MLS UNIT 22

Security deposits should be listed on a closing statement as a credit to the A) buyer. B) lender. C) seller. D) broker. Explanation The answer is BUYER. When investors buy an income property, rental security deposits held by the former owner are transferred to them. They are credited for all existing security deposits at closing.

Answer: A) buyer.

Certain real estate closings must be reported to the Internal Revenue Service (IRS) on Form 1099-S. The affected properties include sales or exchanges of A) land, residential or commercial structures, condominiums, and shares in a cooperative housing corporation. B) residential structures and condominiums. C) land, residential structures, condominiums, and shares in a cooperative housing corporation. D) land, residential structures, and condominiums. Explanation: The answer is LAND, RESIDENTIAL OR COMMERCIAL STRUCTURES, CONDOMINIUMS, AND SHARES IN A COOPERATIVE HOUSING CORPORATION. Certain real estate closings must be reported to the Internal Revenue Service (IRS) on Form 1099-S. The affected properties include sales or exchanges of land, residential or commercial structures, condominiums, and shares in a cooperative housing corporation.

Answer: A) land, residential or commercial structures, condominiums, and shares in a cooperative housing corporation.

Real Estate Settlement Procedures Act (RESPA) regulations apply to first-lien mortgage loans made to finance the purchase of A) one- to four-family homes and condominiums. B) one- to four-family homes, cooperatives, condominiums, and commercial properties. C) one- to four-family homes, condominiums, and commercial properties. D) one- to four-family homes, cooperatives, and condominiums. Explanation The answer is ONE- TO FOUR-FAMILY HOMES, COOPERATIVES, AND CONDOMINIUMS. RESPA regulations apply to first-lien mortgage loans made to finance the purchase of one- to four-family homes, cooperatives, and condominiums.

Answer; D) one- to four-family homes, cooperatives, and condominiums. Explanation

Sample Proration Calculation

Assume a sale is to close on September 17. Using a 360-day year, prorate the current real estate taxes of $3,600 for the accrued period of 8 months, 17 days. First determine the prorated cost of the real estate tax per month and day: Next, multiply these figures by the accrued period and add the totals to determine the prorated real estate tax: Thus, the accrued real estate tax for 8 months and 17 days is $2,570. This amount represents the seller's accrued earned tax. It will be a credit to the buyer and a debit to the seller on the closing statement. To compute this proration using the actual number of days in the accrued period, the following method is used: The accrued period from January 1 to September 17 runs 260 days (January's 31 days plus February's 28 days and so on, plus the 17 days of September). Although these examples show proration as of the date of settlement, the agreement of sale may indicate otherwise. For instance, if the buyer's possession date does not coincide with the settlement date, the parties could prorate according to the date of possession.

Buyer's Issues

Both the buyers and their lenders must be sure that the seller can deliver the title that was promised in the purchase agreement and that the property is now in essentially the same condition it was in when the buyers and the sellers agreed to the sale. This involves inspecting •the title evidence; •the sellers deed; •any documents demonstrating the removal of undesired liens and encumbrances; •the survey; •the results of any inspections, such as termite or structural inspections, or required repairs; and •any leases, if tenants reside on the premises. IN PRACTICE Although the For Your Protection, Get a Home Inspection pamphlet is required only for FHA loans, the information is valuable for all buyers. The pamphlet emphasizes the difference between an appraisal and a home inspection.

Title Procedures

Buyers and their lenders require that the seller's title complies with the terms of the real estate contract. Although practices vary from state to state, most require that the seller produce a current abstract of title or title commitment from the title insurance company. This responsibility can be handled in the real estate contract, but in Georgia the responsibility usually falls on the buyer.

If the APR of a buyer obtaining financing subject to the Truth in Lending Disclosure Act has changed more than 0.125 percent from the original or most recent TIL and GFE, closing may NOT take place for three business days.

TRUE

The only fee that the lender may collect before the applicant receives the Good Faith Estimate (GFE) is for a credit report.

TRUE

Legal title ALWAYS passes from the seller to the buyer: A) on the date of execution of the deed. B) when the closing statement has been signed. C) when the deed is delivered and accepted. D) when the deed is placed in escrow. Explanation The answer is WHEN THE DEED IS DELIVERED AND ACCEPTED. Although the buyer received equitable title upon contract, legal title does not pass until delivery and acceptance of the deed. If the buyer, or someone acting on the buyer's behalf, records the deed, acceptance is presumed.

The Answer: when the deed is delivered and accepted. D)

Real Estate Settlement Procedures Act (RESPA).

The Real Estate Settlement Procedures Act (RESPA) is a federal consumer law that requires certain disclosures about the mortgage and settlement process and prohibits certain practices that increase the costs of settlement services, such as kickbacks and referral fees that can increase settlement costs for homebuyers.

