CH. 14- Escrow & Title

Which of the following statements is NOT true regarding a broker acting as an escrow agent?

A broker may advertise that he or she is an escrow agent.

RESPA applies to all of the following EXCEPT which?

Seller-financed loan

PRORATING ITEM

Some expenses paid at closing must be prorated or divided proportionately between the buyer and the seller. The most common items that fall into this category include: Taxes. Insurance. Mortgage interest. Utilities. Any item that is prorated is shown on the settlement statement as a debit to one party and a credit to the other party for the same amount. Some items are those that were paid for in advance; so the buyer will owe the seller part of the payment. For example, let's say the seller paid real estate taxes for the entire year in advance and the transaction will close on September 18. The buyer will owe the seller the portion of the taxes that apply from September 19 to December 31. Or if the seller paid for the rental of a propane tank for the calendar year, the buyer will owe the seller the prepaid rent on the tank from September 19 to December 31. For items paid in advance, the buyer will receive a debit and the seller will receive a credit. Other items are those expenses that the seller incurred but have not yet been billed for at the time of closing. These items are paid in arrears. For example, the buyer will receive the sewer bill for September. The charges from September 1-18 belong to the seller, but the buyer will be paying the bill. So on the settlement statement, the buyer will get a credit and the seller will get a debit.

Which of these individuals could not act as an escrow agent without an escrow license?

Real estate salesperson

Which statement is not true about opening escrows?

The buyer's and seller's agents will sign the escrow instructions.

THE ESCROW PROCESS

As we mentioned earlier, the purchase contract is often the basis for the escrow instructions and, in California, the document most often used is CAR's Residential Purchase Agreement and Joint Escrow Instructions. Here are the typical steps to the escrow process. Select the escrow company. Deliver the purchase contract to the escrow holder. Open the escrow. Complete all items outlined in the escrow instructions. Close the escrow. Let's look at the steps in more detail. Select the Escrow Company The buyer and seller select the escrow company through negotiation at the time the purchase agreement is drawn up and signed. Either party may choose the escrow holder. As an agent, you may suggest an escrow company. However, keep in mind that licensees are prohibited from receiving a "kickback" for referrals. Also, a licensee must disclose in writing any shared interest he or she or the broker has with the company the parties select. Note: If the seller named a specific escrow holder in the listing agreement, it cannot be changed in the purchase agreement without the seller's permission. Fax the Purchase Contract The last page of the Residential Purchase Agreement and Joint Escrow Instructions has an acknowledgement for receipt of the signed agreement to be signed by the escrow company. Once the agreement has been negotiated, filled out and signed by all parties, fax the form (or deliver it in person) to the escrow company. The escrow holder will fill in the appropriate spaces in the form and sign it, acknowledging its receipt. If earnest money has been delivered with the form, be sure to get a receipt for that deposit. Open the Escrow The escrow holder will open an escrow in the names of the parties involved. Along with the purchase agreement, the escrow holder will need information about such items as: The length of escrow. Terms of loans. Commissions. Instructions about inspections, such as termite reports. Personal property included in the sale. Legal description of the property. Earnest money deposit. The escrow holder will use the purchase agreement and all the supporting documentation to compile the escrow instructions. Then the escrow holder will send the instructions to the buyer's and seller's agents with copies for the clients to sign. Note: Once the escrow instructions have been signed by the buyer and seller, neither party may make any changes without the written agreement of the other. Complete All Items During the escrow period, a number of activities will be taking place. Activities include: Ordering pest control and other inspection reports. Arranging financing. Ordering the title search and title insurance. (We'll explain this further later in this chapter.) Obtaining property insurance. Getting all paperwork in order. Many of these activities fall to other persons to perform, but it's critically important for you to keep track of the progress and ensure that any problems that arise are addressed and resolved. To keep track of escrow progress, many brokers have developed an internal form or checklist for their agents to use. Check with your broker to get copies of this form. Close the Escrow Also referred to as closing or settlement, this is the process of signing and transferring all documents and distributing the funds. At the property closing: The buyer completes his or her financing arrangements (referred to as closing the loan). The seller transfers the title. Both the buyer and seller pay the necessary taxes, fees and other charges. Note: We'll look at closing and settlement charges in more detail a bit later in this chapter.

Who needs title insurance and why?

Both the buyer and the lender need title insurance. Insurance for the buyer ensures a clear title and protects his or her investment. Insurance for the lender protects the lender's interest in the property.

