Chapter 14 - Closing the Residential Transaction

What is a borrower's monthly housing payment if we assume the following: $2,560 in principal and interest, $420 in taxes, and $110 in insurance?

- $3,090 (Dollars) - All added together

Which form does the IRS require settlement agents to file after closing?

- 1099-S

If a property is set to close on July 13th, how much of mortgage interest will be debited towards the seller?

- 13 Days

A property is set to close on August 9th. How many days of interest will the buyer have to pay on their new loan at closing if their first mortgage payment is not due until October1st?

- 22 days - The buyer's October 1st mortgage payment will be for the month of September; however, they are still required to pay the loan interest for the remaining days in August. - This will be paid by the buyer as pre-paid interest at the closing. Since they will be living in the house after the closing date, they must pay interest for the days between August 9th and September 1st.

Amalia wants to borrow money to buy a home. She has gathered four Loan Estimates from four lenders. The Loan Estimates provide TIPs of 63.5%, 87.2%, 53.4%, and 60.5%. Assuming all the other loan terms are equal, which loan should she choose?

- 53.4 Percent (%)

Javier buys Tina's house for $325,000. How would we characterize the $325,000 payment from each person's point of view?

- A debit for Javier and a credit for Tina

RESPA requires lenders to provide what disclosure within three days of receiving a loan application?

- A loan estimate - The Loan Estimate must be delivered to the applicant within 3 business days of receiving their application.

The interests or claims that would prevent the buyer from selling the property or threaten the buyer's use of the land"

- A mortgage that has yet to be paid in full. ~) If the buyer takes title subject to the mortgage, and the seller does not pay off the loan, then the lender could foreclose on the property and sell the house from under the buyer

What is "Your home loan toolkit: A step-by-step guide"?

- A pamphlet explaining the loan and closing process that a lender must provide to a borrower

Theoboldt is a title searcher, and he wants to create a working relationship with Honest Bank. He proposes that if Honest Bank refers borrowers to him for title searches, in exchange, he will agree to charge a premium above his usual rate and give Honest Bank the premium as a finder's fee, without disclosing the arrangement to the buyer. Honest Bank agrees. What is this deal under RESPA?

- A prohibited kickback scheme

What does a Closing Disclosure primarily include?

- An accounting of all money coming in and out of a real estate sales transaction

Janice and Shawn attend a closing. At the closing, Janice and Shawn are interested in making sure the seller's title is marketable, all the loan documents are executed properly, and the seller's loan is paid in full. If Janice and Shawn occupy two different roles, which two are they likely to occupy?

- Both the buyer and lender will want to ensure the title is delivered clear and marketable.

Role of the lender

- Brings the closing disclosure (AKA Settlement Statement) -) Outlines all the important numbers of the transaction highlighting where all the money is going,who is being paid, what numbers should be on the checks, and every cent of the transaction - Federal law requires the lender to provide the closing disclosure at least three days before closing to allow the buyer—and the other parties—a chance to check all the numbers. - The lender's primary purpose at closing is to make sure the lender protects its security interest in the property

How do title searchers usually search a title?

- By consulting an index of the land records to find relevant documents - An index of land records will help expedite the title searcher's efforts to find relevant information about the property.

By which category are land records least likely to be indexed?

- By sales price - The sales price will not be accurately indexed. It's better to search by the property's block and lot number, or the names of the grantor and/or grantee.

Which item will the settlement agent most likely adjust to ensure the buyer's side of the Closing Disclosure balances properly?

- Cash from Buyer - The buyer (with the help of their lender) will provide the money at the closing. - The seller receives the money and pays various parties (they have to pay off their existing mortgage and the broker's commission, among other expenses) before keeping the rest as their profit.

Which item will the settlement agent most likely adjust to ensure the seller's side of the Closing Disclosure balances properly?

- Cash to Seller - The buyer (with the help of their lender) will provide the money at the closing. The seller receives the money and pays various parties (they have to pay off their existing mortgage and the broker's commission, among other expenses) before keeping the rest as their profit.

Hector is buying a house from Rita with a closing in May. The settlement agent learns that water charges have accrued, but have not yet been paid. How should Samantha treat the water charges on the Closing Disclosure?

- Credit the buyer and debit the seller for water charges prorated to the date of closing.

we call amounts that flow into an account

- Credits - For the buyer, credits will include things like down payments and loaned funds, - For the seller , credits will include the buyer's purchase payment,

We call amounts that flowing out of an account

- Debits - the debits will include things like loan costs, appraisal fees, and title search fees. For the seller - for the buyer debits will include things like loan payoff s and outstanding taxes.

What is RESPA's primary mechanism for making sure borrowers make informed decisions?

- Disclosure requirements

How many pages is a Closing Disclosure?

