Unit 10: Closing Procedures/Closing the Real Estate Transaction
What is the amount that the Redemanns will owe for interest in advance for the last 16 days of June, assuming that the first mortgage payment will not be due until August 1 and will cover interest for the month of July only? loan of 15-year is from Thrift Federal Savings in the amount of $165,000 at 3% interest
$165,000 × .03 ÷ 360 = $13.75/day × 16 days = $220
Brad is selling his home to Sally with a closing date of January 31. Brad's taxes for the last year were $3,756.75. How much is Sally's share of the taxes, using a 365-day-year statutory proration.
$3,437.68. Using the 365-day year $3,756.75/365= 10.29 31 days - 365 year= 334 334 x 10.29 = for $3,437.68 rounded to the nearest cent.
Brad is selling his home to Sally with a closing date of January 31. Brad's taxes for the last year were $3,756.75. How much is Sally's share of the taxes, using a 360-day-year statutory proration? (prorated expenses:360 days in a year and 30 days)
$3,443.69. Using the 360-day year $3,756.75/360= 10.44 360-30= 330 then multiply by 330 for $3,443.69 rounded to the nearest cent.
Brad is selling his home to Sally with a closing date of January 30. Brad's taxes for the last year were $3,756.75. How much is Brad's share of the taxes, using a 360-day-year statutory proration?
$313.06. Using the 360-day year, divide $3,756.75 by 360, then multiply by 30 for $313.0625, rounded up to $313.06.
Brad is selling his home to Sally with a closing date of January 31. Brad's taxes for the last year were $3,756.75. How much is Brad's share of the taxes, using a 365-day-year proration?
$319.07. Using the 365-day year, divide $3,756.75 by 365, then multiply by 31 for $319.07.
How much is the Iuros' loan payoff amount? if The unpaid balance of the Iuros' mortgage after the seller makes the June 1 payment will be $97,700. Principal and interest payments are $807 per month with interest at 8% per annum on the unpaid balance.
$97,700 seller's loan balance + $325.67 interest for June = $98,025.67 loan payoff
The statutory year has how many days for the purpose of calculating prorated expenses?
360 days in a year and 30 days in a month. Prorations may be based on a statutory year (360 days in a year and 30 days in a month) calendar year (365 days in a year and actual days in each month), Most tax and interest prorations in Texas are based on the calendar year.
How much will the Iuros owe for prorated taxes if the Iuros owe taxes from January 1 through June 15 $4,383.55 (of this year's taxes).
4,383.55 ÷ 12 months = $365.295 per month $365.295 ÷ 30 days = $12.176 per day The earned period is from January 1 to and including June 15 and equals 5 months, 15 days: $365.295 × 5 months = $1,826.475; $12.176 × 15 days = $182.640; $1,826.475+$182.640= $2,009.12 seller owes buyer.
Most tax and interest prorations in Texas are based on
65-day calendar year, including prepaid interest calculations for new loans to be sold to Ginnie Mae. Prepaid interest calculations for new loans to be sold to Fannie Mae and Freddie Mac must be computed using the 360-day statutory year.
The sales price of the property is which of the following?
A debit to the buyer and a credit to the seller
HUD-1 Statement
A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing.
Closing Disclosure
A final closing disclosure to the consumer that must be received by the consumer 3 days before closing replaces the HUD-1 and Final TIL Disclosure.
Assumption Fee
A lender's charge for changing over and processing new records for a new owner who is assuming an existing loan.
creditor
A person to whom money is owed
Which of the following expenses are typically NOT prorated?
Agent's commission Prorate: Taxes Rents Utility bills Prorations of expenses between buyer and seller are necessary to ensure that expenses are divided fairly. Expenses that are most frequently prorated include interest on an assumed loan, taxes, rents, and utility bills.
Credit to the Buyer
Anything that decreases the amount of money the buyer must bring to the closing Earned interest on existing assumed mortgage not yet payable Seller-financed purchase-money loan Earned portion of general real estate tax not yet due
Where does closing *usually* take place in Texas?