What is the difference between CLTA and ALTA policies? How does ALTA-R differ from ALTA?

CLTA is the basic standard policy and ALTA provides extended coverage. ALTA includes a survey and ALTA-R does not.

CLOSING DISCLOSURE - PAGE 3

Calculating Cash to Close Closing costs are only part of the cash a borrower needs to bring to closing. The top of page 3 shows how the final costs of the loan compare to the Loan Estimate the lender originally provided to the borrower and then calculates the amount of cash the borrower will need at closing. This calculation includes such items as costs paid before closing, down payment, deposits, seller credits, adjustments, and other credits. Summaries of Transactions This section is divided into two columns. The left column summarizes the borrower's transaction and includes: Due from the borrower at closing - This includes the sale price of the property and any adjustments for items paid by the seller in advance. Paid already by or on behalf of borrower at closing - This includes deposit, loan amount, loan assumptions, seller credits, other credits, and adjustments for items unpaid by the seller. The calculation at the bottom of the left column subtracts the totals already paid by the borrower from the total due from the borrower and results in the Cash to Close due from the borrower at closing. This total is the same figure that appears on the bottom of page 1 under the heading "Costs at Closing - Cash to Close." Summaries of Transactions (cont) The right column of page 3 summarizes the seller's transaction and includes: Due to seller at closing - This includes the sale price of the property and any adjustments for items paid by the seller in advance. Due from seller at closing - This section includes closing costs the seller will pay, payoff of any first or second mortgages, seller credit, and adjustments for items unpaid by the seller. The calculation at the bottom of the right column subtracts the total due from the seller from the total due to the seller and results in the Cash to Seller, which is the amount the seller will receive from the borrower at closing. Note: This last line on page 3 is important because it shows how much cash the borrower needs to bring to closing and how much cash the seller will receive at closing.

TITLE INSURANCE POLICIES

California Land Title Association (CLTA) The standard policy in California is the CLTA policy. It may be issued to a lender only, a buyer only or jointly to lender and buyer (called a joint-protection standard coverage policy). The buyer and seller negotiate who pays for the CLTA policy. The standard policy covers items of record as well as some risks that are not of record, such as: Forgeries. Acts of minors and incompetents. Failure of delivery of a prior deed. Federal estate tax liens. Acts of an agent whose authority has terminated. American Land Title Association (ALTA) This policy is an extended coverage policy that insures against many of the items excluded in the CLTA standard policy. This policy gives coverage to the lender, not the buyer. However, a buyer can purchase an owner's policy that provides the extended coverage. The ALTA policy includes a survey or physical inspection of the property. Therefore, it is usually required by California lenders or out-of-state-lenders that cannot make their own personal inspection of the property. As stated, many of the items excluded on the CLTA standard policy are covered on the ALTA extended policy. However, please note that no title insurance policy protects against: Defects known to the insured but not disclosed to the title insurer. Government zoning regulations. The American Land Title Association has a policy called the ALTA-R that many title insurance companies recommend to owners of one-to-four unit, owner-occupied residences. This policy does not include a survey, since property lines are already established by recorded subdivision maps. CAR's purchase agreement form lists the ALTA-R policy as the preferred title policy choice for residential properties.

CLOSING AND SETTLEMENT

Closing and Settlement Previously, RESPA required lenders to provide a HUD "Guide to Settlement" booklet and a Good Faith Estimate (GFE) of all costs related to settlement to borrowers within three days of loan application. RESPA also required the use of the HUD-1 settlement statement at closing plus a final good faith estimate and Truth-in-Lending Statement. Effective in October 2015, the real estate industry has new requirements as specified in the TILA/RESPA Integrated Disclosure (TRID) Rule. According to the TRID rule: Lenders must give a copy of the booklet, "Your home loan toolkit" to every person at the time of application for a loan. Lenders must provide a Loan Estimate of settlement costs at the time of loan application or within three business days of application. A Closing Disclosure, a form designed to detail all financial particulars of a transaction, must be delivered to the borrower at least three days before closing. The actual time frame is based on the method of delivery. The settlement agent must also provide the seller with the Closing Disclosure, which may be done at consummation. RESPA specifically prohibits any payment or receiving of fees or kickbacks when a service has not been rendered. For example, an insurance company cannot pay a kickback to a real estate agent or to a lender for referring a client to their agency. Referral fees are strictly forbidden for these services: Title search. Title insurance. Inspection. Survey. Appraisal. Loan. Credit report. Attorney. RESPA permits sharing commissions and the payment of referral fees among cooperating brokers or multiple-listing services. Click here to read NAR's current information on RESPA. If a real estate office has a computerized loan origination system that gives borrowers information about different kinds of loans, does pre-qualification and initiates the loan application process, the office may charge a fee for the service as long as only the borrower pays the fee. In addition, the broker must tell the prospective borrower that other mortgage products are available that are not part of the broker's system, so that the borrower is free to look elsewhere for comparable mortgage products. In addition to the exchange of the purchase price for the title, the closing requires that both the buyer and the seller pay certain fees and expenses to settle the transaction. The settlement statement has a list of the debits and credits for both the buyer and the seller. A debit is money that the buyer or seller needs to pay at closing. A credit is money that the buyer or seller receives at closing, either because it was already paid, it's being reimbursed or there is a promise to pay.

