Real Estate #13

T This is a requirement of the Foreign Investment in Real Property Tax Act (FIRPTA). Exemptions exist, however.

T or F If the seller in a real estate transaction is a nonresident alien, in many cases 15% of the amount realized from the sale must be withheld and forwarded to the IRS within 20 days after the closing date.

False Escrow agents are required to be licensed and registered with the Department of Financial Institutions.

T or F Escrow agents must be licensed and registered with the Department of Licensing's real estate division.

Balance due from buyer

The balance due from the buyer is the amount of cash the buyer has to bring to closing.That figure is calculated by adding up the buyer's credits, adding up the buyer's debits, and then subtracting the buyer's total credits from the buyer's total debits.

A Absent a seller concession, the borrower/buyer pays for any inspections that the lender requires.

The lender requires a home inspection. Who usually pays the inspector's fee? A. Buyer B. Seller C. Lender D. Listing firm

appraiser's fee, a credit report fee, and possibly a surveyor's fee.

Thus, loan approval involves an As a general rule, the buyer pays these fees.

A kickback

is a fee paid for a referral. RESPA prohibits referral fees between settlement service providers in federally related loan transactions.

Escrow

is an arrangement in which the buyer and the seller have a third party hold money and documents on their behalf until the transaction is ready to close.

Prepaid interest

is the amount of interest that will accrue from the closing date to the end of the month of closing.The lender requires the borrower to pay that amount of interest on the day of closing.

A A real estate agent who is not a licensed escrow officer can act as closing agent for any transaction in which she is the real estate agent for a party, but she cannot collect a fee, other than her normal commission. However, if the real estate agent is also a licensed escrow officer, she may collect a fee for acting as a closing agent.

A real estate agent can serve as a closing agent for a fee in the state of Washington, if the: A. agent is a licensed escrow officer B. fee is reasonable C. buyer and seller agree D. agent discloses the fact to all parties

D Because the seller has already paid for the insurance, he would be credited for the prorated value of the remaining prepaid insurance.

A refund for prepaid fire insurance would be listed on the settlement statement as a: A. debit to the buyer B. debit to the seller C. credit to the buyer D. credit to the seller

debit to buyer The survey benefits the buyer, and in the absence of any agreement to the contrary, the cost of the survey is a charge (debit) to the buyer.

A survey was conducted to confirm the property's boundary. Where will the cost of the survey appear on a closing statement?

Form 1099-S An escrow agent isn't required to file Form 1099-S for the sale of a principal residence if: the seller certifies in writing that none of the gain is taxable; and the sale is for $250,000 or less ($500,000 or less if the seller is married).

As a general rule, sales of real property must be reported to the IRS. The escrow agent fills out with the seller's name and social security number and the gross sale proceeds, then sends it in. The agent isn't allowed to charge an extra fee for filling out and submitting Form 1099-S.

The buyer must receive the disclosure at least three business days before closing. The property seller must receive the disclosure no later than closing

Both RESPA and TILA require lenders to give borrowers the closing disclosure we mentioned in the last section. The disclosure states the actual closing costs (as opposed to the estimated figures in the loan estimate given earlier).

A The earnest money has already been paid and will be applied to the purchase price at closing, so it appears on the settlement statement as a credit for the buyer.

On a settlement statement, an earnest money deposit that will be held by the brokerage until closing is a: A. credit to the buyer B. credit to the seller C. debit (charge) to the buyer D. debit (charge) to the seller

T RESPA prohibits lenders and settlement service providers from paying or accepting kickbacks (referral fees) for referring customers.

T or F RESPA prohibits giving kickbacks in exchange for referrals.

F The agent can provide the escrow services in connection with her own transactions, but her compensation is limited to her brokerage commission.

T or F A real estate agent can provide escrow services for a fee, without being a licensed escrow agent, as long as the services are related to a transaction in which the agent is also providing the brokerage services.

F The agent can't charge a fee for filling out the form.

T or F An escrow agent is permitted to charge a fee for preparing Form 1099-S and submitting it to the IRS.

B An escrow agent will release something that one party placed in escrow to the other party when all the conditions in the escrow instructions have been fulfilled. An item can't be returned to the party who placed it in escrow (in this case, the buyer) without the consent of the other party (the seller), or unless the escrow instructions direct the agent to do so.

