lender. It also provides information about complaint resolution. If the borrowers don't get these documents at the time of application, the lender must mail them within three business days of receiving the loan application. If the lender turns down the loan within three days, however, then RESPA does not require the lender to provide these documents.

Debit

A charge on a closing statement; the opposite of a credit.

Debit:

A charge on a closing statement; the opposite of a credit.

Closing Statement

A detailed cash accounting of a real estate transaction prepared by a broker, escrow officer, attorney or other person designated to conduct the closing, showing all cash received, all charges and credits made and all cash paid out in the transaction.

Closing Statement:

A detailed cash accounting of a real estate transaction prepared by a broker, escrow officer, attorney or other person designated to conduct the closing, showing all cash received, all charges and credits made and all cash paid out in the transactions

Relation-Back Doctrine

A doctrine establishing the effects of the grantor's death on an escrow transaction. Under this doctrine, title is said to pass when the signed deed is deposited in escrow.

Relation-Back Doctrine:

A doctrine establishing the effects of the grantor's death on an escrow transaction. Under this doctrine, title is said to pass when the signed deed is deposited in escrow.

Escrow Instructions

A written contract signed by buyer and seller that details the procedures necessary to close a transaction and directs the escrow agent how to proceed.

Escrow Instructions:

A written contract signed by buyer and seller that details the procedures necessary to close a transaction and directs the escrow agent how to proceed.

After closing on most real estate sales, the closing agent must provide the seller with which of the following? An IRS form 8300. An IRS form 1099S. An IRS form 1099MIS. An IRS form 1098.

An IRS form 1099S. The seller and the IRS must be provided with an IRS form 1099S upon the closing of most real estate transactions.

Arrears

At or after the end of the period for which expenses are due or levied; the opposite of in advance or prepaid. Mortgage interest and property taxes are usually paid in arrears.

Arrears;

At or after the end of the period for which expenses are due or levied; the opposite of in advance or prepaid. Mortgage interest and property taxes are usually paid in arrears.

Civil law suits

Civil law suits. Individuals have one (1) year to bring a private law suit to enforce violations of Section 8 or 9. A person may bring an action for violations of Section 6 within three years. Lawsuits for violations of Section 6, 8, or 9 may be brought in any federal district court in the district in which the property is located or where the violation is alleged to have occurred. HUD, a State Attorney General or State insurance commissioner may bring an injunctive action to enforce violations of Section 6, 8 or 9 of RESPA within three (3) years.

Settlement

Closing; the act of adjusting and prorating the various credits, charges and settlement costs to conclude a real estate transaction.

Settlement:

Closing; the act of adjusting and prorating the various credits, charges and settlement costs to conclude a real estate transaction.

A closing is scheduled for March 15th and the buyer will be assuming the one-year contract for the security system, purchased by the seller on February 1st for $560. How will this appear on the closing statement? Debit buyer $490 and credit seller $490. Debit buyer $70 and credit seller $70. Debit buyer $490 and credit seller $70. Debit seller $490 and credit buyer $490.

Debit buyer $490 and credit seller $490. When the seller purchased the security system contract on February 1st, he paid $560 for one year of service, meaning that the service will remain active until February 1st next year. Closing is taking place on March 15th, so there is still 10.5 months remaining on the contract. If the buyer didn't want to take over the contract, the seller would receive a refund for the remaining term of the contract or transfer it to the seller's new home and receive credit for the remaining term at that location. So, to prorate the remaining term, one would figure the length of time from closing to the future date to which the contract is paid, which is 10 1/2 months or 10.5 months. Then, divide the amount paid by 12 months and multiply it times the number of months remaining. So, $560 ÷ 12 x 10.5 = $490. Since the buyer owes the seller this money, you would debit the seller and credit the buyer in the amount of $490.