Closing Agent or Closing Officer

A closing agent may be a representative of the title company, the lender, the real estate broker, or the buyer's or the seller's attorney. Some title companies and law firms employ paralegal assistants who conduct closings for their firms. The closing agent orders and reviews the title insurance policy or title certificate, surveys, property insurance policies, and other items. After reviewing the agreement of sale (purchase agreement), the agent prepares a closing statement indicating the division of income and expenses between the parties. Finally, the time and place of closing must be arranged.

Basic Information of Offer and Sale

A couple list their home at 3045 North Racine Avenue in Roswell, Georgia, with a real estate brokerage. The listing price is $237,000, and possession will take place within two weeks, after all parties have signed the contract. Under the terms of the listing agreement, the sellers agree to pay the licensee a commission of 6 percent of the sales price.

Survey

A survey provides information about the exact location and size of the property. Typically, the survey indicates the location of all buildings, driveways, fences, and other improvements located on the premises. The survey should also indicate any existing easements and encroachments. The cost of the survey is negotiated in the contract. IN PRACTICE Relying on old surveys is not necessarily a good idea; the property should be resurveyed prior to closing by a competent surveyor, whether or not the title company or lender requires it. A current survey confirms that the property purchased is exactly what the buyer wants.

Prepaid Items

A tax proration might be a prepaid item. Because real estate taxes may be paid in the early part of the year, a tax proration calculated for a closing that will take place later in the year must reflect the fact that the seller has already paid the tax. For example, in the preceding problem, suppose that all taxes had been paid. The buyer would then have to reimburse the seller; the proration would be credited to the seller and debited to the buyer. In figuring the tax proration, the number of future days, months, and years for which taxes have been paid must be ascertained. The formula commonly used for this purpose is as follows: This formula will calculate the amount the buyer will reimburse the seller for the unearned portion of the real estate taxes. The prepaid period determined by the formula for prepaid items is three months and 13 days. Three months at $300 per month equals $900, and 13 days at $10 per day equals $130. Add these two figures to determine that the proration is $1,030 credited to the seller and debited to the buyer.

The document that provides borrowers with general information about settlement costs, RESPA provisions, and the Uniform Settlement Statement is the A) special information booklet. B) good-faith estimate of settlement costs. C) HUD-1 form. D) closing statement. Explanation The answer is SPECIAL INFORMATION BOOKLET. HUD's special information booklet, which lenders are required to issue to loan applicants within 72 hours of application, gives information about settlement costs, RESPA, and the Uniform Settlement Statement (HUD-1).

ANSWER: A) special information booklet.

The Real Estate Settlement Procedures Act (RESPA) applies in a loan assumption if the A) lender charges less than $50 for the assumption. B) seller does not want to be liable for the loan in the future. C) terms of the assumed loan are modified by the lender. D) buyer must be approved by the lender for the assumption to occur. Explanation The answer is TERMS OF THE ASSUMED LOAN ARE MODIFIED BY THE LENDER. If the terms of the assumed loan are modified or if the lender charges more than $50 for the assumption, then the transaction is subject to RESPA regulations.

ANSWER: C) terms of the assumed loan are modified by the lender.

At the closing of a real estate transaction, the person performing the settlement gave the buyer a credit for certain accrued items. These items were A) bills relating to the property that the buyer needed to pay. B) all of the buyer's real estate bills. C) all of the seller's real estate bills. D) bills relating to the property that had already been paid by the seller. Explanation The answer is BILLS RELATING TO THE PROPERTY THAT THE BUYER NEEDED TO PAY. Accrued items are those property-related expenses (bills) that remain on the property as it is sold and that the purchasers will have to pay later.

ANSWER: A) bills relating to the property that the buyer needed to pay.

The first title search shows the status of the seller's title on that date. The second search is made after closing and is known as a A) close down. B) take down. C) wrap up. D) bring down. Explanation The answer is BRING DOWN. The first title search shows the status of the seller's title on that date. The second search is made after closing and is known as a bring down.

ANSWER: D) bring down.

The Arithmetic of Prorating

Accurate prorating involves the following four considerations: • Nature of the item being prorated • Whether the item is accrued and requires the determination of an earned amount • Whether the item is prepaid and requires the determination of an unearned amount (i.e., a refund to the seller) • What arithmetic processes must be used

Escrow Procedure

After the sales contract is signed, the buyer and the seller execute escrow instructions to the escrow agent. The selection of the escrow agent is often determined by negotiation, custom, or state law. The broker turns over the earnest money to the escrow agent, who deposits it in a special trust, or escrow, account. The buyer and the seller deposit all pertinent documents and other items with the escrow agent before the specified date of closing.