Accepting referral fees:

Could be a violation of state licensing laws.

What items are not covered by any title insurance policy?

Defects known to the insured but not disclosed to the title insurer. Government zoning regulations.

Who is responsible for ordering the preliminary title report?

Escrow officer

Proof of ownership of a property is called:

Evidence of title

Which of the following is not an item that a buyer usually pays at closing?

Fee for clearing the title

WHAT IS ESCROW?

For purposes of real estate, escrow is defined as the process in which a disinterested third party holds all money and documents relating to a transaction until all of the terms and conditions of the escrow instructions have been satisfied. The parties to the escrow - the buyers and the sellers - are the persons who decide what the escrow instructions will be. These instructions detail the procedures necessary to close the transaction and direct the escrow agent in how to proceed. In many cases, the purchase contract itself serves as the basis for the escrow instructions.

ESCROW AGENTS

In California, the majority of escrows are handled by either of these entities: Title insurance companies. Independent escrow companies. The remaining escrows are typically handled by either of these individuals: Attorneys who routinely perform escrows as a part of their practice. Brokers who handle the escrow of their own transactions.

TITLE INSURANCE

In California, title insurance insures the lender (and the property owner for an additional fee). The title insurance company: Examines all records pertaining to the property's recorded history. Reviews risks that might not appear in the public record. Interprets the legality of the records. Helps the property owner correct any defects. Insures the property against economic loss. Both the buyer and the lender should have title insurance. Insurance for the buyer ensures a clear title and protects his or her investment. Insurance for the lender protects the lender's interest in the property. Preliminary Title Report The escrow officer orders a preliminary title report to start the title search. This report shows the condition of the title before the loan or sale transaction. Buyers must acknowledge receipt of the preliminary report which contains: The owner's name and property description. A list of any outstanding assessments, such as taxes or bonds. Any covenants, conditions or restrictions. Recorded liens or encumbrances that must be removed before a loan can go through.

CLOSING DISCLOSURE - PAGE 1

Loan Terms This section of page 1 gives the exact figures for the loan amount, interest rate, and monthly principal and interest payment, and indicates with a "yes" or "no" whether any of those amounts can increase after closing. It also indicates whether or not there is a prepayment penalty or balloon payment with the loan, and if so, gives the specifics that apply to that feature. Projected Payments This section of page 1 shows the actual payments the borrower will make for principal & interest and mortgage insurance, an estimated amount for the escrow payment, and the total estimated monthly mortgage payment. This section also gives an estimated monthly amount for taxes, insurance, and assessments and specifies whether or not the money for these payments will be in escrow. The last section of page 1 shows the borrowers' total costs as closing costs (which are detailed on page 2) and the total amount the buyers need to bring to closing (which includes the closing costs and other amounts that are detailed on page 3).a

CLOSING DISCLOSURE - PAGE 2

Page 2 of the disclosure gives the details of the closing costs. The page is divided into four columns: Column 1 - Description of the costs Column 2 - Costs paid by the borrower - designated as being paid either "at closing" or "before closing" Column 3 - Costs paid by the seller - designated as being paid either "at closing" or "before closing" Column 4 - Costs paid by others Loan Costs The first section deals with the loan costs: Origination charges - Items such as points, application fee, and underwriting fee Services the borrower did not shop for - These are items the lender requires for the loan, such as appraisals and credit reports. Services the borrower did shop for - These are items the borrower can get on his own, such as pest inspections, survey fees, and title insurance. The total of the costs of A, B, and C above Other Costs The next section deals with other costs: Taxes and other government fees - Items such as recording fees and transfer taxes Prepaids - These are items paid for in advance, such as homeowner's insurance and property taxes. Initial escrow payment at closing - An escrow account is an account where money is held for certain payments until they are paid out - typically for insurance and taxes. The lender gives the borrower a statement that tells how much money it requires the borrower to put into the account each month. Other costs not covered elsewhere on the disclosure - Items such as HOA fees, home warranty fees, home inspection fees, and real estate commission The total of the costs of E, F, G, and H above Section J gives the total closing costs to the borrower (D + I from above).This total will be moved to the bottom of page 1 under the heading "Costs at Closing - Closing Costs."