At the title company
Buyer Benjamin is getting a new loan to finance the purchase of a home from seller Susan; Ace Real Estate Brokerage is the intermediary. The lender charging a 1% loan origination fee. Who is responsible for payment of the fee?
Benjamin
Buyer Betsy is assuming seller Samuel's existing loan. Who pays the assumption fee?
Betsy
seller responsible for depositing with the escrow agent prior to closing
Deed conveying the property Payoff statement Title evidence
A real estate sales contract has been negotiated between the Smiths and the Rays. The transaction is ready to close. Who is considered a disinterested (neutral) third party who can coordinate the closing activities without the parties' being present?
Escrow agent escrow agent may be an attorney, a title company, a lending institution's escrow department, or a real estate brokerage.
Covered by RESPA
Federally related loans advanced for first-lien mortgages on one- to four-unit residential properties are covered
Which of the following would a lender generally NOT require to be produced at or before the closing?
Homestead declaration Is Required: Survey Appraisal Title insurance policy
A broker must advise a buyer in writing to have the abstract of title reviewed by an attorney or to get title insurance. Where is this advice located?
In the TREC-promulgated contract
doctrine of relation back
Irrevocable deposit of the executed deed, purchase money, and instructions into escrow pending performance of escrow conditions.
At the time of loan application or within three business days thereafter, the lender must provide which document, showing the closing costs the borrower may incur?
Loan Estimate. The Loan Estimate of closing costs is the RESPA disclosure form that is given to the borrower at loan application to inform the borrower of the expenses he or she may incur in the transaction. It is only an estimate and the actual charges may differ. The Closing Disclosure reflects actual closing costs.
buyer responsible for depositing with the escrow agent prior to closing
Loan documents Balance of cash needed to complete transaction Survey deposits a hazard insurance policy, including flood insurance (where required). deposits the balance of the cash needed to complete the purchase, usually in the form of a certified check; loan documents (if the buyer is securing a new loan)
How is rent usually prorated for purposes of closing?
On the actual number of days in the month of closing
Who is usually responsible for fees to prove good title?
Seller
When is the earliest that a home purchase transaction can close?
Seven business days after the lender delivers the Loan Estimate to the homebuyer.
How much will the Redemanns owe for prepaid taxes for June 16 through July 31? $4,383.55 of this year's taxes
The Redemanns' share of prepaid taxes for June 16 through July 31 equals 15 days (including June 16) plus 1 month: 4,383.55 ÷ 12 months = $365.295 per month $365.295 ÷ 30 days = $12.176 per day $12.176 × 15 days =$182.640; $4,383.55 /12 = $365.295 × 1 month = $365.29; $365.29 + $182.64 = 547.94 buyer's prepaid taxes.
Who typically pays for recording fees to record the deed and deed of trust?
The buyer
What are the two events that typically take place at a closing?
The closing of the sale and the consummation of the buyer's loan
Buyer John wants to ensure that seller Linda can deliver good title at closing. Review of which of the following documents is NOT part of the process?
The inspection report Part: the survey The commitment for title insurance The sellers deed
How much are loan fees and when are they paid?
The lender generally charges the purchaser a loan origination fee of 1% payable at the time of close.
Under The TILA-RESPA Integrated Disclosure Rule, who must prepare the Closing Disclosure?
The lender or the closing agent
Credit to the Seller
The sales price and anything else that increases the amount of money the seller takes from closing. Sales price Prorated premium for prepaid portion of fire insurance Unearned portion of general real estate tax, if paid in advance
Who owns the home on the day of closing?
The seller owns the home until the end of day and is responsible for all expenses until the end of the day.
prorate
To divide or distribute expenses, either prepaid or paid in arrears, between buyer and seller at the closing (such as taxes, interest, and rents).
Len and Mary are preparing to go to closing at the title company. Their real estate broker mentioned the "good funds rule." How does that relate to their closing?
They must take a cashier's check, certified check, or wired funds to closing if the amount due at closing is $1,500 or more.
When must the Closing Disclosure be provided to the borrower-buyer?
Three days before consummation of the loan
Which of the following best describes the purpose of RESPA?