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 Department of Veterans Affairs at closing. If a conventional loan carries private mortgage insurance (PMI), the buyer prepays one year's insurance premium at closing.

A buyer purchases a home in an area where closings are traditionally conducted in escrow. Which item would a buyer deposit with the escrow agent before the closing date? A) Cash needed to complete the purchase B) Deed to the property C) Title evidence D) Estoppel certificate Explanation The answer is CASH NEEDED TO COMPLETE THE PURCHASE. The buyer is normally responsible for depositing the cash needed to complete the transaction.

Answer: A) Cash needed to complete the purchase

The principal amount of a purchaser's new mortgage loan is a A) debit to the buyer. B) credit to the buyer. C) credit to the seller. D) debit to the seller. Explanation The answer is CREDIT TO THE BUYER. The purchasers see to it that money is available in the form of a mortgage loan for the purchase of the property. They are given credit for getting this money to the table.

B) credit to the buyer.

Accrued items are expenses to be prorated (such as water bills and interest on an assumed mortgage) that are owed by the seller but will be paid late by the buyer. True

TRUE

Internal Revenue Service Reporting Requirements

Certain real estate closings must be reported to the Internal Revenue Service (IRS) on Form 1099-S. The affected properties include sales or exchanges of • land (improved or unimproved), including air space; • an inherently permanent structure, including any residential, commercial, or industrial building; • a condominium unit and its appurtenant fixtures and common elements (including land); or • shares in a cooperative housing corporation. Information to be reported includes the sales price, the amount of property tax reimbursement credited to the seller, and the seller's Social Security number. If the closing agent does not notify the IRS, the responsibility for filing the form falls on the mortgage lender, although the brokers or the parties to the transaction ultimately could be held liable

Broker's Role at Closing

Depending on local practice, the licensee's role at closing can vary from simply collecting the commission to conducting the proceedings. In states that require an attorney's participation, a licensee's responsibility is essentially finished as soon as the real estate contract is signed. Even so, most licensees continue to be involved all the way through closing because it is also in their best interest that the transactions move successfully and smoothly to a conclusion. On behalf of their clients, licensees take care of all details so that the closing can proceed smoothly. This may mean actively arranging for title evidence, surveys, appraisals, and inspections or repairs related to structural conditions, water supplies, sewerage facilities, or toxic substances

Appraisal Fees

Either the seller or the purchaser 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 been paid outside of closing (POC).

Accounting for Expenses

Expenses paid out of the closing proceeds are debited only to the party making the payment. Occasionally, an expense item (e.g., an escrow fee, a settlement fee, or a transfer tax) may be shared by the buyer and the seller. In this case, each party is debited for its share of the expense.

A debit on a closing statement is an amount entered in a person's favor—an amount that has already been paid, an amount being reimbursed, or an amount the buyer promises to pay in the form of a loan. False

FALSE

Certain real estate closings must be reported to the Internal Revenue Service (IRS) on Form 1099-S and include MOST typical transactions, except the sale or exchange of shares in a cooperative housing corporation.

FALSE

Prepaid items are expenses to be prorated (such as fuel oil in a tank) that have been prepaid by the seller but NOT fully used up and are credits to the buyer. False

FALSE

RESPA applies as well to a transaction financed solely by a purchase-money mortgage taken back by the seller.

FALSE

RESPA permits lenders to maintain a cushion equal to one-sixth of the total estimated amount of annual taxes and insurance. State laws that attempt to allow for a smaller cushion are NOT enforce False

FALSE

RESPA regulations apply to all residential mortgage loans made to either finance the purchases of one- to four-family homes or to a refinancing.

FALSE

Under RESPA, a real estate firm, title insurance company, mortgage broker, home inspection company, or even a moving company may NOT offer a package of services to consumers, a practice known as a controlled business arrangement (CBA)

FALSE

Face-to-Face Closing

Face-to-face closings may be held at the office of the title company, the lending institution, an attorney for one of the parties, the broker, the county recorder, or the escrow company. Those attending a closing may include •the buyer; •the seller; •the real estate salespeople or brokers (both the buyer's and the seller's agents); •the seller's and the buyer's attorneys; •representatives of the lending institutions involved with the buyer's new mortgage loan, the buyer's assumption of the seller's existing loan, or the seller's payoff of an existing loan; and •a representative of the title insurance company. Georgia uses the face-to-face closing procedure except when a closing must occur by a specified date and not all conditions have been met, in which case the closing in escrow is used.

Closing involves two major events

First, the promises made in the sales contract are fulfilled; second, the mortgage funds are distributed to the buyer. Before the property changes hands, however, important issues must be resolved. Many real estate licensees maintain lists of events that must take place before the actual closing in order to avoid surprises that might lead to delays. Each party—buyer and seller—has specific concerns that must be addressed

Closing is known by many names.