The Closing Statement

The closing Statment *The Sale/Purchase Price:* The total consideration (sale or purchase price) for the property must be paid by the buyer to the seller at closing. This will appear on the buyer's closing statement as a charge and on the seller's closing statement as a credit. Regardless of whether you are filling out a closing statement worksheet showing all of the party's debits (charges) and credits (receipts), or a HUD-1 RESPA required closing statement form, the buyer must be charged for the purchase price and the seller must receive it from the buyer. *Earnest Money:* Any earnest money that the buyer has given must be credited to the buyer's account. The earnest money does not appear as such on the seller's closing statement because it is included in the purchase price that the seller receives as a credit. *Broker's Commission.* The responsibility for paying the broker's commission will have been determined by previous agreement. If the broker is the agent for the seller, the seller is normally responsible for paying the commission. If an agency agreement exists between a broker and the buyer, or if two agents are involved, one for the seller and one for the buyer, the commission may be apportioned as an expense between both parties or according to some other arrangement. *Attorney's Fees.* If either of the parties' attorneys will be paid from the closing proceeds, that party will be charged with the expense in the closing statement. This expense may include fees for the preparation or review of documents or for representing the parties at settlement. *Recording Expenses.* The seller usually pays for recording charges (filing fees) necessary to clear all defects and furnish the purchaser with a marketable title. Items customarily charged to the seller include the recording of release deeds or satisfaction of mortgages, quitclaim deeds, affidavits and satisfaction of mechanics' liens. The buyer pays for recording charges that arise from the actual transfer of title. Usually, such items include recording the deed that conveys title to the buyer and a mortgage or deed of trust executed by the buyer. *Transfer Tax.* Most states require some form of transfer tax, conveyance fee or tax stamps on real estate conveyances. This expense is most often borne by the seller, although customs vary. In addition, many cities and local municipalities charge transfer taxes. Responsibility for these charges varies according to local practice. *Title Expenses.* Responsibility for title expenses varies according to local custom. In most areas, the seller is required to furnish evidence of good title and pay for the title search. If the buyer's attorney inspects the evidence or if the buyer purchases title insurance policies, the buyer is charged for the expense. *Loan Fees.* When the buyer secures a new loan to finance the purchase, the lender ordinarily charges a loan origination fee of 1 to 2 percent of the loan amount. The fee is usually paid by the buyer at the time the transaction closes. The lender may also charge discount points if the buyer has secured a loan with a below-market interest rate. If the buyer assumes the seller's existing financing, the buyer doesn't have to pay a loan origination fee or discount points, but may pay an assumption fee. Also, under the terms of some mortgage loans, the seller may be required to pay a prepayment penalty for paying off the mortgage loan before its due date. *Appraisal Fees.* Either the seller or the buyer pays the appraisal fees, depending on who orders the appraisal. When the buyer obtains a mortgage, it is customary for the lender to require an appraisal. In this case, the buyer usually bears the cost, although this is always a negotiable item. If the fee is paid at the time of the loan application, it is reflected on the closing statement as having already been paid. *Survey and Inspection Fees.* The buyer who obtains new mortgage financing customarily pays the survey fees. The sales contract may require that the seller furnish a survey. Pest control (termite) inspections required by the buyer's lender may be paid by the buyer or the seller depending on the contract and local custom. Home inspection fees are typically paid for by the buyer, but the parties may negotiate that they be paid by the seller. *Additional Fees.* An FHA borrower owes a lump sum for payment of the mortgage insurance premium (MIP) if it is not financed as part of the loan. A VA mortgagor pays a funding fee directly to the VA at closing. If a conventional loan carries private mortgage insurance (PMI), the buyer prepays one year's insurance premium at closing. *Accounting for Expenses.* Expenses paid out of the proceeds of the sale at closing are debited only to the party making the payment. Occasionally, an expense item, such as an escrow fee, a settlement fee or a title insurance premium may be shared by the buyer and the seller. In this case, each party is debited for their share of the expense.

Annual Escrow Statement

Loan servicers must deliver to borrowers an Annual Escrow Statement once a year. The annual Escrow account statement summarizes all escrow account deposits and payments during the servicer's twelve month computation year. It also notifies the borrower of any shortages or surpluses in the account and advises the borrower about the course of action being taken.

Loan servicing complaints

Loan servicing complaints. Section 6 provides borrowers with important consumer protections relating to the servicing of their loans. Under Section 6 of RESPA, borrowers who have a problem with the servicing of their loan (including escrow account questions), should contact their loan servicer in writing, outlining the nature of their complaint. The servicer must acknowledge the complaint in writing within 20 business days of receipt of the complaint. Within 60 business days the servicer must resolve the complaint by correcting the account or giving a statement of the reasons for its position. Until the complaint is resolved, borrowers should continue to make the servicer's required payment. A borrower may bring a private law suit, or a group of borrowers may bring a class action suit, within three years, against a servicer who fails to comply with Section 6's provisions. Borrowers may obtain actual damages, as well as additional damages if there is a pattern of noncompliance.

Doctrine of relation-back

Most states have a law called the doctrine of relation-back that provides that, when closing is conducted in escrow, title is said to transfer when the deed is deposited in escrow. The seller usually signs the deed early on in the escrow process and gives it to the escrow holder. The written escrow instructions specifically provide that title will be transferred to the buyer at closing or when the deed is recorded. However, if the seller dies prior to closing, the seller's heirs cannot cancel the transaction because of the doctrine of relation-back.