The buyer has deposited the purchase price in escrow. The escrow agent will release this money: A. to the buyer, if he asks for it back B. to the seller when all conditions in the escrow instructions have been fulfilled C. to the real estate agent, if the seller directs her to do so D. to the seller, if the real estate agent directs her to do so

A After determining the per diem rate of an expense, the next step in a proration is counting the number of days for which one party is responsible for that expense. (The final step is to multiply the per diem rate by the number of days.)

The escrow agent is prorating a monthly expense and needs to determine how much the buyer's share will be. After calculating the per diem rate, the agent's next step will be to: A. count the number of days for which the buyer is responsible for this expense B. divide the total expense by 365 (or 366 in a leap year) C. add up the buyer's total debits D. subtract the buyer's total credits from the seller's total debits

To find the per diem rate, divide $44.50 by 31 (since there are 31 days in January) ($44.50 / 31 = $1.4354). Then, calculate how many days the buyer is responsible for (the 14th through the 31st, which is 18 days). Multiply $1.4354 by 18, for a result of $25.84.

The homeowners association dues are $44.50 a month, and they have been paid for the current month, which is January. If the transaction closes on the 14th of January, and the buyer is responsible for the day of closing, how much will be credited back to the seller at closing? Base your computations on a 365-day year.

RESPA rules Thus, most institutional loans secured by one- to four-unit residential property are covered by RESPA. Note that RESPA does not apply to seller-financed transactions, because seller financing is not a federally related loan. RESPA applies to federally related loan transactions when the mortgage or deed of trust will be secured by a dwelling with up to four units. (Note that this transaction involves an institutional loan rather than seller financing, which is why answer B is incorrect.)

The loan will be secured by a mortgage or deed of trust against:a dwelling with up to four units;a condominium unit or a co-op apartment;a lot with a mobile home; orland on which the loan proceeds will be used to build a dwelling with up to four units. The lender:is federally regulated,has federally insured accounts,is assisted by the federal government,makes loans in connection with a federal program,sells loans to Fannie Mae or Freddie Mac, ORmakes real estate loans totaling more than $1,000,000 per year.

B The appraisal fee is typically required by the buyer's lender, so it is ordinarily listed as a debit to the buyer.

The property appraisal cost $450. In a typical real estate transaction, the expense would be listed as a: A. $225 debit to the buyer and $225 debit to the seller B. $450 debit to the buyer C. $450 debit to the seller D. $450 debit to the buyer and a $250 credit to the seller

First, calculate the per diem tax rate ($4,212 / 360 = $11.70). The seller has only paid taxes through the previous year, meaning she must still pay taxes for the current year until the closing date. On a 360-day calendar, there are 79 days between January 1 and March 19. Multiply $11.70 by 79, for a result of $924.30.

The seller has paid her annual taxes of $4,212 through the previous year. If the sale closes on the 20th of March, how will the taxes appear on the seller's settlement statement? Base your prorations on a 360-day year. The buyer is responsible for the taxes on the day of closing.

First, calculate the annual interest ($84,450 X 7.5% = $6333.75). Divide the annual interest by 365 to calculate the per diem amount ($6333.75 / 365 = $17.3527). The seller is charged interest for the 1st through the 19th, which is 19 days. Multiply $17.3527 by 19, for a result of $329.70.

The seller's loan balance at closing is $84,450. The loan's interest rate is 7-1/2%. If the sale is completed on the 19th of March, how much prorated interest will the seller be charged at closing? Base your prorations on a calendar year. The seller will be charged for the day of closing.

licensed and registered with the Department of Financial Institutions.

Washington's Escrow Agent Registration Act requires escrow agents to be

A The primary purpose of the settlement statement is to set forth all the financial aspects of closing, detailing each party's expenses and credits.

What is the primary purpose of the settlement statement? A. To account for, in detail, each party's expenses and credits, and the amount each will receive or be required to pay at closing B. To disclose the true costs of financing to both buyer and seller C. To provide documentary evidence of closing costs for state and federal authorities D. To provide the necessary documentation for a proper conveyance of title

A The buyer's total debits are the total charges imposed on the buyer in the closing process. The buyer's total credits represent the amount paid into escrow by the buyer or on the buyer's behalf, such as the good faith deposit (earnest money) and the loan proceeds. The difference is the balance due from the buyer at closing.