For instance, in some areas, closing is called settlement and transfer. In some parts of the country, the parties in the transaction sit around a table and exchange copies of documents, a process known as passing papers. ("We passed papers on the new house Wednesday morning.") In other regions, the buyer and the seller never meet; the paperwork is handled by an escrow agent in a process known as closing escrow. ("We'll close escrow on our house next week.") The main concerns are that the buyer receives marketable title and that the seller receives the purchase price.

Disclosure Requirements (3 of 5)

Good Faith Estimate of Settlement Costs The new three-page Good Faith Estimate (GFE) must contain the exact language specified by HUD, making it easier for borrowers to compare loan conditions from one lender to another. The only fee that the lender may collect before the applicant receives the GFE is for a credit report. Once the GFE is issued, lenders are committed and may only modify the GFE in certain specific instances. If certain information or circumstances change after the original GFE is issued, then a new GFE must be issued. Issuing a new GFE triggers a new three-day waiting period; in which case, closing may not occur until after three days have passed. Click here for the Good Faith Estimate (GFE) form.

IN PRACTICE Licensees should avoid recommending sources for any inspection or testing services

If a buyer suffers any injury as a result of a provider's negligence, the licensee might also be named in any lawsuit. The better practice is to give clients the names of several professionals who offer high-quality services. In addition, licensees who receive any compensation or reward from a source they recommend to a client must disclose such an arrangement to the client. Licensees must never receive compensation from an attorney or a lender.

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.

Closing in Escrow

In an escrow closing, a disinterested third party is authorized to act as escrow agent (escrow holder) and to coordinate the closing activities. The escrow agent may be an attorney, a title company, a trust company, an escrow company, or the escrow department of a lending institution. Although a few states do not permit certain transactions to be closed in escrow, escrow closings are used to some extent in most states. The closing in escrow procedure is rarely used in Georgia.

In Georgia, the closing agent must be an attorney

In most cases, this attorney represents the lender.

Final Property Inspection

In the real estate contract, the buyer usually reserves the right to make a final inspection, often called a walk-through, shortly before the closing takes place. Accompanied by the licensee, the buyer verifies that necessary repairs have been made, that the property has been well maintained, that all fixtures are in place, and that no unauthorized removal or alteration of any part of the improvements has taken place. It is not an opportunity to reopen negotiations.

Disclosure Requirements (1 of 5)

Lenders and settlement agents have the following disclosure obligations at the time of loan application and loan closing or within three business days of receiving the loan application. If the lender denies the loan within three days, then RESPA does not require that the lender provide the documents described below, which are otherwise required in all other instances.

RESPA does not apply to the following settlements:

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

Disclosure Requirements (4 of 5)

Mortgage Servicing Disclosure Statement This statement tells the borrower whether the lender intends to service the loan or to transfer it to another lender. It will also provide information about resolving complaints. The last page of the GFE is a worksheet consumers can use to compare different loans and terms to aid in price shopping. The lender is responsible for the accuracy of the GFE and the actual costs that the lender charges on the HUD-1.

Prorations

Most closings involve the division of financial responsibility between the buyer and the 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 item settled at the closing. When 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

Tax Reserves and Insurance Reserves (Escrow or Impound Accounts)

Most mortgage lenders require that borrowers provide funds to pay future real estate taxes and insurance premiums. These funds are held in an escrow account or impound account. A borrower starts the account at closing by depositing funds to cover at least the amount of unpaid real estate taxes from the date of the lien to the end of the current month. (The buyer receives a credit from the seller at closing for any unpaid taxes.) Afterward, an amount equal to one month's portion of the estimated taxes is included in the borrower's monthly mortgage payment.

Transfer Tax

Most states, counties, and local municipalities require some form of transfer tax, conveyance fee, or tax stamps on real estate conveyances. Responsibility for these charges varies according to local practice and by agreement in the sales contract. The Georgia transfer tax is a state transfer tax (see Unit 12). In Georgia, there is no county, city, or local municipality transfer tax.

The GFE indicates which closing costs may or may not change prior to settlement and, if they do, by how much. The fees are divided into three categories:

No tolerance—fees that may not increase before closing: lender charges for taking, underwriting, and processing the loan application, including points, origination fees, and yield spread premiums •10 percent tolerance—fees that cannot increase by more than 10 percent in any given category: settlement services for which the lender selects the provider or for which the borrower selects the provider from the lender's list, title services and title insurance if the lender selects the provider, and recording fees •Unlimited tolerance—fees for services that are out of the lender's control: services for which the borrower chooses the provider (such as escrow and title insurance), impounds for taxes, mortgage interest, and the cost of homeowners' insurance

Seller's Issues

Obviously, the seller's main interest is to receive payment for the property. Sellers want assurance that the buyer has obtained the necessary financing and has sufficient funds to complete the sale. In turn, sellers should review the purchase agreement to ensure they have completed their tasks. Both parties, accompanied by their attorneys or real estate licensees, will want to inspect the closing statement to make sure that all monies involved in the transaction have been accounted for properly.