Prorating Arithmetic

Prorating Arithmetic Accurate prorating requires the answers to the following questions: What type of item is being prorated? Is the item an accrued (unpaid) item or a prepaid item? What does the contract between the parties say about the item? What arithmetic processes must be used? The computation of a proration involves identifying a yearly or, in some cases, monthly charge for the item to be prorated, then dividing by the number of months or days in a year (or month) to determine a monthly or daily amount for the item. These smaller portions are then multiplied by the number of months or days in the prorated time period to determine the accrued or unearned amount that will be figured in the settlement. Using this general principle, there are two methods of calculating prorations: The yearly charge is divided by a 360-day year (commonly called a banking year), or 12 months of 30 days each. The yearly charge is divided by 365 days (366 in a leap year) to determine the daily charge. Then the actual number of days in the proration period is determined, and this number is multiplied by the daily charge. The final proration figure varies slightly, depending on which computation method is used. The final figure also varies according to the number of decimal places to which the division is carried before rounding off. All of the computations in this lesson are computed by allowing the calculator to carry the calculation to not less than four places to the right of the decimal. The fourth decimal place is rounded off to cents only after the final proration figure is determined. When rounding off, if the last number to the right is a 5 or higher, round up and if it is a 4 or less, round down.

The law that sets limits on the amount of reserves for taxes and insurance a lender can require from a borrower is which of the following? Regulation Z. The Equal Credit Opportunity Act. The Truth-in-Lending Act. The Real Estate Settlement Procedures Act.

The Real Estate Settlement Procedures Act. RESPA limits the reserves a lender can require to be included in a borrower's payments to one-twelfth of the amount of the annual bills for taxes and insurance plus a cushion not exceeding two months, plus any shortage. Regulation Z is the Federal Reserve's regulation promulgating the Truth in Lending Act.

Prorate:

To divide or distribute proportionately. At closing, various expenses that will be paid by the buyer later on or that the seller has prepaid are prorated between the buyer and the seller to ensure that each is responsible for the operating expenses of the property during his or her ownership.

A written statement from a lender certifying the principal balance, interest rate, interest paid-to date, balance of reserves for taxes and insurance and breakdown of the PITI payment amount is called: an estoppel certificate. a mortgage reduction certificate. a subordination agreement. a non-recourse agreement.

a mortgage reduction certificate. When the buyer is assuming the seller's loan, it is customary in many areas of the country to obtain a "mortgage reduction certificate" from the seller's lender. This written instrument from the lender certifies the principal balance of the loan, the date to which the interest has been paid, the balance in the impound or reserve account for taxes and insurance and gives a breakdown of the monthly payment. Of course, all of these figures are as of the date of the certificate.

Jim deposits a signed deed with Marsha and instructs her to hold it until she has received the full purchase price for his home from Buyer Nathan. Nathan gives Marsha $5,000 which she is authorized to give to Jim, along with the balance of the purchase price when Nathan is satisfied that the property is suitable for his needs and his lender has agreed to provide a loan for not less than $135,000. This is an example of: a net sale. an exchange. an escrow closing. passing papers.

an escrow closing Whenever the buyer and seller hire a disinterested third party to hold funds and documents and close the transaction when all the the terms and conditions of their agreement have been met, it is called "closing in escrow" or an "escrow closing."

When a lender requires a survey prior to closing, the purpose of the survey is to: assure the lender that the property is worth what the appraisal shows. assure the borrower that the property is worth what the appraisal shows. verify that there are no unrecorded liens on the property. assure the lender that the improvements are located on the property.

assure the lender that the improvements are located on the property. A survey shows the location of the improvements on the property. If the survey shows that any part of the property is encroaching on a neighboring property or any neighboring property is encroaching on the subject property, then the value of the property may be adversely affected and the lender will not want to make the loan until the issue is resolved.

The Real Estate Settlement Procedures Act (RESPA) applies to the activities of: banks financing the purchase of an office building. a seller financing the sale of her own home for the first time. a licensed real estate broker who finances the down payment on a 1-4 unit residence. banks financing the purchase of a borrower's residence.

banks financing the purchase of a borrower's residence. A loan from a bank is a "federally related" loan. RESPA applies to federally related mortgage loans made to finance the purchase or refinance of a 1-4 unit residence.

The purpose of the date down at closing is to: prepare all of the necessary closing documents. find out if the seller paid off the existing loan. record the closing documents. bring the title search up to date.

bring the title search up to date. There is usually a title search done shortly after the signing of the contract and a commitment issued that shows the current condition of the title, any requirements necessary to place the title in the condition called for in the sales contract and the exceptions that will appear on the title policy. Then another search is done at the time of closing to ensure that all the requirements have been met and nothing new has been filed in the public records that was not there at the time of the original search.