- Five pages, as required by RESPA - The Closing Disclosure is required under RESPA. The Closing Disclosure is a five-page form that provides final details about the mortgage loan. It includes the loan terms, projected monthly payments, and how much the borrower will pay in fees and other costs to get the mortgage (closing costs).

The Role Of The Real Estate Broker And Salesperson

- Good deal of knowdledge of the deal between buyer and seller - answer practical questions of the sale - You help the deal close smoothly.

Sally submits a loan application to Honest Bank. Over the next few days, she has several phone conversations with Honest Bank about the application. One week after filing her application, she receives a Loan Estimate and a Home Loan Toolkit. Based on RESPA, what has happened?

- Honest Bank failed to provide required disclosures within the three-day window - Even though Sally had on-going conversations with the bank, The Loan Estimate must still be delivered to her within 3 business days of receiving her application.

Omar wants to borrow money to buy a home. He has gathered two Loan Estimates from two lenders. The two estimates have the same terms, except for their APRs and their TIPs. The loan from Honest Bank's has an APR of 4.0% and a TIP of 71.87%. The loan from Fair Bank has an APR of 3.75% and a TIP of 83%. If Omar wants to pay as little as possible over the life of the loan, which loan should Omar choose?

- Honest Bank's loan because its TIP is the lowest

Mortgage payments are typically paid...?

- In-arrears

Title Insurance

- Insurance to protect a real property owner or lender up to a specifi ed amount against certain types of loss, e.g., defective or unmarketable title. - For buyers, the title insurer defends claims that threaten the buyer's title to the property or impair any of the rights in the buyer's bundle of rights. - For lenders, the title insurer defends claims that might affect the lender's mortgage, like the claims of other lenders

Purpose of a title examiner

- Investigate whether marketable title exists - Examine property indexes to see if there are mortgages, tax delinquency notes or other concerns that affect title marketability - Looks over chain of title history

Abstract of Title

- Is a summary of everything the examiner found in the land records affecting title—all the transfers, conveyances, legal proceedings, and other facts showing continuity of ownership and documenting any facts that might impair title

Which is true about form 1099-S?

- It only takes up a third of a page - The 1099-S is a short document that only includes several lines of information, including the date of closing, the gross proceeds, the address, and the buyer's part of the real estate tax.

A mortgage payment made on June 1st will be for the month of...?

- May - Mortgage payments are typically paid in-arrears, meaning in the past. For example, a May 1st mortgage payment will be for the month of April.

Technically, RESPA applies to all "federally related mortgage loans." As a practical matter, to what does RESPA apply?

- Most sales of one-to-four family residences - RESPA applies to nearly all residential loans

Generally, how many land record offices will a title searcher have to visit to search a title?

- One - Only the local records office will have to be visited, as land records are only filed with the local office.

Marketable Title

- One which is free from reasonable doubts or objections, and which the courts would compel a purchaser to accept under the terms of a sales contract. - Marketable title does not mean that a property is free of all claims, encumbrances, or liens. For example, many properties are subject to third party interests that do not affect the marketability of title. - A power company might have the right to run power lines across a section of property. A neighbor might have the right to draw water from a property well - Interests like these usually do not affect the marketability of title because they don't unreasonably hinder the buyer's use of the property and would not prevent the buyer from selling the property later.

Olivia is buying her first house. She's nervous, and she wants to make sure she understands all the financial details of the closing before she gets there. Which pages of the Closing Disclosure should she consult?

- Pages 2 and 3 will provide specific details.

To find the amount of interest paid per diem, you must divide the annual interest by...?

- Per diem means daily. - Daily interest is calculated using a 360-day calendar, rather than a 365-day calendar.

The Closing Disclosure sometimes includes a figure representing mortgage interest for the period from the date of closing to the end of the month. What do we call this figure?

- Pre-paid interest - The buyer will not have to make their first mortgage payment (which includes interest owed on the loan) until the first of the following month. - For example, if the closing occurs on March 15th, the first mortgage payment will not be due until May 1st. The May 1st payment will be for the month of April; however, the buyer still has to pay the interest on the loan from March 15th to April 1st.

Closing

- Process by which all the parties to a real estate transaction conclude the details of a sale or mortgage. - The process includes the signing and transfer of documents and distribution of funds.

On the Closing Disclosure, property taxes, water assessment, homeowner's association fees, and prepaid interest are all amounts that might be subject to what?

- Proration

We use a certain method for distributing property costs that are incurred over time but paid at discrete intervals. What is the name of that method?

- Proration

What is the relationship between RESPA and the Closing Disclosure?

- RESPA requires the lender to give the buyer the Closing Disclosure - The Closing Disclosure is required under RESPA. - The Closing Disclosure is a five-page form that provides final details about the mortgage loan. - It includes the loan terms, projected monthly payments, and how much the borrower will pay in fees and other costs to get the mortgage (closing costs).