To protect consumers from abusive lending practices
What is one of the purposes of a survey in a real estate transaction?
To show existing easements and improvements on the property.
Who pays the attorney fees in a deal in which both the homeseller and the homebuyer have legal counsel?
Typically, the homeseller pays his attorney for preparation of the deed and the buyer pays his attorney for the preparation of deed of trust.
Who pays the appraisal fee on the property?
Usually the buyer pays for the appraisal, but that payment can be the subject of negotiation between the buyer and the seller.
accrued item
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
At closing, the payoff on an existing mortgage is
a debit to the seller
RESPA requirements apply when
a purchase is financed by a federally related mortgage loan. Federally related loans include: loans made by banks, savings associations, or other lenders whose deposits are insured by federal agencies. It also includes loans insured by the FHA and guaranteed by the VA; loans administered by HUD; and loans intended to be sold by the lenders to Fannie Mae, Ginnie Mae, or Freddie Mac.
Which of the following would be considered "prepaid" items that a buyer should compensate a seller for at closing?
annual homeowner association dues; lawn service contract. Prepaid items are anything that was paid in full up front but will carry forward even after the seller leaves.
closing agent
assembles all the documents necessary to finalize the purchaser's loan and the seller's transfer of title; prepares the Seller's Closing Disclosure; while the Borrower's Closing Disclosure may be prepared by either the closing agent or the lender, the lender is ultimately responsible for timely delivery and accuracy of the disclosures; arranges the time and place of closing with all parties; in most cases, conducts the closing.
buyer pays for what fees
attorney fees for the preparation of the note and deed of trust Fees to record the deed and deed of trust
After a sales contract has been signed by all parties, TREC rules require the broker to have the earnest money deposited by the end of
the second business day.
The real estate sales agent's presence at the closing can BEST be described as
being available for questions, locating missing documents, handling emergency issues.
After the contract is signed
broker turns over the earnest money to the escrow agent. The License Act and TREC rules require that the broker deposit the earnest money by the end of the second business day after the contract has been signed by all parties.
RESPA does not apply to loans for
business, commercial, or agricultural purposes.
Which is permitted between brokers according to the RESPA prohibition against kickbacks?
commission splitting. Commission splitting between brokers is allowed. RESPA (Real Estate Settlement Procedures Act) prohibits kickbacks, or unearned fees, given for referrals for settlement services including those related to mortgage loans, title searches, title insurance, surveys, credit reports, appraisals, and services rendered by attorneys. Fee splitting among cooperating brokers or members of MLSs, brokerage referral arrangements, the division of a commission between brokers and their salespeople, and referrals made by an employee to generate business for the company itself are not prohibited by RESPA.
consummation
completion
Under the TRID Rule, what is the difference between consummation and closing?
consummation is the date the borrower becomes contractually obligated to the lender and closing is the date the buyer becomes contractually obligated to the seller in a real estate transaction. "Consummation" is not the same as "closing" or "settlement" although they can happen at the same time. Consummation is the date the borrower signs the note and becomes contractually obligated to the lender-creditor on the loan. Closing or settlement occurs when the borrower-buyer becomes contractually obligated to the seller in a real estate transaction.
closing
consummation of a real estate transaction, when the seller delivers title to the buyer in exchange for payment by the buyer of the purchase price.
What is a CBA?
controlled business arrangement. A real estate firm, title insurance company, mortgage broker, home inspection company, or even moving company may agree to offer a package of services to consumers. Controlled business arrangements are permitted as long as a consumer is clearly informed of the relationship among the service providers and that other providers are available. Fees may not be exchanged among the affiliated companies simply for referring business to one another.
An escrow agent is preparing a Closing Disclosure in preparation for a closing. How would the agent normally enter the broker's commission?
debit to the seller. The seller normally pays the commission, and this would show as a debit to the seller on the Closing Disclosure.
closing statement
detailed cash accounting of a real estate transaction showing all cash received, all charges and credits made, and all cash paid out in the transaction. HUD-1
Loan Estimate
detailed loan costs
Because home loans are applied for at one point but may not actually close until weeks or months later, the fees for some items may change up or down in the interim. However, some fees have "zero tolerance" for change. Those fees include
discount points and origination fees. RESPA does not allow lenders to change many terms of a loan after agreement has been reached with the borrower. Borrowers are entitled to know as nearly as possible the cost of their loan before they go to close.