When completing a buyer's settlement statement, how is the amount of cash the buyer will need at closing determined? A. Subtract the buyer's total credits from the buyer's total debits B. Subtract the buyer's total debits from the seller's total credits C. Subtract the buyer's total credits from the seller's total debits D. Subtract the buyer's total debits from the purchase price

Credit buyer The buyer's loan is a credit, not a debit. The loan is not a charge; it's a source of money.

Where does the buyer's new loan appear on a settlement statement?

Debit to buyer This is a closing cost for the buyer.

Where does the lender's policy of title insurance show up on a settlement statement?

The purchase price is charged to the buyer and credited to the seller.

Where does the purchase price appear on a settlement statement?

D Prepaid interest (also known as interim interest) is listed as a debit to the buyer on the settlement statement.

Where is prepaid interest noted on the settlement statement? A. Only as a credit for the seller B. Only as a credit for the buyer C. Only as a debit for the seller D. Only as a debit for the buyer

D RESPA does not set maximum interest rates.

Which of the following does RESPA not do? A. Prohibit lenders from requiring excessive deposits into impound accounts B. Require certain disclosures for institutional loans for purchase of single-family residences C. Require lenders to give borrowers a loan estimate form D. Set maximum interest rates that a lender may charge

C An escrow agent may not give legal advice. Only an attorney may give legal advice.

Which of the following functions would not be performed by the escrow agent? A. Preparing the deed B. Recording documents C. Giving legal advice D. Disbursing funds

A Escrow instructions dictate the terms and conditions under which the escrow agent will act.

Which of the following is designed to determine under what conditions and at what time the escrow agent will distribute the money and documents involved in a real estate transaction to the proper parties? A. Escrow instructions B. Settlement statement C. Purchase and sale agreement D. Listing agreement

C The seller usually pays the commission, the cost of releasing her existing mortgage, and at least part of the escrow fee. The buyer is responsible for the cost of recording his own mortgage.

Which of the following settlement charges is usually a buyer's cost exclusively? A. Brokerage's commission B. Release of existing mortgage C. Recording fees for new mortgage D. Escrow fee

B Generally, the parties split the escrow fee.

Which of the following usually involves a charge to both parties? A. owner's title insurance B. escrow agent C. appraisal D. inspector

D Since the loan origination fee is paid to cover administrative costs involved in authorizing the loan, it is usually a debit to the buyer.

Which of the following would normally be a debit to the buyer? A. Commission B. Unpaid property taxes C. Standard policy of title insurance D. Loan origination fee

C The buyer pays for the lender's title insurance; it's not a shared expense with the seller.

Which of the following would not be prorated? A. Prepaid property taxes B. Interest on seller's existing loan C. Lender's policy of title insurance D. Interest on buyer's new loan

B RESPA applies to loans secured by residential properties with four units or less. Seller financing, including a contract for deed, is not subject to the act.

Which one of the following transactions is subject to the Real Estate Settlement Procedures Act? A. A seller-financed residential sale B. A VA-guaranteed loan to finance the purchase of a single-family dwelling C. A conventional loan to finance the purchase of a six-unit residential building D. A contract for deed to finance the purchase of a duplex

B A real estate agent may act as an escrow agent in her transactions even if she only represented one party prior to closing. But when acting as an escrow agent, she is a dual agent, representing both parties' interests in carrying out the escrow instructions.

Which statement about real estate settlement is FALSE? A. An escrow agent is a third party who acts on behalf of both the buyer and seller to orchestrate the closing of the transaction B. The escrow agent is the seller's agent, not the buyer's C. A real estate agent can't act as the escrow agent unless she was a dual agent when the purchase agreement was signed D. The buyer and seller sign instructions telling the escrow agent how to close their transaction

C Both the buyer and seller usually have to pay recording fees; the buyer pays to record the deed and mortgage, and the seller pays to record the lien release for the payoff of his mortgage.

Who is likely to be charged recording fees in a typical transaction? A. Seller only B. Buyer only C. Buyer and seller D. Lender only

Debit seller The Washington sales tax on real property is called the excise tax and by custom the seller pays it.

Who pays the excise tax?

A The transfer tax is called the excise tax in Washington and it's generally paid by the seller.