Which aspect of buying real property makes title searches so important?

- Real property is expensive - Buying a home is usually the most expensive purchase a person will make in their life. - For this reason, the buyer needs to be sure they are receiving clear title to the property.

If a borrower pays $12,690 in interest annually, how much is paid per diem?

- Remember, interest per diem is calculated using a 360-day calendar, rather than a 365-day calendar. - Therefore, the interest paid per diem equals $12,690 / 360 = $35.25.

Rent from an income producing property is typically collected...?

- Rent is typically paid for the upcoming month/ end of the month

"Bundle of Rights" to the property

- Rights such as the right to possess the property, - to use the property, - to lease the property to another person, - and to sell the property. - Title refers to ownership of this bundle of rights.

Jilian and Terence are married. They are selling their house. At closing, Sam the settlement agent, prepares a 1099-S that shows gross proceeds of $467,000. Must Sam file the 1099-S?

- Sam does not need to file the 1099-S if he gets residence certificates from Jilian and Terence. - According to the IRS, married couples are exempt from capital gains of up to $500,000 ($250,000 for singles) if they lived in the property as a primary residence for at least 2 out of the last 5 years.

Which of the following must come first at closing?

- Signing the loan documents - The closing documents must be signed before the deed is transferred to the buyer. Once the documents are signed, the money can be transferred between the parties.

Hansel is buying a house. The Closing Disclosure indicates the cash needed to close from the buyer is $12,443.76. Hansel comes to closing with a check for $12,343.76. What is the most likely result?

- Since the check does not equal the required amount, Hansel will have to give a second check for $100 to make up the difference.

Hector is buying a house from Rita with a closing in May. The settlement agent learns that city taxes have been paid in full through the date of closing. How should Samantha treat the city taxes on the Closing Disclosure?

- Since the taxes have been paid through the closing date, no credits or debits need to be made.

When a Loan Estimate includes costs of settlement services from a settlement service provider affiliated with the lender, what must the Loan Estimate also state?

- That the borrower is not required to use the affiliated provider - This is intended to give the borrower an estimated cost for settlement services; however, the borrower may use another provider.

Before October 3, 2015, lenders used a form called

- The HUD-1 Settlement Statement - lays out the financial details of the loan and sale, just like the CD does - Federal law still requires the HUD for transactions like equity lines of credit or reverse mortgages, but most residential sales now require the Loan Estimate and Closing Disclosure.

Who requires the lender to give the buyer a Closing Disclosure at least three business days before closing?

- The Real Estate Settlement Procedures Act (RESPA)

The outstanding loan balance multiplied by the interest rate equals...?

- The annual interest paid - Since the interest rate is quoted on an annual basis, the annual interest paid will equal the loan balance times the interest rate.

Hester is buying a house. While preparing for the sale, her lender pays for an appraisal. At a meeting, the lender mentions that the appraisal valued the house higher than expected. Hester wants to know more. What can she do?

- The borrower must receive a copy of the appraisal since they are technically paying for it. - That being said, the lender will use the lesser of the purchase price or appraised value when determining their loan amount. - Even if the appraisal came in high, the loan amount would remain the same.

Sally attends a closing for the sale of a house. She brings a check to closing. At the closing, she signs many papers. The settlement agent takes Sally's check and cuts a number of checks to other parties. At the end of the closing, Sally is given a deed, in addition to copies of all the papers she signed. Who is Sally?

- The buyer brings money to the closing, and in exchange, receives the deed to the property.

A Closing Disclosure maintains separate columns for keeping track of what?

- The buyer's and the seller's debits and credits

The Role Of The Closing Agent

- The closing agent might be a representative of the title insurance company, an escrow agent, a representative of the lender, or the buyer's attorney. Sometimes it's a person whose sole reason for being in the room is to act as closing agent - makes sure everyone signs the required paperwork and then distributes copies and checks to all the right people.

Hazard insurance premiums are prorated based on...?

- The date the policy was issued

From the buyer's point of view, which is the most important document at the closing table?

- The deed

What will happen if numbers on the Closing Disclosure change beyond RESPA tolerances between the time the buyer receives the disclosure and closing?

- The lender will need to issue a new Closing Disclosure with updated numbers and give the borrower an additional three days to review it before closing can occur.

The amount of interest paid per year is equal to which of the following?

- The loan amount multiplied by the interest rate

From the seller's point of view, which is the most important document at the closing table?