A closing on the sale of a home for $110,000 is scheduled for July 15. The buyers will assume the seller's existing first trust deed loan which has a principal balance of $87,450. Interest on the loan at the rate of 5.75% is paid to July 1. The monthly P & I payments are $466.86 and the PITI payments are $571.03. The impound account balance on the loan is $937.53. The lender is charging a $150 assumption fee which is to be split 50/50. How will the loan assumption appear on the buyers' closing statement? $1,012.50 credit and $87,659.52 debit. $284.52 debit and $88,387.53 credit. $1,012.50 debit and $87,659.52 credit. $87,450.00 credit and $1,222.02 debit.

$1,012.50 debit and $87,659.52 credit. The principal balance of an assumed loan is shown on the closing statements as a debit to the seller and a credit to the buyer. The accrued interest on the loan must be prorated, because it is paid in arrears (for the time period that has passed since the paid-to date) and, since the buyer will be making the next payment, debited to the seller and credited to the buyer. The impound account represents money that the seller has paid to the lender for the lender to pay property taxes and insurance when they come due later on, so the buyer must reimburse the seller for the balance in the impound account. This is done by debiting the buyer and crediting the seller for the amount in the account. So, on the buyer's side of the transaction, the loan assumption would appear as follows: Debits: Impound Account Balance of $937.53 + $75.00 = $1,012.53. Credits: Principal Balance of $87,450.00 + Interest for 15 days of $209.52 = $87,659.52.

The buyer is assuming the seller's existing FHA loan which has a principal balance of $95,623 and an interest rate of 6.0% per annum. P & I payments on the loan are $644.72 and due on the first of each month. Closing is scheduled for February 15th. How will the interest appear on the closing statement? $239.06 debit to seller and $239.06 credit to buyer. $478.12 debit to seller and $239.06 credit to buyer. $239.06 debit to buyer and $239.06 credit to seller. $239.06 debit to seller and $239.06 debit to buyer.

$239.06 debit to seller and $239.06 credit to buyer. There are 15 days from the first of the month until closing. So you need to calculate interest at 6% per annum for 15 days. $95,623 x .06 ÷ 360 x 15 days = $239.06.

Closing is scheduled for May 1. Property taxes are paid in arrears at the end of the year. The bill for this year is estimated to be $1,475. How will the taxes appear on the closing statement. $492.67 debit to the seller and $983.33 credit to the buyer. $492.67 debit to the buyer and $492.67 credit to the seller. $491.67 debit to seller and $491.67 credit to buyer. $492.67 debit to the seller and $983.33 debit to the buyer.

$491.67 debit to seller and $491.67 credit to buyer. $1,475 ÷ 12 x 4 months = $491.67. The seller owes the buyer for this portion of the bill, so you would take the money from the buyer and give it to the seller at closing. You do this by charging the seller (debiting the seller) and crediting the buyer for the prorated amount. The amount is the same on both closing statements as you are taking it from one party and giving it to the other.

Consummation

*Consummation* of the loan is typically the date on which the borrower becomes obligated to pay the lender back; usually, the day the borrower signs the loan documents, not necessarily the date of closing. The same form may be used to provide the seller's closing statement.

Accrued Expenses

*Unpaid& expenses that are owed by the seller, but not due at the closing are called *accrued expenses.* These expenses will later be paid by the buyer. Accrued expenses are expenses that are *paid in arrears*—that is, paid after they have been earned by the creditor. Accrued expenses include such items as property taxes that are paid in arrears, water bills and interest on assumed mortgages. The seller pays the buyer for the seller's share of these expenses at closing. Accrued expenses appear on the closing statement as a *debit to the seller* and a *credit to the buyer* for the portion of the expenses owed by the seller.

Real Estate Settlement Procedures Act (RESPA)

A federal law, enacted in 1974 and later revised, that ensures that the buyer and seller in a real estate transaction have knowledge of all settlement costs when the purchase of a one-to -four-family residential dwelling is financed by a federally related mortgage loan. RESPA also prohibits the payment of kickbacks and unearned fees in connection with any transaction in which a federally related mortgage loan is used to finance the purchase of a 1-4 unit residence and regulates the maximum amount of reserves a lender can require a borrower to maintain for payment of taxes and insurance.

Real Estate Settlement Procedures Act (RESPA):

A federal law, enacted in 1974 and later revised, that ensures that the buyer and seller in a real estate transaction have knowledge of all settlement costs when the purchase of a one-to -four-family residential dwelling is financed by a federally related mortgage loan. RESPA also prohibits the payment of kickbacks and unearned fees in connection with any transaction in which a federally related mortgage loan is used to finance the purchase of a 1-4 unit residence and regulates the maximum amount of reserves a lender can require a borrower to maintain for payment of taxes and insurance.