Buyer Barbara is purchasing a home from seller Sandra. Barbara's lender offers discount points to buy down the interest rate. Who is always responsible for payment of the discount points?
negotiable. The lender may also charge discount points, the payment of which is negotiated between the buyer and the seller on the sales contract.
A transaction is to be closed in escrow. The seller should expect to deposit all of the following items with the escrow agent before the closing date EXCEPT
new hazard insurance policy. will need: deed to the property. payoff letter. title evidence.
RESPA covers real estate transactions financed using
new residential first-mortgage loans. RESPA applies to all federally related mortgage loans except (1) a loan for business, commercial, or agricultural purposes; (2) a loan on property of 25 acres or more; (3) a temporary construction loan; (4) a loan on vacant land; (5) assumption without lender approval; (6) a conversion of a federally related mortgage loan to different terms, if a new note is not required; and (7) transfer of a loan in the secondary market.
All encumbrances and liens shown on the title commitment, other than those waived or agreed to by the purchaser and listed in the contract, must be removed so that the title can be delivered free and clear. The removal of such encumbrances is the duty of
seller. Under the provisions of the Texas-promulgated sales contract form, the seller is required to furnish evidence of good title. If the seller cannot do so, then the sale cannot be consummated.
The borrower (ex: title company) must be provided
the Closing Disclosure three days before closing or consummation. A comparison between the expense estimates received at loan application on the Loan Estimate and the actual closing expenses is reflected on the Closing Disclosure. In some expense categories, the buyer would be entitled to reimbursement from the lender if the actual expenses reflected on the Closing Disclosure exceed those on the Loan Estimate by applicable tolerance levels.
TRID Rule variance
the TIL early disclosures were combined with the RESPA-required Good Faith Estimate (GFE) into one document called the Loan Estimate
Taxes for the current year are prorated
through the closing date.
In the sale of rental properties, how are staff wages prorated?
unpaid wages are prorated if the sale closes between payment dates. The seller owns the property until the close, and therefore is beholden to the employees, while the buyer assumes that responsibility the day following the close.
Legal title passes from the seller to the buyer
when the deed is delivered and accepted.
How much will the Iuros owe for mortgage interest on the outstanding mortgage? if The unpaid balance of the Iuros' mortgage after the seller makes the June 1 payment will be $97,700. Principal and interest payments are $807 per month with interest at 8% per annum on the unpaid balance.
8% × $97,700 (principal due after 6/1 payment) = $7,816 interest per year; $7,816 ÷ 360 days = $21.711 interest per day; 15 days of accrued interest to be paid by the seller (June 1-15) 15 × $21.711 = $325.665 $325.67 interest owed by the seller.
Real Estate Settlement Procedures Act (RESPA)
The federal law that requires certain disclosures to consumers about mortgage loan settlements. The law also prohibits the payment or receipt of kickbacks and certain kinds of referral fees. administered by the Consumer Financial Protection Bureau RESPA applies to all federally related residential mortgage loans except a loan on property of 25 acres or more; a loan for business, commercial, or agricultural purposes; a temporary construction loan; a loan on vacant land; assumption without lender approval; a conversion of a federally related mortgage loan to different terms, if a new note is not required; and transfer of a loan in the secondary market.
Sally's real estate broker is checking the closing cost figures on the Closing Disclosure before delivering it to Sally to review before closing. Among other things, the broker is checking to see that unpaid accrued real estate taxes are
credit to the buyer and a debit to the seller. On the day of closing, accrued real estate taxes are a debit (charge) to the seller, prorated through the day of closing. The buyer will then be credited the same amount. To cover the seller's portion of this year's tax bill, the escrow agent will transfer those funds to the buyer's lender for deposit into the buyer's new escrow account. The servicer for the buyer's loan will pay the entire year's taxes at the end of the year.
