Lesson 11 - math

steps in closing process

1. open escrow account 2. order inspection 3. obtain title report 4. obtain loan payoff 5. receive and sing loan documents 6. receive funds 7. recording documents 8. prepare settlement statements 9. disburse funds 10. obtain hazard insurance

This law requires an escrow agent to report almost all sales of real property to the Internal Revenue Service.

1099-S form t

Insurance that protects lenders or buyers against outstanding liens or other potential legal problems affecting ownership of the property.

A title insurance policy will include a title report, which shows any unpaid liens or other title defects that are on the record. Many policies will also cover problems revealed by a physical survey, such as encroachments.

environmental inspection

An environmental inspection addresses concerns about radon, urea formaldehyde, asbestos, lead-based paint, underground storage tanks, or contaminated water.

Escrow agents

An escrow agent has many tasks to perform during the closing process. She will make sure that the legal documents are prepared and executed, arrange for the documents to be recorded, calculate the settlement costs, and prepare the settlement statements. Various types of companies offer escrow services, including title insurance companies, lenders, law offices, and independent escrow companies. Real estate firms may also offer escrow services.

Proration

Before we look at each type of closing cost and who typically pays it, let's take a moment to discuss proration. Some expenses will have to be prorated between the buyer and the seller. To prorate an expense is to divide and allocate it proportionately, according to time, interest, or benefit.

Form 1099 reporting

Escrow agents must report most sales of real property to the Internal Revenue Service. Form 1099-S is used to report the seller's name and social security number and the gross proceeds from the sale. The gross proceeds figure is usually the same as the sales price. -The escrow agent is not allowed to charge a separate fee for filling out the 1099-S form. Although some real estate transactions are exempt from the 1099-S requirement, it applies to most transactions.

Appraisal

Even if the buyer is preapproved for a loan, the loan won't go through unless the property the buyer has chosen meets the lender's standards. As part of the closing process, the lender will order an appraisal to determine the property's market value. The buyer's loan will be funded only if the appraisal indicates that the property is adequate security for the loan amount.

This law requires 10% of the seller's sales price to be withheld and forwarded to the Internal Revenue Service if the seller is not a U.S. citizen or resident alien.

FIRPTA,

purchase price and finaincing

For the buyer, the purchase price is offset by the earnest money deposit and any financing, whether it's a new loan, an assumption, or seller financing.

Form 8300 reporting

If a closing agent receives more than $10,000 in cash, she must report the cash payment on IRS Form 8300. This is true even if the cash isn't received all at once. The closing agent must file Form 8300 within 15 days of receiving the cash, and a copy of the form should be kept on file for five year

Affiliated provider

If any settlement service provider is in a position to refer a borrower to an "affiliated" provider, that joint business relationship must be fully disclosed as well, along with a fee estimate and language that the referral is optional.

No unnecessary deposits

If the borrower must make deposits into an impound account to pay for taxes, insurance, and other recurring costs, the lender may not require larger deposits than necessary.

excise tax

In Washington, a seller of real property is responsible for paying excise tax on the selling price. The state imposes a tax rate of 1.28% of the selling price, and city or county government may impose an additional amount.

escrow

In Washington, real estate transactions are ordinarily closed through the escrow process. A neutral third party called an escrow agent holds funds and documents for the buyer and seller. The escrow agent disburses funds and records documents only when conditions set forth in the escrow instructions are satisfied.

Homeowner's coverage

In Washington, the purchase and sale agreement will usually state that the owner's title insurance should be a homeowner's coverage policy. This coverage is available in transactions involving 1- to 4-unit residential property. A homeowner's coverage policy covers most of the same matters as an extended coverage policy, as well as some additional issues, such as violations of restrictive covenants.

interior inspection

In an interior inspection, the inspector checks the walls, floors, and ceilings for signs of water damage, fire hazards, or other problems. Ventilation and energy conservation issues are noted. Appliances may also be examined for operational problems.

Uniform settlement statement

In any transaction covered by RESPA, the closing agent must itemize all loan settlement charges (closing costs) on a HUD form called the uniform settlement statement, which the parties will receive at closing.