Accrued items are expenses to be prorated (such as water bills and interest on an assumed mortgage) that are owed by the seller but will be paid late by the buyer. The seller, therefore, pays for these items by giving the buyer credits for them at closing

On a closing statement, items of expense that are incurred but not yet payable, such as interest on a mortgage loan or taxes on real property.

Mortgage Loan Interest

On almost every mortgage loan, the interest is paid in arrears. The buyer and the seller must understand that a mortgage payment due on June 1, for example, includes interest due for 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 and 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 learn that the first mortgage payment is not due for another month.

Real Estate Taxes

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. Tax payments can even be more complicated if city, state, school, and other property taxes 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.

Kickbacks and Referral Fees

RESPA prohibits the payment of kickbacks, or unearned fees, in any real estate settlement service. It prohibits referral fees when no services are actually rendered. The payment or receipt of a fee, a kickback, or anything of value for referrals for settlement services includes activities such as mortgage loans, title searches, title insurance, attorney services, surveys, credit reports, and appraisals.

Consumer Protections

RESPA's consumer protections include •computerized loan origination (CLO) regulation, •controlled business arrangement (CBA) disclosure, •distribution of the Shopping for Your Home Loan: HUD's Settlement Cost Booklet, •a good-faith estimate of settlement costs, •a HUD-1 settlement statement, and •prohibition of kickbacks and unearned fees.

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.

RESPA prohibits certain practices that increase the cost of settlement services:

Section 8 prohibits kickbacks and fee-splitting for referrals of settlement services, and unearned fees for services not actually performed. Violations are subject to criminal and civil penalties, including fines up to $10,000 and/or imprisonment up to one year. Consumers may privately pursue a violator in court; the violator may be liable for an amount up to three times the amount of the charge paid for the service. • Section 9 prohibits homesellers from requiring that homebuyers buy title insurance from a particular company. Buyers may sue the seller for such a violation; violators are liable for up to three times the amount of all charges paid for the title insurance. • Section 10 prohibits lenders from requiring excessive escrow account deposits, money set aside to pay taxes, hazard insurance, and other charges related to the property.

Mortgage Disclosure Improvement Act

Since its effective date of July 31, 2009, the Mortgage Disclosure Improvement Act (MDIA), an amendment to the Truth and Lending Act, has changed how buyers and sellers, lenders, mortgage brokers, title agents, and real estate licensees prepare for a closing. The timeliness of certain disclosures now affects the date of closings. Lenders and licensees should keep in mind the numbers 3, 7, and 3: •3 business days from application to provide the truth-in-lending statement (TIL) and good-faith estimate (GFE) •7 business days before the signing of loan documents, after the borrower receives the final truth-in-lending statement and good-faith estimate •3 business days to wait for closing if the APR has changed more than 0.125 percent from the original or most recent TIL and GFE

Disclosure Requirements (2 of 5)

Special information booklet Shopping for Your Home Loan: HUD's Settlement Cost Booklet must be given at the time of application or provided within three days of loan application. It provides the borrower with general information about settlement (closing) costs. It also explains the various provisions of RESPA, including a line-by-line description of the HUD-1 settlement statement.

How the Closing Statement Works

The closing statement is an accounting of the parties' debits and credits. A debit is a charge—an amount that a party owes and must pay at closing. A credit is an amount entered in a person's favor—an amount that has already been paid, an amount being reimbursed, or an amount the buyer promises to pay in the form of a loan. To determine the amount a buyer must bring to closing, any buyer expenses and prorated amounts for items prepaid by the seller are added to the purchase price. Then the buyer's credits are totaled. Credits to the buyer include the earnest money (already paid), the balance of the loan the buyer obtains or assumes, and the seller's share of any prorated items the buyer will pay in the future.

Loan Fees

The discussion of loan fees becomes even more critical with the new Good Faith Estimate form associated with the new HUD-1 form. For a new loan, the lender generally charges an origination fee and possibly discount points, if the borrower wants a below-market interest rate. These lender charges for taking, underwriting, and processing the loan application, including points and origination fees, may not increase prior to closing. If they do, the lender may elect to reissue a new GFE, thereby triggering a three-day waiting period to closing (to allow the buyer time to "shop" for a new loan) or to "correct" the problem with a reimbursement within 30 days of closing. If the buyer assumes the seller's existing financing, the buyer may be required to pay an assumption fee. Also, under the terms of some mortgage loans, the seller may be required to pay a prepayment charge or penalty for paying off the mortgage loan before its due date.