Closing Math Tips

Closing Math Tips The following are some simple tips to remember when dealing with prorating questions on the real estate exam: *Accrued items:* Calculate time from the past up to the date of closing to compute the amount and then debit the seller and credit the buyer for the same amount. *Prepaid items:* Calculate from closing to the future date to which the expense is paid to compute the amount and then debit the buyer and credit the seller for the same amount. *Rents:* Most rents are paid once a month, so divide the rent by 30 days and multiply by the number of days the rent has been prepaid and debit the seller and credit the buyer for the same amount. *Security Deposits:* The seller is holding security deposits that are to be used to pay for damages done by the tenants that are still in possession of the property. Therefore, the seller needs to give the buyer all security deposits that are being held. This is done by debiting the seller and crediting the buyer for the total amount of the security deposits. *Loan Assumptions:* When the buyer assumes the seller's existing loan, the principal balance of the loan shows on the closing statement as a debit to the seller and credit to the buyer. The interest on the loan must be prorated from the date to which the interest is paid until the date of closing and the amount must be debited to the seller and credited to the buyer. If there is an impound account (reserves for taxes and insurance), the buyer must reimburse the seller for that account (debit buyer and credit seller for the balance in the account). *Seller Carrybacks:* When the seller finances part of the purchase price, the amount of the seller carryback must be debited to the seller and credited to the buyer.

Closing Costs

Expenses of the sale (or loan refinance) that must be paid in addition to the purchase price (in the case of the buyer's expenses) or be deducted from the proceeds of the sale (in the case of the seller's expenses).

Closing Costs:

Expenses of the sale (or loan refinance) that must be paid in addition to the purchase price (in the case of the buyer's expenses) or be deducted from the proceeds of the sale (in the case of the seller's expenses).

Prepaid Expenses

Expenses that are paid before they are currently due. Most insurance premiums are paid in advance. Rent is normally paid one month in advance. At closing, the seller is normally credited with prepaid expenses and charged for prepaid income, such as rent received.

Prepaid Expenses:

Expenses that are paid before they are currently due. Most insurance premiums are paid in advance. Rent is normally paid one month in advance. At closing, the seller is normally credited with prepaid expenses and charged for prepaid income, such as rent received.

Loan Estimate

First, the Good Faith Estimate (GFE) and the initial Truth-in-Lending disclosure (initial TIL) have been combined into a new form, the Loan Estimate, which must be provided to affected loan applicants within 3 business days after receipt of a loan application.

Credit

In closing statements, that which is due and payable to either the buyer or the seller—the opposite of a charge or debit. The credit appears in the right-hand column of the accounting statement.

Credit:

In closing statements, that which is due and payable to either the buyer or the seller—the opposite of a charge or debit. The credit appears in the right-hand column of the accounting statement.

Prorating Expenses

Most closings involve the division of financial responsibility between the buyer and seller for such items as loan interest, taxes, rents, fuel and utility bills. These allowances are called prorations. *Prorations* are necessary to ensure that expenses are divided fairly between the seller and the buyer. For example, the seller may owe current taxes that have not been billed; the buyer would want this settled at the closing. Where taxes must be paid in advance, the seller is entitled to a rebate at the closing. If the buyer assumes the seller's existing mortgage or deed of trust, the seller usually owes the buyer an allowance for accrued interest through the date of closing.

The Closing Agent

One person usually conducts the proceedings at a closing and calculates the division of income and expenses between the parties (called settlement). In some areas, real estate brokers preside. In others, the closing agent is the buyer's or seller's attorney, a representative of the lender or a representative of the title company. Some title companies and law firms employ paralegal assistants who conduct closings for their firms. Preparation for closing involves ordering and reviewing an array of documents, such as the title insurance policy or title certificate, surveys, property insurance policies, and other items. Arrangements must be made with the parties for the time and place of closing. Closing statements and other documents must be prepared.

Prepaid Expenses

Prepaid expenses are items that the seller has paid but not fully used up. They include items such as hazard insurance premiums and fuel oil in a tank. The buyer reimburses (pays) the seller for the unused portion of these expenses at closing. Prepaid expenses appear on the closing statement as a *debit to the buyer* and a *credit to the seller* for the unused portion of the expenses.

Federally Related Loans/Mortgages

RESPA is applicable to all federally related mortgage loans. A "federally related mortgage loan" is defined as loans (other than temporary loans), including refinancings, that satisfy the following two criteria: the loan is secured by a first or subordinate lien on residential real property, located within a State, upon which either: A one-to-four family structure is located or is to be constructed using proceeds of the loan (including individual units of condominiums and cooperatives); or A manufactured home is located or is to be constructed using proceeds of the loan. the loan falls within one of the following categories: Loans made by a lender1, creditor2 or dealer3; Loans made or insured by an agency of the federal government; Loans made in connection with a housing or urban development program administered by an agency of the federal government; Loans made and intended to be sold by the originating lender or creditor to FNMA, GNMA, or FHLMC (or its successor); or Loans that are the subject of a home equity conversion mortgage or reverse mortgage issued by a lender or creditor subject to the regulation.