- The net proceeds check

The Role Of The Seller

- The seller needs the buyer's money —the proceeds check for the sale of her property. This check represents the net proceeds of the sale, not the gross proceeds. The seller may have a mortgage loan of her own to pay off , or other property-secured liens or loans she may have gathered while owning the property. She likely has attorney's fees to pay as well, and, of course, she has to pay the agent or broker a commission for bringing the buyer to the closing table. So, in addition to collecting a net proceeds check, the seller needs to use the buyer's money to pay everyone who assisted her in the sale as well. - Complete anyother obligations listed in the sales contract

A property is set to close on March 5th. If the seller collected $6,800 in rent on March 1st, how much will the seller be debited at closing?

- The seller will be debited (and the buyer will be credited) for the days between March 5th and March 31st. This equals 26 days. - The rent paid per diem equals $6,800 / 31 = $219.35. - $219.35 x 26 days = $5,703.23.

Which of the following pays the seller a credit at closing for the remaining days left on their insurance policy?

- The seller's insurance company - The insurance company will reimburse the seller at closing for the remaining days left on the insurance policy.

From the point of view of the buyer and the seller, what may prove to be the most useful document on the closing table?

- The settlement statement - The settlement statement will summarize all of the fees and costs associated with purchasing the home. - The seller will see how much profit they will make on the transaction, while the buyer will see where their money is being spent.

Jilian is buying a house. By the day before closing, she has received a title opinion, an informational pamphlet, a loan estimate, and a closing disclosure. Which of these items does RESPA not require?

- The title opinion is not required. - The loan estimate and closing disclosure are the two most important documents required by RESPA. - The informational pamphlet is also required.

Many people may own an interest in a particular property, including owners, easement holders, lenders, unpaid workers, and tenants. How do we keep track of all these interests?

- The title system - A title is a formal document outlining the rights a person or people hold in a piece of property. - While commonly used to confirm ownership of the property, a title can also help prospective purchasers and land owners understand more about existing liens, usage rights, easements, natural resource rights, and other rights.

When it enacted RESPA, what did Congress hope the required lender disclosures would encourage a borrower to do?

- To shop around and compare loans before committing to one - The Real Estate Settlement Procedures Act, or RESPA, was enacted by Congress to provide homebuyers and sellers with improved disclosures of settlement costs and to eliminate abusive practices (such as kickbacks) in the real estate settlement process.

If you had to boil the IRS rules down to their essence, who is ultimately responsible for filing a 1099-S after closing?

- Typically the settlement agent is responsible. - The person who gathers all the numbers together and distributes the cash at closing

Which information can you usually find on the fourth page of the Closing Disclosure?

- Whether the lender will allow someone else to assume the mortgage - Early repayment policies - Whether the monthly payments will be too low to reduce the principal amount of the loan

A buyer asks Polly to conduct a title search on a property. After searching the land records, she finds a warranty deed granting title to the seller, an existing undischarged mortgage deed from the seller, an easement granting a neighbor the permanent right to drive across the property, an easement from an electric company granting the company the right to erect and maintain a line of electric poles crossing the property, and a discharged tax default that the land records show the seller paid in full. Is this title likely to be marketable?

- Yes. Although local law controls, a reasonable buyer would likely accept this title if the mortgage loan is paid at closing. - Marketable title does not mean the title has to be perfectly clear. - A mortgage lien is common with most properties and will be settled at the property closing. The tax lien has been settled. And, the easements listed are not a major encumbrance to the property.

For the Closing Disclosure to be complete and accurate, the seller's total credits and debits must add up to what amount?

- Zero dollars - The debits and credits on a settlement statement must add up to $0.

An "account" is:

- any activity or asset you want to keep track of, like your hand-made jewelry business on Etsy, your personal stamp collection, or checking account - We keep track of these accounts using debits and credits

A cloud on title

- is anything that casts doubt about a seller's title. - If a cloud on the title exists, the seller must clear up the issue before the sale can close

Closing Disclosure (CD)

- lays out all the finances of the sale - identifies every expense in the deal and shows who paid what. Because the CD describes the entire deal, it may be the most useful document on the closing table

Trail of Records

- linking buyer to buyer to buyer, the chain of title

Opinion of Title

- provides a legal opinion on whether title is marketable, based on all the records described in a title abstract. - An attorney giving a title opinion does not act as a guarantor or insurer of title.

Congress revised RESPA in 2010, transferring RESPA oversight responsibility to:

- the Consumer Financial Protection Bureau (The CFPB) - The CFPB created the Closing Disclosure form and required lenders to use the CD form beginning October 3, 2015.

RESPA requires the lender to provide the buyer with a CD at least three business days before closing because:

- this allows the buyer to review the numbers and understand the transaction before closing. - To meet the three-day rule, the lender will gather all the required numbers and information well before closing—maybe as many as 10 days before closing.

List of possible people involved in the closing:

• The buyer. • The buyer's attorney. • The seller. • The seller's attorney. • Representatives of any lenders. • A real estate sales agent or broker. • A representative of the title insurer. • Finally, a closing officer.