The Exchange

The exchange is made when the parties are satisfied that everything is in order. The seller delivers the signed deed to the buyer, who accepts it. 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. Because the buyer cannot pledge the property as security for the new loan until ownership has been transferred, the buyer's new mortgage or deed of trust is recorded after the deed.

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 distributed as an expense between both parties or according to some other arrangement.

Basic Information of Offer and Sale: Computing the Prorations and Charges

The following list illustrates the various steps in computing the prorations and other amounts to be included in the settlement to this point: • Closing date: June 15 • Commission: 6% (0.06) × $230,000 sales price = $13,800 • Seller's mortgage interest: 7% (0.07) × $115,400 principal due after June 1 payment = $8,078 interest per year; $8,078 ÷ 360 days = $22.44 interest per day; 15 days of accrued interest to be paid by the seller × $22.44 = $336.60 interest owed by the seller; $115,400 + $336.60 = $115,736.60 payoff of seller's mortgage • Real estate taxes (estimated at $3,450): $3,450 ÷ 12 months = $287.50 per month; $287.50 ÷ 30 days = $9.58 per day • The earned period, from January 1 to and including June 15 (5 months, 15 days): $287.50 × 5 months = $1,437.50; $9.58 × 15 days = $143.70; $1437.50 + $143.70 = $1,581.20 seller owes buyer • Transfer tax ($0.50 per $500 of consideration, or fraction thereof): $230,000 ÷ $500 = $460; $460 × $0.50 = $230 transfer tax owed by seller • Buyer's tax reserve payment: $2,012.50 paid to separate account (7/12 of the anticipated county real estate taxes of $3,450) • Buyer's one-year hazard insurance payment: $3 per $1,000 of appraised value ($230,000 ÷ 1,000 × 3 = $690 paid in advance to insurance company) • Buyer's first full payment, including July's interest due (15 days × $30.67 = $460.05) on August 1 The seller's loan payoff is $115,736.60. The seller must pay an additional seller's fee of $25 to record the mortgage release, as well as $100 for a pest inspection and $200 for a survey, as negotiated between the parties.

Lenders must provide a statement to the applicants indicating that they are not obligated to complete the transaction simply because disclosures were provided or because they applied for a loan. If the annual percentage rate increases by more than 0.125 percent from the original TIL, then creditors must provide new disclosures with a revised annual percentage rate (APR) and then wait an additional three business days before closing the loan. Consumers are permitted to accelerate the process if a personal emergency, such as a foreclosure, exists

The intent of this law is to prevent consumers from receiving an enticing low rate at the initial application and then learning at settlement that the lender is charging more in fees. Licensees should encourage their buyers to discuss all loan options with their lenders before signing a contract so that lenders can provide the disclosures in a timely fashion. Borrowers should lock in interest rates with a date that is about ten days from an anticipated settlement. Any change to the interest rate, loan amount, loan product, or lender's or escrow fees can affect the APR, which may then require a redisclosure. Redisclosures can potentially delay settlement.

Survey Fees

The purchaser who obtains new mortgage financing customarily pays the survey fees. The sales contract may require that the seller furnish a survey.

General Rules for Prorating

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 are made up to and including the day of closing. A few states specify that the buyer owns the property on the closing date. In that case, adjustments are made as of the day preceding the day on which title is closed. • 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. However, the rules in some areas provide for computing prorations on the basis of the actual number of days in the calendar month of closing. The agreement of sale should specify which method will be used. • 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. • Special assessments for municipal improvements such as sewers, water mains, or streets are usually paid in annual installments over several years, with annual interest charged on the outstanding balance of future payments. The seller normally makes the current payments, and the buyer assumes all future payments. The special assessment installment generally is not prorated at the closing. A buyer may insist that the seller allow the buyer a credit for the seller's share of the interest to the closing date. The agreement of sale may address the manner in which special assessments will be handled at closing. • Rents are usually adjusted on the basis of the actual number of days in the month of closing. The seller customarily receives the rents for the day of closing and pays 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 prorated 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.

Recording Expenses

The seller usually pays for any 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 purchaser and a mortgage or deed of trust executed by the buyer. In Georgia, local custom may determine which party pays for specific recording charges.

Basic Information of Offer and Sale: Closing Costs

The unpaid balance of the seller's mortgage as of June 1, 201X, will be $115,400. Payments are $825 per month, with interest at 7 percent per year on the unpaid balance. The seller submits evidence of title in the form of a title insurance binder at a cost of $30. The title insurance policy, to be paid by the buyer at the time of closing, costs an additional $540, which includes $395 for the lender's coverage and $145 for the owner's coverage. The seller must pay $20 for the recording of two instruments to clear defects in the seller's title. The seller must also pay an attorney's fee of $600 for preparing the deed and for legal representation, which will be paid from the closing proceeds. The buyer has agreed to pay for the state transfer tax stamps in the amount of $230 ($0.50 per $500 of the sales price or fraction thereof). The buyer must pay an attorney's fee of $500 for examining the title evidence and for legal representation. The buyer must pay $20 to record the deed and $50 to record the mortgage.