Closing Disclosure

Second, the HUD-1 and final Truth-in-Lending disclosure (final TIL and, together with the initial TIL, the Truth-in-Lending forms) have been combined into another new form, the *Closing Disclosure,* which is designed to provide disclosures that will be helpful to consumers in understanding all of the costs of the transaction. This form must be provided to the buyer/borrower at least three business days before consummation of the loan. *Consummation* of the loan is typically the date on which the borrower becomes obligated to pay the lender back; usually, the day the borrower signs the loan documents, not necessarily the date of closing. The same form may be used to provide the seller's closing statement.

Using a 360-day year at closing, what is the amount the buyer will be credited if closing is held on May 15th and the annual real property taxes of $1,890 are unpaid and due at the end of the year? $866.25. $708.75. $1,890. $1,181.25.

Since the taxes are unpaid and the buyer will pay the entire bill of $1,890 at the end of the year, the seller owes the buyer for the time period covered by the bill during which the seller owned the property. From January 1 through May 15th is 4 months and 15 days or 135 days (4 months times 30 days equals 120 days plus 15 days equals 135 days). So, $1,890 ÷ 360 x 135 = $708.75.

Preparation of Closing Documents

The closing of a real estate transaction involves expenses for both the buyer and the seller in addition to the purchase price. There is usually the real estate broker's commission, the payoff of an existing loan, fees and expenses in connection with the buyer's new loan, inspection fees, an appraisal fee, title insurance. etc. These are expenses that must be paid at the closing. There are also expenses involved that are not paid at the closing but which may have been prepaid by the seller for which he or she must be reimbursed (such as insurance and/or taxes) and items of expense the seller has incurred, but for which the buyer will be billed (such as taxes and mortgage interest paid in arrears when a loan is assumed). The financial responsibility for these items must be prorated (or divided) between the buyer and the seller. All expenses and prorated items are accounted for on the settlement (or closing) statement. This is how the exact amount of cash required from the buyer and the net proceeds to the seller are determined.

Closing

The consummation of a real estate transaction, when the seller delivers title to the buyer in exchange for payment of the purchase price by the buyer. Also referred to as settlement.

Closing:

The consummation of a real estate transaction, when the seller delivers title to the buyer in exchange for payment of the purchase price by the buyer. Also referred to as settlement.

Escrow

The process by which money and/or documents are held by a disinterested third party until satisfaction of the terms and conditions of the escrow instructions (as prepared by the parties to the escrow) has been achieved. Once these terms have been satisfied, delivery and transfer of the escrowed funds and documents takes place.

General Prorating Rules

The rules or customs governing the computation of prorations for the closing of a real estate sale vary widely from state to state. The following are some general guidelines for preparing the closing statement: -In most states, the seller owns the property on the day of closing, and prorations or apportionments are usually made to and including the day of closing. -Mortgage interest, general real estate taxes, water taxes, insurance premiums and similar expenses are usually computed by using 360 days in a year and 30 days in a month. The agreement of sale should state whether this method or actual days are to be used. On almost every mortgage loan the interest is paid in arrears, so buyer and seller must understand that the mortgage payment due on June 1, for example, includes interest due for the month of May. Thus, the buyer who assumes a mortgage on May 31 and makes the June payment pays for the time the seller occupied the property so the seller should be debited and the buyer should be credited with a month's interest. On the other hand, the buyer who places a new mortgage loan on May 31 may be pleasantly surprised to hear that he or she will not need to make a mortgage payment until a month later. -Accrued or prepaid general real estate taxes are usually prorated at the closing. When the amount of the current real estate tax cannot be determined definitely, the proration is usually based on the last obtainable tax bill. Proration of real estate taxes varies widely depending on how the taxes are paid in the area where the real estate is located. In some states, real estate taxes are paid in advance; that is, if the tax year runs from January 1 to December 31, taxes for the coming year are due on January 1. In this case, the seller, who has prepaid a year's taxes, should be reimbursed for the portion of the year remaining after the buyer takes ownership of the property. In other areas, taxes are paid in arrears, on December 31 for the year just ended. In this case, the buyer should be credited by the seller for the time the seller occupied the property. Sometimes, taxes are due during the tax year, partly in arrears and partly in advance; sometimes they are payable in installments. It gets even more complicated; city, state, school and other property taxes may start their tax years in different months. Whatever the case may be in a particular transaction, the licensee should understand how the taxes will be prorated. - Special assessments are usually paid in full by the seller at closing. Sometimes the buyer will agree to assume the assessment in which case the seller pays the current installment, and the buyer assumes all future installments. The special assessment installment generally is not prorated at the closing. -Rents are usually adjusted on the basis of the actual number of days in the month of closing. It is customary for the seller to receive the rents for the day of closing and to pay all expenses for that day. If any rents for the current month are uncollected when the sale is closed, the buyer often agrees by a separate letter to collect the rents if possible and remit the pro rata share to the seller. -Security deposits made by tenants to cover the last month's rent of the lease or to cover the cost of repairing damage caused by the tenant are generally transferred by the seller to the buyer.