At closing, the buyer's earnest money is
credit to the buyer. Because the buyer has already paid the earnest money to the title company when the contract is executed, it shows as a credit to the buyer at closing.
Rita and Samuel are closing on their new home. They received the Closing Disclosure three days before closing. The principal amount of their new mortgage loan would be shown as which of the following?
credit to the buyer. The principal amount of the buyer's new loan will show as a credit to the buyer because this is an expense the buyer's lender will pay on behalf of the buyer.
When Thomas inspects the Closing Disclosure before closing on the new home he is purchasing, he notes that the sales price of the property is listed as
credit to the seller and a debit to the buyer. The sales price is a debit (charge) to the buyer and thus a credit (an amount being received) to the seller.
The doctrine of relation back is MOST closely associated with
escrow. The doctrine of relation back is a rule of law that would determine that title passed to the buyer on the date the seller deposited the deed in escrow with the escrow agent—it relates back to that time.
What are accrued items at closing?
expenses that are owed by the seller but will later be paid by the buyer. Accrued expenses include unpaid ad valorem property taxes, interest on an assumed mortgage, some utility bills. The seller is debited (charged) for these items at closing, and the buyer gets the credit.
The Real Estate Settlement Procedures Act was first enacted as
federal law. The Real Estate Settlement Procedures Act was established by Congress in 1974. The purpose of the law was to make sure real estate professionals did not exert undue influence over homebuyers in decisions about lending and settlement services.
The Real Estate Settlement Procedures Act is NOT a factor in
loans for business, commercial, or agricultural purposes.
Seller Bob has an existing mortgage on the house he is selling to buyer Billie that will be paid off at closing. The closing agent must do which of the following?
obtain payoff information before closing, withhold the money from the seller's proceeds, pay the escrowed money to the lienholder, and get a release. For liens that are not released before closing (including mortgage liens, mechanic's liens, and judgment liens), the closing agent must obtain the payoff information from the lienholder, withhold the money from the seller's proceeds, close the transaction, pass title to the buyer, and pay the escrowed money to the lienholder and get a release.
Once payments begin after closing, the borrower cannot be required to pay more than
one-twelfth of the annual taxes and insurance premium in each month
prepaid item
paid in advance by the seller, such as insurance premium
If the buyer's credits are greater than the buyer's debits on the Closing Disclosure, the buyer will
receive cash at closing. Usually, the buyer has a debit balance on the Closing Disclosure, which is the amount owed at closing. Under the good-funds rule, the title company must require that the buyer provide a bank cashier's check or certified personal check at closing if the amount due at closing is $1,500 or more.
homestead declaration
recorded document that claims a particular dwelling as owner's principal place of residence
The seller pays what fees
recording or filing fees for documents to clear the title.
The Closing Disclosure must be used to illustrate all settlement charges for
residential transactions financed by federally related mortgage loans. Real Estate Settlement Procedures Act (RESPA) requirements apply when a purchase is financed by a federally related mortgage loan. This includes loans made by banks, savings associations, or other lenders with federally insured deposits, as well as FHA-insured and VA-guaranteed loans and loans intended to be sold to Fannie Mae, Freddie Mac, or Ginnie Mae.
If the transaction is reportable by the closing agent, the closing agent generally provides the
the IRS Form 1099-S to the seller. If not, the lender would provide it—then, if not, the broker would be responsible. In most cases, capital gains on a principal residence are not reportable by the title company because they do not exceed the $250,000 (single) or $500,000 (married) capital gains exclusion. Closings on other types of properties generally would be reportable by the title company.
The document that provides borrowers with general information about the application and closing process, and worksheets and checklists to aid the buyer is
the booklet Your Home Loan Toolkit: A Step-By-Step Guide.
who are considered the grantors
the borrowers
Security deposits should be listed on a closing statement as a credit to
the buyer.
The disbursement of funds, including payment for the property to the seller, is performed in
the closing process.
Escrow
the depositing of money, legal documents, and instructions with a third party to be held until the conditions of a contract are fulfilled
Escrow Agent
the neutral third party who conducts the closing in real property sales may be: an attorney a title company a trust company an escrow company the escrow department of a lending institution