If the escrow agent's examination of the title discloses liens, a portion of the purchase price can be withheld from the seller

The withheld portion is used to pay the liens to clear the title.

As part of the later search, the sellers may be required to execute an affidavit of title.

This affidavit is a sworn statement in which the sellers assure the title insurance company (and the buyer) that no other defects in the title have occurred since the date of the title examination (e.g., judgments, bankruptcies, divorces, unrecorded deeds or contracts, unpaid repairs or improvements that might lead to mechanics' liens). The affidavit gives the title insurance company a basis on which to sue the sellers should their statements in the affidavit be incorrect.

Key Point Review: Closing (settlement and transfer) is the point at which ownership of a property is transferred in exchange for the selling price. To complete the transaction, the buyer requires the following: Title evidence—a current abstract of title with opinion of title from the buyer's attorney or title commitment from the title insurance company Seller's deed Affidavit of title by the seller and documents showing the removal of prior encumbrances Mortgage reduction certificate from the lender, if the buyer is assuming the loan Survey and the results of required inspections Leases, if tenants reside on the premises Successful final property inspection (walk-through) Closing statement showing the amount and distribution of funds An escrow holder (escrow agent) is a disinterested third party authorized to coordinate the closing activities. The Internal Revenue Service (IRS) may require completion and submission of the Form 1099-S statement of income to the seller showing the seller's Social Security number. Form 1099-S is filed by a closing agent or the mortgage lender, with the brokers or the parties being ultimately liable for the filing. The Real Estate Settlement Procedures Act (RESPA) is a federal law enacted to protect consumers in the settlement process as follows: Requires accurate and timely information about the actual costs of a transaction Eliminates kickbacks and other referral fees Prohibits lenders from requiring excessive escrow account deposits RESPA does not apply to a transaction financed solely by a purchase-money mortgage taken back by a seller, installment contracts (contract for deed), or a buyer's assumption of a seller's existing loan. RESPA requires that lenders and settlement agents provide a special information booklet produced by HUD to every person from whom they receive or for whom they prepare a loan application (except for refinancing), good-faith estimate of settlement costs to the borrower no later than three business days after receiving a loan application, and Uniform Settlement Statement (HUD-1) to the borrower and the seller that itemizes all charges to be paid in connection with closing. A closing (settlement) statement involves an accounting of the amounts paid by or received by the parties, as follows: Debit (give) is a charge that must be paid by the buyer or the seller at closing. Credit (receive) is the amount entered in favor of the buyer or the seller. In most instances, a debit to one party is a credit to the other party. Certain charges are prorated, divided between the buyer and the seller, in one of two ways: Yearly charge is divided by a 360-day year (banking year), or 12 months of 30 days each. Yearly charge is divided by a 365-day year (366 days in leap year) to determine the daily charge, the actual number of days in the proration period is determined, and the number of days is multiplied by the daily charge. In most states, the charges are prorated as of the date of closing, with the seller being responsible for the date of closing. Cl

To complete the transaction, the seller requires the following: Payoff statement from the seller's lender noting the amount owed Evidence that the buyer has the necessary funds Closing statement showing the distribution of funds Depending on state law and local custom, closing may be conducted through a licensed escrow company, in which case the parties may execute documents separately and never meet; or face-to-face meeting of the parties at the escrow company, title company, lender's office, or attorney's office. Georgia uses the face-to-face closing, except on rare occasions when an escrow closing is used. By law, the closing agent in Georgia must be an attorney. This attorney most often represents the lender.

Controlled Business Arrangements

To streamline the settlement process, a real estate firm, title insurance company, mortgage broker, home inspection company, or even a moving company may agree to offer a package of services to consumers, a system known as a controlled business arrangement (CBA). RESPA permits a CBA as long as a consumer is clearly informed of the relationship among the service providers, that participation is not required, that other providers are available, and that the only thing of value received by one business entity from others, in addition to permitted payments for services provided, is a return on ownership interest or franchise relationship

Disclosure Requirements (5 of 5)