Owner's policy

In most transactions, the seller agrees to purchase an owner's title insurance policy for the buyer. The owner's policy protects the buyer's interest in the property against undiscovered title problems that arose during the seller's period of ownership, or earlier -If a claim that is covered by the owner's policy is asserted against the buyer's title, the title company will pay the legal fees incurred in defending the buyer's title. If necessary, the title company will pay off the claim, up to the face amount of the policy.

Choosing an inspector

Inspections required by the buyer are usually ordered and paid for by the buyer. Unless the buyer has an inspector in mind, she will probably ask you to recommend one. Whenever possible, you should provide at least three names to choose from. You must check the state licensing database to make sure any home inspector you recommend is licensed.

Another federal law that affects closing is the Real Estate Settlement Procedures Act, or RESPA.

Institutional lenders must comply with RESPA's requirements. You should be able to explain RESPA to your buyers. The law has two main goals: to provide borrowers with information about their closing costs, and to eliminate kickbacks and referral fees that increase closing costs. 0 -RESPA applies to most residential mortgage loans made by institutional lenders. But it does not apply to a loan for business, agricultural, or commercial purposes, a loan that is used to purchase 25 acres or more, a loan used to purchase vacant land for investment purposes, a construction loan when the borrower already owns the lot, or an assumption of an existing mortgage loan that does not require the lender's approval.

Here are some questions the buyer might want to ask a home inspector:

Is the inspector licensed? It's a good idea to check with the Department of Licensing to make sure. How long has the firm (or individual inspector) been in business? A minimum of five years' experience is recommended. Is the firm a member of the American Society of Home Inspectors? Membership requires actual experience, passing a written examination, inspection reviews, and continuing education. Has the firm changed its name recently? If so, why? What type of report does the firm use? How long does it take to complete the report and get it back to the client? How many inspectors does the firm have? Are they full-time or part-time? Does the firm engage in other businesses in addition to inspections? Does the firm also offer to make any of the repairs recommended by the inspection? If the inspection company also makes repairs, it may not give unbiased reports. Does the firm provide references? Any inspector should be willing to give several references if the buyer asks for them. The buyer may also want to check with the Better Business Bureau to see if any complaints have been lodged against the inspection firm.

The Good Faith Estimate (GFE) form correlates very closely with the uniform settlement statement form.

Lenders and mortgage brokers must provide the required good faith estimate of closing costs on a form published by HUD. -The GFE form helps provide consumers with accurate information about their transaction costs. This way, it's easier for borrowers to shop around for the least costly loan and also helps them avoid unnecessary and unexpected costs at closing.

inspections

Next, let's take a closer look at some of the steps in the closing process. We'll start with inspections. Many real estate transactions are conditioned on one or more satisfactory inspections of the property. The inspections may be required by the buyer or by the buyer's lender. For example, the buyer may have conditioned the sale on a satisfactory structural inspection, and approval of the buyer's loan may be conditioned on a satisfactory soil inspection or perc test.

reinspection report

Once the inspection report is presented, the party that requested it (the buyer or the lender) will approve or disapprove the report. If it is disapproved, repairs may have to be completed before the transaction can close. Once the repairs are completed, they must be reinspected. A reinspection report is then sent to the buyer or the lender for approval. The parties should have already determined who will pay for any required repairs.

pest inspection

Pest inspectors check for damage caused by wood eating insects such as termites, wood-boring beetles, and carpenter ants.

The seller will be responsible for property taxes up to the day of closing, while the buyer is responsible for them thereafter. The parties will agree on which one pays taxes on the closing date, though typically the buyer is responsible.

Property taxes

This law prohibits lenders from paying kickbacks to anyone for referrals in any federally related loan transaction.

RESPA

This law requires a lender to give loan applicants a good faith estimate of closing costs within three days of receiving the loan application.

RESPA

soil inspection

Soil inspectors examine soil conditions to see if there are existing or potential settling or drainage problems.

respa

The Real Estate Settlement Procedures Act requires institutional lenders to provide residential mortgage borrowers with information about closing costs.

property tax

The buyer pays prorated property taxes from the closing date through the end of the tax period. If the seller has already paid the taxes, the prorated amount is credited to the seller.

Financing

The buyer's financing arrangements are another key part of the closing process. Today, most buyers get preapproved for a loan before they start looking for a home in earnest. This lets them know the price range they can afford, which helps them avoid the inconvenience and disappointment that can result from picking out a home and then being turned down for financing.