Who usually pays the sales (transfer) tax on a real property transaction? A. Seller B. Buyer C. Lender D. Buyer and seller together; the amount is split

RESPA applies to most residential loans made by institutional lenders. is a federal law that applies to all federally related loan transactions, a category that includes most residential loans made by institutional lenders. More specifically, it applies to any "federally related loan transaction" that is not exempt. For the purposes of this law, a loan transaction is federally related if both of the following criteria are met.

is a federal law that requires certain information about closing costs to be disclosed to loan applicants, and also prohibits kickbacks (referral fees) between settlement service providers.

Foreign Investment in Real Property Tax Act (FIRPTA) Under FIRPTA, a property buyer must determine whether the seller is a "foreign person"—not a U.S. citizen or resident alien. Usually the escrow agent handles this for the buyer. If the seller isn't a citizen or resident alien, then the buyer or escrow agent must withhold 15% of the amount realized (usually the sales price) from the seller. The withheld funds must be sent to the IRS within 20 days after the closing date. For less expensive homes that the buyer will occupy, FIRPTA eases its requirements: if the amount realized is over $300,000 but not more than $1 million, only 10% needs to be withheld. And if the amount realized is $300,000 or less, no withholding is required.

is intended to prevent foreign investors from evading their U.S. tax liability for income generated from the sale of real estate.

The balance due to the seller

is the amount of cash the seller will take away from the transaction at closing.That figure is calculated by adding up the seller's credits, adding up the seller's debits, and then subtracting the seller's total debits from the seller's total credits.

First, calculate the annual interest ($185,000 X 8% = $14,800). Divide the annual interest by 360 to find the per diem rate ($14,800 / 360 = $41.11). The buyer must pay prepaid interest for the period between the 22nd and the 30th (which is 9 days). Multiply $41.11 by 9, for a result of $370.00.

A buyer obtains a new purchase money loan in the amount of $185,000, with an annual interest rate of 8%. If the sale closes on the 22nd of the month, how much prepaid interest will the buyer be charged at closing? Base your prorations on a 360-day year.

A An escrow agent or other closing agent is generally required to report a sale of real property to the IRS on Form 1099-S.

A closing agent is generally required to: A. report sales of real property to the Internal Revenue Service B. ensure that the buyer receives a seller disclosure statement C. disclose the loan's annual percentage rate to all parties D. All of the above

A A company licensed under the Escrow Agent Registration Act is called a licensed escrow agent.

A company that is licensed to engage in the escrow business under the Escrow Agent Registration Act is called a: A. licensed escrow agent B. licensed escrow office C. settlement trustee D. uniform settlement agent

irrevocable Once a party places money or a document in escrow, she can't get it back except under the conditions in the escrow instructions, or with the other party's consent.

A deposit into escrow is

There are several exemptions from RESPA. RESPA applies to institutional loans secured by residential properties with up to four units. Seller financing, including a contract for deed (a land contract), is not subject to the act. One of the rules imposed by RESPA is that the seller may not require the buyer to use a particular title company.

A loan used to purchase 25 acres or more. A loan used to purchase vacant land, unless the borrower is going to build a one- to four-unit dwelling or put a mobile home on the property. A temporary loan (such as a construction loan). An assumption or a purchase subject to an existing mortgage loan, without lender approval. A loan for primarily business, commercial, or agricultural purposes.

C The Consumer Financial Protection Bureau first published the loan estimate and closing disclosure forms in 2015.

A portion of which form contains a settlement statement? A. Form 8300 B. Form 1099-R C. Closing disclosure D. Escrow registration

B Attorneys, title companies, banks, and savings and loans are allowed to perform escrow services without being licensed and registered in accordance with the Escrow Agent Registration Act. An escrow company must be licensed and registered.

All of the following are exempt from the Washington Escrow Agent Registration Act except: A. a title company B. an escrow company C. a savings and loan D. an attorney

prorating

An escrow agent will divide and allocate an expense proportionately, according to time, interest, or benefit, to determine what share of it a particular party is responsible for. This process is called _________ an expense.

A The closing disclosure form must be provided to the buyer (the borrower) at least three days before closing. A closing disclosure must also be provided to the seller at closing.

In a real estate loan transaction that is covered by RESPA, the lender is legally required to give the buyer a: A. closing disclosure form B. certified copy of the purchase and sale agreement C. copy of his credit report D. copy of the property appraisal

Debit to seller In almost every residential transaction, the seller pays the sales commission. The buyer doesn't pay anything towards it.