Uniform Settlement Statement (HUD-1) RESPA requires that the Uniform Settlement Statement (HUD-1) be used for most residential closings (it is required for all federally related closings). The HUD-1 itemizes all charges that are normally paid by a borrower and a seller in connection with settlement, whether required by the lender or another party, or paid by the lender or any other person. Charges required by the lender that are paid before closing are indicated as paid outside of closing (POC). Sections J and K on the first page are a summary of the borrower's and the seller's transactions. At the bottom of the first page, line 303 indicates the total amount of cash due from (or to) the borrower. Line 603 indicates the cash due to (or from) the seller. The second page itemizes the settlement charges to be paid from the borrower's funds or from the seller's funds at settlement. A number of the costs to the buyer must correlate to the GFE that the buyer received within three business days of loan application. All items in the borrower's column are added up and transferred to line 103 on the first page. All items in the seller's column are added up and transferred to line 502 on the first page. The third page of the new HUD-1 form provides for a comparison of the original GFE estimates to the actual charges appearing on the HUD-1. Lenders are permitted to correct any violation of the tolerances by reimbursing the borrower within 30 days of settlement. By law, borrowers have the right to inspect a completed HUD-1 form, to the extent that the figures are available, one business day before the closing (sellers are not entitled to this privilege). Lenders must retain these statements for two years after the dates of closing date. In addition, state laws generally require that licensees retain all records of a transaction for a specific period.

Good Faith Estimate

Using both the Good Faith Estimate (GFE) and HUD-1 forms is mandatory; failure to meet these standards can and will delay closings. To make it easier for borrowers to understand costs, the law requires lenders to provide a standard Good Faith Estimate (GFE), provided by HUD, that clearly discloses key loan terms and closing costs. More importantly, most of these disclosed costs cannot vary greatly between the time that the GFE is issued and closing.

The computation of a proration involves identifying a yearly charge for the item to be prorated, then dividing by 12 to determine a monthly charge for the item. Also, it is usually necessary to identify a daily charge for the item by dividing the monthly charge by the number of days in the month. These smaller portions are then multiplied by the number of months or days in the prorated 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 (called a banking or statutory year), or 12 months of 30 days each. • The yearly charge is divided by 365 (a calendar year) to determine the daily charge. Then the actual number of days in the proration period is determined, and this number is multiplied by the daily charge.

Accrued Items

When the real estate tax is levied for the calendar year and is payable during that year or in the following year, the accrued portion is for the period from January 1 to the date of closing (or to the day before the closing in states where the sale date is excluded). If the current tax bill has not yet been issued, the parties must agree on an estimated amount based on the previous year's bill and any known changes in assessment or tax levy for the current year.

Lender's Interest in Closing

Whether a buyer obtains new financing or assumes the seller's existing loan, the lender wants to protect its security interest in the property and ensure that its mortgage liens have priority over other liens. Therefore, lenders may require a survey, a pest control or other inspection report, or a certificate of occupancy (for a newly constructed building). In order to ensure that the buyer takes good and marketable title at closing, lenders generally require a mortgagee's title insurance policy. The buyer must also provide a fire and hazard insurance policy (along with a receipt for the premium). A lender usually requests that a reserve account be established for tax and insurance payments so that these payments are maintained. Lenders sometimes even require representation by their own attorneys at closing.

Prepaid items

are expenses to be prorated (such as fuel oil in a tank) that have been prepaid by the seller but not fully used up. They are, therefore, credits to the seller.

In Georgia, under the Brokerage Relationships in Real Estate Transactions Act (BRRETA),

brokers may provide ministerial acts to their customers, including locating inspectors, architects, engineers, surveyors, lenders, attorneys, and insurance agents. Brokers will usually provide information on two or three service providers in any one field of expertise so customers may choose the one best for their circumstances. In addition, if licensees receive any compensation or reward from a source they had recommended to a client, this must be disclosed to the client. Licensees must never receive compensation from an attorney or lender.

the Home Valuation Code of Conduct (HVCC)

requires that the borrower be provided with a copy of the home's appraisal within three business days of closing

When the buyer assumes the seller's existing mortgage loan

the buyer needs to know the exact balance of the loan as of the closing date. Usually, the lender is required to provide the buyer with a mortgage reduction certificate, which certifies the amount owed on the mortgage loan, the interest rate, and the date and amount of the last interest payment.

The seller usually deposits

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

When an abstract of title is used

the purchaser's attorney examines it and issues an opinion of title. The attorney's opinion of title is a statement of the quality of the seller's title, and it lists all liens, encumbrances, easements, conditions, and restrictions that appear on the record and to which the seller's title is subject. The attorney's opinion is not a guarantee of title.

When the purchaser pays cash or obtains a new loan to purchase the property

the seller's existing loan is paid in full and satisfied on the record. The exact amount required to pay the existing loan is provided in a current payoff statement from the lender, effective the date of closing. This payoff statement notes the unpaid amount of principal, the interest due through the date of payment, the fee for issuing the certificate of satisfaction or release deed, credits (if any) for tax and insurance reserves, and the amount of any prepayment penalties. The same procedure is followed for any other liens that must be released before the buyer takes title.

The buyer deposits

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