Good faith estimate

The lender must give the loan applicant a good faith estimate of closing costs within three days after receiving the application. If the lender or another settlement service provider requires the borrower to use a particular attorney, credit reporting agency, or appraiser, that requirement must be disclosed to the borrower at the time of the loan application or service agreement.

Mortgage servicing disclosure

The lender must provide the loan applicant with a mortgage servicing disclosure statement, which informs the borrower of the likelihood that the lender will transfer the loan to another lender. This disclosure must be provided within three days of receiving the loan application.

Lender's policy

The lender will require the buyer to purchase a lender's title insurance policy, which protects the lender's security interest in the property against loss due to title defects that were not discovered at the time of sale. A lender's policy is typically an extended coverage policy, which protects not only against title defects but also against unrecorded encumbrances and matters that could be discovered by survey, such as encroachments or adverse possession.

No title company requirements

The seller may not require the buyer to use a particular title company.

Clsoing process

These include arranging financing, obtaining title insurance, ordering inspections and repairs, and preparing legal documents. -All of these tasks are part of the closing process, and it is your responsibility to see that closing proceeds as smoothly as possible. 1. arranging financing 2. obtaining title insurance 3. ordering inspections and repairs 4. preparing legal documents

Title insurance

Title insurance is quite different from hazard insurance, but its purpose is the same: protection against potential loss. Either the escrow agent or the lender will order a title report from a title insurance company. The report shows the condition of the seller's title. The seller will be required to pay off any outstanding liens—such as liens for unpaid back taxes or special assessments, construction liens, and judgment liens—so that she can deliver clear title to the buyer. Clearing the liens can usually be arranged through escrow.

firpta

To comply with the Foreign Investment in Real Property Tax Act, an escrow agent must withhold 10% of a property's sales price if the seller is not a U.S. citizen. Those funds must be forwarded to the Internal Revenue Service.

hazard insurance

To protect its investment, the lender will require the buyer to obtain hazard insurance for the property being purchased. A hazard insurance policy will typically insure the property up to its replacement cost.

the Form 1099 and Form 8300 reporting laws, and the Foreign Investment in Real Property Tax Act.

We'll start with some income tax laws that you should know about

RESPA-Uniform settlement statement

When a transaction covered by RESPA is ready to close, the closing agent prepares a uniform settlement statement for each party. Upon request, the closing agent must allow the buyer to review the settlement statement at least one day before closing. The uniform settlement statement itemizes all of the costs connected with the transaction. It also compares the actual charges to the estimates given on the GFE form.

The process of valuing a property through comparison to similar properties that have sold recently.

appraisail

One of the first steps is the opening of an escrow account. Escrow may be opened by the lender when the buyer applies for the loan, or by the real estate agent. You would open an escrow account by delivering a copy of the purchase and sale agreement to the closing agent named by the parties in the agreement. The closing agent will use the purchase and sale agreement as the basis for preparing escrow instructions for the buyer and seller to sign. -Either you or the buyer will order any necessary inspections. If a particular inspection was required by the buyer's lender, a copy of the inspection report will have to be sent to the lender after it has been approved by the buyer. If the inspection report calls for any repairs, proof of those repairs will also have to be forwarded to the lender.

closing process

No kickbacks or referral fees

enders and providers of settlement services may not pay kickbacks or referral fees to anyone for referring customers for any transaction involving a loan covered by RESPA. They also may not accept unearned fees for services that were not actually provided, and may not charge a fee for preparing the uniform settlement statement, an impound account statement, or a TILA disclosure statement.

In Washington, someone who provides escrow services must be licensed by or registered with the state. Attorneys, title companies, lenders, and insurance companies are exempt from this requirement. So are real estate agents who provide escrow services for their own transactions without charging an extra fee.

escrow agent licensing

A bank or savings and loan must be licensed as an escrow agent in order to provide escrow services.

false

A sale will close November 1. The seller has already paid the property taxes through year's end. The annual property tax bill was $1,100. The buyer is responsible for the day of closing. The seller will be returned $370.68, using a 365-day year for the proration.

false

An escrow agent relies on the purchase and sale agreement for direction on how to disburse the funds.

false

Under Washington law, the buyer is responsible for paying excise tax on the purchase of the property.

false

Interest on a real estate loan is almost always paid in advance.

falseMortgage interest is typically paid in arrears.