How is the sales commission allocated on the settlement statement?

B Divide $2,156 by 360 days to calculate the per diem rate of $5.99 ($2,156 ÷ 360 = $5.99).

If the annual property taxes are $2,156, what would the per diem rate be for proration purposes if the calculations are based on a 360-day year? A. $5.91 B. $5.99 C. $6.01 D. $6.10

A The earnest money has already been paid and will be applied to the purchase price at closing, so it appears on the settlement statement as a credit for the buyer.

On a settlement statement, an earnest money deposit that will be held by the brokerage firm until closing is a: A.credit to the buyer B.credit to the seller C.debit (charge) to the buyer D.debit (charge) to the seller

C RESPA does not apply to loans used to purchase 25 acres or more.

RESPA applies to all of the following except a: A. purchase money first loan made by a bank B. senior mortgage loan made by a mortgage banker to finance a condominium unit C. loan used to finance 50 acres for residential development D. VA loan used to finance a fourplex

D One name for the tax paid by the seller based on a percentage of the selling price is the transfer tax. In Washington, it's called the excise tax.

State or local sales tax on the sale of property helps generate revenue. On a settlement statement, it is normally listed as a debit to the seller. It goes by a variety of names, such as the documentary stamp tax or the: A.ad valorem tax B.assessment fee C.environmental tax D.transfer tax

T This is one of the listed exemptions from the Real Estate Settlement Procedures Act.

T or F A buyer assumes an existing mortgage loan without the lender's approval. In this transaction, the lender is exempt from the RESPA requirements.

T The escrow agent is usually a corporation or partnership. Escrow officers are the natural persons who work for the escrow agent.

T or F A licensed escrow agent may employ escrow officers, who must take an exam and be properly licensed.

FIRPTA

The Foreign Investment in Real Property Tax Act is a federal law intended to prevent foreign investors from evading their U.S. tax liability.

Form 8300 The escrow agent must file Form 8300 within 15 days of receiving the cash. A copy of the form should be kept on file for five years. The IRS requires any trade or business handling a transaction involving a payment of more than $10,000 in cash to file a Form 8300.

The IRS requires an escrow agent who receives more than $10,000 in cash to report the cash payment on

RESPA

The Real Estate Settlement Procedures Act is a federal law that requires lenders to use the loan estimate and closing disclosure forms to disclose closing cost information to home loan borrowers.

A The per diem rate is $0.8222 ($296 ÷ 360 = $0.82). This is multiplied by 71 days for a total of $58.38 ($0.8222 × 71 = $58.38). Since the seller has already paid for insurance through the end of the year, this amount is credited to the seller.

The seller's annual hazard insurance policy is paid through the end of the year, in the amount of $296. The transaction closes on October 20. The seller is not responsible for the day of closing. If prorations are calculated on a 360-day basis, the hazard insurance will appear on the settlement statement as a: A. $58.38 credit to the seller B. $58.38 debit to the seller C. $237.62 credit to the seller D. $237.62 debit to the seller

Both parties are protected during the closing period from a change of heart by the other party. Neither party is required to attend the closing in person.

There are several benefits to closing a transaction through escrow. Here are two of the main ones:

B The buyer's loan is listed only as a credit for the buyer. The buyer's loan is part of the purchase price already credited to the seller, so it is not entered into the seller's side of the statement.

To help finance the purchase, the buyer is going to obtain a new 80% conventional loan. Where is the buyer's loan reflected in the settlement statement? A. Only as a debit for the buyer B. Only as a credit for the buyer C. As a credit for the buyer and a debit for the seller D. As a debit for the buyer and a credit for the seller

Closing costs

include all of the fees and expenses incidental to a real estate transaction, such as the loan origination fee and the real estate excise tax. Some of the closing costs are paid by the buyer, some are paid by the seller, and others are shared between the parties.

An escrow agent carries out (or assists the lender in carrying out) the following steps to complete closing:

ordering a preliminary title report from the title insurance company; preparing disclosures, such as the closing disclosure form; depositing funds from the buyer (and the seller if necessary); preparing the deed; obtaining title insurance policies; arranging payoff of loans and other liens secured by the property; sending documents for recording; and disbursing funds and delivering documents.

The closing disclosure

shows actual closing costs (as opposed to estimated costs) in a settlement statement format.The borrower must receive the disclosure form at least three business days before closing.