Escorw Procedure

The seller usually deposits - the deed conveying the property to the buyer; -title evidence (abstract and attorney's opinion, certificate of title, title insurance or Torrens certificate); -existing hazard insurance policies; - a letter or mortgage reduction certificate from the lender stating the exact principal remaining (if the buyer assumes the seller's loan); - affidavits of title (if required); -a reduction certificate or 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. The buyer deposits -the balance of the cash needed to complete the purchase, usually in the form of a certified or cashier's check; -loan documents (if the buyer secures a new loan); -proof of hazard insurance, including (where required) flood insurance; and -other necessary documents, such as inspection reports required by the lender.

Prorate

To divide or distribute proportionately. At closing, various expenses that will be paid by the buyer later on or that the seller has prepaid are prorated between the buyer and the seller to ensure that each is responsible for the operating expenses of the property during his or her ownership.

Other enforcement actions

Under Section 10, HUD has authority to impose a civil penalty on loan servicers who do not submit initial or annual escrow account statements to borrowers. Borrowers should contact HUD's Office of RESPA and Interstate Land Sales to report servicers who fail to provide the required escrow account statements.

Accrued

Unpaid; accumulated over a period of time, such as accrued depreciation, accrued interest or accrued expenses. Accrued expenses, such as property taxes, have been incurred, but are not yet paid.

Accrued:

Unpaid; accumulated over a period of time, such as accrued depreciation, accrued interest or accrued expenses. Accrued expenses, such as property taxes, have been incurred, but are not yet paid.

The Exchange

When the parties are satisfied that everything is in order, the exchange is made. All pertinent documents are then recorded in the correct order to ensure continuity of title. For instance, if the seller pays off an existing loan and the buyer obtains a new loan, the seller's satisfaction of mortgage must be recorded before the seller's deed to the buyer. The buyer's new mortgage or deed of trust must then be recorded after the deed because the buyer cannot pledge the property as security for the loan until he or she owns it.

When a buyer assumes the seller's mortgage loan, the impound account balance will appear on the closing statement as: a debit to the buyer and credit to the seller. a debit to the buyer only. a debit to the buyer and credit to the lender. a debit to the seller and credit to the buyer.

a debit to the buyer and credit to the seller. The buyer will get the balance in the impound account which represents prepaid amounts to cover expenses that will be paid later, so the buyer must reimburse the seller for the amount held by the lender in the impound account. This is done by debiting (charging) the buyer and crediting the seller for the balance in the account.

When a buyer assumes the seller's existing mortgage loan, the principal balance is shown on the closing statement as: a debit to the seller and credit to the buyer. a credit to the buyer only. a debit to the buyer only. a debit to the buyer and credit to the seller.

a debit to the seller and credit to the buyer. The principal balance of the loan is owed by the seller and has to be entered on the seller's closing statement as debit in order to reduce the amount of the check the seller receives at closing by that amount. The principal balance on the loan also reduces the amount the buyer must bring in at closing, so it must appear on the buyer's closing statement as a credit.

A buyer is purchasing a home and assuming the seller's existing mortgage loan on the property. The closing is set for May 13th. The seller paid the May 1 payment on the loan and the buyer will be making the June 1 payment. At closing, the interest on the loan will need to be prorated and should be calculated: from May 13th to June 13th. from May 1 to June 1. from May 1 through May 13th. from May 13th to June 1.

from May 1 through May 13th. Since the June 1 payment that the buyer will make will pay the interest from May 1 to June 1, the seller needs to reimburse the buyer for the 13 days of the month of May during which the seller still owned the property. This is done by calculating the number of days the seller owned the property during the month covered by the payment, computing the daily interest figure and multiplying it times the number of days represented. Then the seller is charged (debited) for that amount and the buyer is credited (receives) the same amount on the closing statement.