CLOSING DISCLOSURE - PAGES 4 AND 5

Page 4 details the Loan Disclosures. It covers: Assumption - Indicates whether or not the lender will allow a loan assumption on a future sale or transfer Demand feature - Indicates whether or not the loan has a demand feature, which would allow the lender to require early repayment Late payment - States what late fee the lender will charge Negative amortization - Indicates whether or not the loan has a negative amortization feature, which could result in the loan amount becoming larger than the original loan amount, resulting in a decrease of the equity the borrower has in the property Partial payments - Indicates whether or not the lender would accept partial payments on the loan Security interest - Lists the address of the property securing the loan Escrow account - Breaks down what is and what is not included in the escrow account Page 5 includes the following sections: Loan Calculations - Details the total amount of all payments on the loan, the dollar amount of the finance charges over the life of the loan, the amount financed, the annual percentage rate (APR), and the total interest percentage (TIP) Other Disclosures - States other important information for the borrower to know including whether or not the borrower would have any protection from liability for the unpaid balance in the event of a foreclosure Contact Information - Gives firm names, addresses, license numbers, contact names, email addresses, and phone numbers for persons involved in the transaction. Confirm Receipt - A place for the borrowers to sign confirming receipt of the Closing Disclosure Signing the document does not indicate acceptance of the loan.

If an item is paid for in advance by the seller, how will it be handled on the settlement statement?

The buyer will receive a debit and the seller will receive a credit.

CLOSING DISCLOSURE FORM

The Closing Disclosure form is designed to detail all financial particulars of a transaction and it must be delivered to the borrower at least three days before closing. It might help in understanding the charges if you can look at a blank, annotated Closing Disclosure form. Click on the link to the Closing Disclosure and print off a copy to look over as we continue our discussion. Closing Disclosure The Closing Disclosure is a five-page document. Note: Depending on the type of loan the borrower is receiving, pages 1, 4, and 5 of the disclosure could look different. Pages 2 and 3 will always look the same, regardless of the loan type. This particular form shows the information that would be needed for a conventional, FHA, or VA loan. Closing Disclosure - Page 1 At the top of the first page of the form are three sections: Closing information - Includes date issued, closing date, disbursement date, settlement agent, file number, property address, and sale price Transaction information - Includes names and addresses for both the borrowers and sellers and the lender's name Loan information - Includes the loan term, purpose of the loan, product type, loan type and loan ID number

What is the ultimate result of using the Closing Disclosure form?

The buyer will see the actual debits and credits for the purchase and know exactly how much money to bring to closing. The seller will know exactly how much he or she will receive at closing.

SETTLEMENT CHARGES - BUYER'S SIDE

The lists below will give you an idea of the items that are typically debited or credited to the buyer. Buyer's Debits Contract sales price. Other expenses, such as loan origination fee, closing fee, recording fee, attorney fees. Buyer's Credits Earnest money or deposit. Loan amount.

What is escrow?

The process in which a disinterested third party holds all money and documents relating to a transaction until all of the terms and conditions of the escrow instructions have been satisfied.

What is the Closing Disclosure?

The required form that details the costs that the buyer and seller will pay at closing.

What do you call those items that have been incurred by the seller but not paid, and how will they be handled on the settlement statement?

These items are paid in arrears. The buyer will get a credit and the seller will get a debit.

SETTLEMENT CHARGES - SELLER'S SIDE

These lists give you an idea of the items that are typically debited or credited to the seller. Seller's Debits Loan balance. Unpaid items due from seller. Other expenses, such as closing fees and document preparation. Seller's Credits Contract sales price. Items paid for in advance.

RESPA gives the buyer the right to review the completed closing disclosure how long before closing?

Three days

Which item is not covered by CLTA, ALTA or ALTA-R insurance policies?

Zoning ordinances