For most sales of real property, the escrow agent must report the gross proceeds to the Internal Revenue Service on Form 1099-S. The escrow agent is not permitted to charge the parties a fee for filling out Form 1099-S. The escrow agent must report cash payments of $10,000 or more on IRS Form 8300.

form 1099 and form 8300

Insurance that protects homeowners against damage to the property from natural or accidental causes.

hazard insurance

A title insurance policy typically purchased by the buyer, although the buyer is not a beneficiary under the policy.

lenders

electrical and plumbing inspectiono

n an electrical and plumbing inspection, the inspector checks the existing electrical and plumbing systems for capacity, safety, life expectancy, and unsanitary conditions. If any upgrades or repairs are needed, they will be noted. If the property's water source is a private well, it may also be inspected for water quality and quantity.

A title insurance policy purchased by the seller for the benefit of the buyer.

oqnwea peopwery

Because interest on a real estate loan is paid in arrears, at closing the buyer has to pay prorated interest to cover the period from the closing date to the end of the month in which closing takes place. This is called prepaid interest or interim interest.

prepaid interst

Proration is the process of dividing an expense proportionately according to time, interest, or benefit. The first step is to divide the expense by the number of days it covers to determine a per diem rate. Next, count the number of days one party is responsible for the expense. Then multiply the per diem rate by that number of days to determine that party's share of the expense.

proration

The Foreign Investment in Real Property Tax Act (FIRPTA)

requires a property buyer to determine whether the seller is a U.S. citizen or resident alien. If not, the buyer must withhold 10% of the amount realized (generally, the sales price) and forward that amount to the IRS. The escrow agent usually handles this requirement on the buyer's behalf. Residential sales are exempt from this law if the buyers will occupy the property as their home and the sales price is $300,000 or less.

This law requires the closing agent to itemize all charges on a uniform settlement statement, which is given to all parties at closing.

respa

under RESPA, the lender must give the loan applicant a copy of a booklet explaining settlement procedures, a good faith estimate of closing costs, and a mortgage servicing disclosure statement. All settlement charges must be itemized on a uniform settlement statement. In addition, kickbacks, referral fees, unearned fees, and excessive deposits are prohibited. RESPA applies to most residential mortgage loans made by institutional lenders. Business, agricultural, and commercial loans are exempt from the law.

respa requirements

A settlement statement is a document that presents a detailed accounting of all costs associated with closing a real estate transaction. Typically prepared by the escrow agent, each party's settlement statement lists his or her debits and credits, as well as how much he or she must pay or will receive from the transaction.

settlement statement

An inspection that focuses on settling or drainage problems.

soil inspection

An inspection that focuses on the foundation, frame, and materials used to build the house.

structural inspecion

HuD Booklet

the lender must give a mortgage loan applicant a copy of a booklet (titled "Shopping For Your Home Loan") about settlement procedures within three days after receiving the written loan application. This booklet (which must meet HUD standards) explains RESPA, closing costs, and the uniform settlement statement.

tolerances.

tolerances are intended to discourage "bait and switch" tactics, in which low estimates of closing costs are later increased at closing. Loan originators can avoid being penalized for excessive increases in the initial cost estimates by amending the GFE form, redisclosing information to the consumer, and issuing refunds to borrowers within 30 days of closing (if excessive costs were paid).

A real estate agent who is providing escrow services in a transaction he is handling may provide escrow services so long as no extra fee is charged.

true

An escrow agent will obtain a beneficiary's statement from the seller's lender to get a final payoff figure for the loan.

true

The appraisal, credit report, and survey costs will typically be paid by the buyer.

true

The escrow process provides an advantage by making it more difficult for parties to back out of the transaction.

true

The lender's title insurance policy is typically a closing cost for the buyer.

true

If you're using a 365-day year, $1.71 would be the per diem rate for a $625 annual fee for hazard insurance.

true-etermine the per diem rate, divide the total expense by the number of days it covers ($625 / 365 = $1.71).

Structural inspection

when a structural inspection is ordered, the inspector will identify the materials used in the construction, the type of construction, and the degree of accessibility of the various areas that are to be inspected. The inspector then checks for both major and minor problems in the various structural systems of the building, such as the foundation, floor, wall, and roof framing.