At the closing, the seller is responsible for: paying the closing costs. inspecting the closing statement, signing the deed and receiving the proceeds check. making sure that the buyer signs the loan documents for the new loan. making sure that the buyer brings the balance of the down payment and closing costs to the closing.

inspecting the closing statement, signing the deed and receiving the proceeds check. The seller should also have vacated the property by the closing date, leaving it clean and in the condition called for in the contract, without removing any unauthorized fixtures.

The HUD-1 Settlement Statement

is a standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement. The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.

Servicing Transfer Statement

is required if the loan servicer sells or assigns the servicing rights to a borrower's loan to another loan servicer. Generally, the loan servicer must notify the borrower 15 days before the effective date of the loan transfer. As long the borrower makes a timely payment to the old servicer within 60 days of the loan transfer, the borrower cannot be penalized. The notice must include the name and address of the new servicer, toll-free telephone numbers, and the date the new servicer will begin accepting payments.

Affiliated Business Arrangement (AfBA) Disclosure

is required whenever a settlement service provider involved in a RESPA covered transaction refers the consumer to a provider with whom the referring party has an ownership or other beneficial interest. For example, if you own an interest in a local insurance agency and you regularly refer buyers in transactions in which you are involved to your real estate agency, you must disclose your ownership interest in writing in the form prescribed by the law. The disclosure must be given to the consumer at or prior to the time of referral and must describe the business arrangement that exists between the two providers and give the borrower an estimate of the second provider's charges. Except in cases where a lender refers a borrower to an attorney, credit reporting agency or real estate appraiser to represent the lender's interest in the transaction, the referring party may not require the consumer to use the particular provider being referred.

Making adjustments at closing for prepaid and/or unpaid expenses is called: protracting. recapitulation. settling. prorating.

prorating. For example, a sale is set to close on June 1st. The real property taxes are payable at the end of the year and cover the period from January 1 through the end of the year. The buyer will receive the bill in November and will have to pay it for the whole year, even though the buyer did not own the property for the entire year. Therefore, at closing, the closing agent must collect from the seller and give to the buyer the portion of the bill that is attributable to the time period covered by the bill during which the seller owned the property. This adjustment is called prorating. The bill is not actually paid at closing, but one party is charged (debited) and one party receives (is credited) for the appropriate amount owed by that party.

The HUD-1 Settlement Statement shows

the actual settlement costs of the loan transaction. Separate forms may be prepared for the borrower and the seller. Where it is not the practice that the borrower and the seller both attend the settlement, the HUD-1 should be mailed or delivered as soon as practicable after settlement.

The Initial Escrow Statement itemizes

the estimated taxes, insurance premiums and other charges anticipated to be paid from the Escrow Account during the first twelve months of the loan. It lists the Escrow payment amount and any required cushion. Although the statement is usually given at settlement, the lender has 45 days from settlement to deliver it.

Escrow:

the process by which money and/or documents are held by a disinterested third party until satisfaction of the terms and conditions of the escrow instructions (as prepared by the parties to the escrow) has been achieved. Once these terms have been satisfied, delivery and transfer of the escrowed funds and documents takes place.

At closing, the broker's commission is usually paid by: the seller and the buyer. the cooperating broker. the buyer. the seller.

the seller Under the traditional real estate business model, the seller signs a listing agreement in which the seller agrees to pay the listing broker a commission if the listing broker produces a signed offer from a ready, willing and able buyer that the seller accepts or one that exactly matches the listing terms.

The purpose of the HUD-1 closing statement is: to ensure that both the buyer and the seller receive an accurate, detailed accounting at closing when a federally related mortgage loan is used to finance the purchase of a 1-4 unit residence. to prevent discrimination in real estate lending. to ensure that all real estate buyers and sellers get an accurate, detailed accounting at closing. to ensure that lenders disclose the true cost of credit when making consumer loans.

to ensure that both the buyer and the seller receive an accurate, detailed accounting at closing when a federally related mortgage loan is used to finance the purchase of a 1-4 unit residence. The original purpose of RESPA was to ensure that the parties received a detailed accounting at closing.

When closing is conducted in escrow, title is said to transfer: when the deed is delivered. when the deed is recorded. when the deed is deposited in escrow. when the deed is accepted.

when the deed is deposited in escrow. The doctrine of relation-back provides that unless there is a written agreement to the contrary between the buyer and seller, title is said to transfer to the buyer when the seller deposits the signed deed into escrow.

When closing is conducted in escrow, title is said to transfer: when the deed is recorded. when the deed is deposited in escrow. when the deed is delivered. when the deed is accepted.

when the deed is deposited in escrow. The doctrine of relation-back provides that unless there is a written agreement to the contrary between the buyer and seller, title is said to transfer to the buyer when the seller deposits the signed deed into escrow.