Real estate Chapter 2 Unit 7
The Real Estate Settlement Procedures Act (RESPA) was created to ensure that the buyer and seller in a residential real estate transaction involving a new first mortgage loan have knowledge of all settlement costs. The Act is administered by the Consumer Financial Protection Bureau (CFPB).
-Applies only when the purchase is financed by a federally-related mortgage loan. FHA - VA or any loan to be sold on the secondary market. -Must be a new first mortgage loan, second mortgage (junior), or a refinance -- Does not apply to loans secured by mortgaged property larger than 25 acres, installment land contracts, contracts for deed, construction loans, or home improvement loans.
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, also known as the Closing Disclosure, 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.
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. Some expenses paid at closing must be prorated or divided proportionately between the buyer and the seller. 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.
Confirm Receipt -
A place for the borrowers to sign confirming receipt of the Closing Disclosure document. Signing the document does not indicate acceptance of the loan.
Loan Costs The first section deals in column 1 with the loan costs:
A. Origination charges - Items such as points, application fee, and underwriting fee B. Services the borrower did not shop for - These are items the lender requires for the loan, such as appraisals and credit reports. C. 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. D. The total of the costs of A, B, and C above
The first section deals with the loan costs:
A. Origination charges - Items such as points, application fee, and underwriting fee B. Services the borrower did not shop for - These are items the lender requires for the loan, such as appraisals and credit reports. C. 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. D. The total of the costs of A, B, and C above
Other Considerations
Appraisal - Informs the borrower that the lender may order and appraisal and charge the borrower Assumption - Indicates whether or not the lender will allow a loan assumption on a future sale or transfer Homeowner's insurance - Indicates that the lender requires property insurance that the borrower may obtain through a company of their choice that the lender finds acceptable Late payment - States what late fee the lender will charge Refinance - Indicates that refinancing depends on future considerations and that borrower may not be able to refinance Servicing - Indicates whether the lender intends to service the loan or transfer servicing to another entity
When must the Closing Disclosure be delivered to the buyer?
At least three business days prior to closing
Important definitions to consider for complying with delivery of the Closing Disclosure include:
Business day means all calendar days except Sundays and legal public holidays specified in 5 U.S.C. 6103, or the observed legal holiday. For example, if Fourth of July falls on Sunday, the observed holiday is Monday. Consummation is defined under Regulation Z as the time that a consumer becomes contractually obligated on a credit transaction. The settlement agent must provide the seller with the Closing Disclosure, and that may be done at consummation.
What does page 3 of the Closing Disclosure contain?
Calculations of the amount of cash the buyer needs to bring to closing and summaries of all the transactions for both the buyer and the seller
Calculating Cash to Close
Closing costs are only part of the cash a borrower needs to bring to closing. The third section on the second half of column 2 deals with calculating the costs to close. This calculation includes the total costs from section J above, closing costs paid from the loan account, down payment, deposits, funds for borrower, seller credits, adjustments, and other credits.
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.
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
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 (As you can see in this example, the appraisal fee was paid by someone other than the borrower or the seller.)
What is the definition of consummation of the loan?
Consummation is defined under Regulation Z as the time that a consumer becomes contractually obligated on a credit transaction
Seller's Credits
Contract sales price Items paid for in advance
Buyer's Debits
Contract sales price Other expenses, such as loan origination fee, closing fee, recording fee, attorney fees
List three items that a buyer usually pays at closing. (See page 5 for other correct answers.)
Credit fees Loan origination Homeowner's insurance
The top of the first page has the identifying information:
Date issued Applicants Property address Sale price of the property Loan term Purpose Product Loan type Loan ID # Rate lock
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)
The next section at the top of column 2 deals with other costs:
E. Taxes and other government fees - Items such as recording fees and transfer taxes F. Prepaids - These are items paid for in advance, such as homeowner's insurance and property taxes. G. 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. H. Other costs not covered elsewhere on the disclosure - Items such as HOA fees, home warranty fees, home inspection fees, and real estate commission I. The total of the costs of E, F, G, and H above
The next section deals with other costs:
E. Taxes and other government fees - Items such as recording fees and transfer taxes F. Prepaids - These are items paid for in advance, such as homeowner's insurance and property taxes. G. 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. H. Other costs not covered elsewhere on the disclosure - Items such as HOA fees, home warranty fees, home inspection fees, and real estate commission I. The total of the costs of E, F, G, and H above
Buyer's Credits
Earnest money or deposit Loan amount
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 a homeowner's insurance premium for the entire calendar year in advance and the transaction will close on September 18. The buyer will owe the seller the portion of the insurance premium that applies from September 19 to December 31.
Rents and insurance are examples of items that are paid in advance. 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. Taxes and interest are examples of items that are paid in arrears.
Contact Information -
Gives firm names, addresses, license numbers, contact names, email addresses, and phone numbers for persons involved in the transaction.
One of the duties that a broker owes to the principal (seller or buyer) is to account for all money involved in the brokerage relationship. This accounting is due at the consummation of the sales transaction: the closing, at which the buyer receives a deed and the seller receives payment for the property. A closing statement (or settlement sheet) is the primary manifestation of this responsibility.
In some states, this meeting doesn't really "close" the transaction, because it does not actually transfer title. Some states close "into escrow" and then transfer title to the buyer after the old loan is paid off, the deed is recorded, etc. In Indiana, the title is transferred as soon as the deed is signed, delivered to, and accepted by the buyer - at the closing table.
Seller's Debits
Loan balance Unpaid items due from seller Other expenses, such as closing fees and document preparation
The right column of page 3 summarizes the seller's transaction and includes:
M. Due to seller at closing - This includes the sale price of the property and any adjustments for items paid by the seller in advance. N. 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.
Let's take a look at those items that the buyer usually pays. Unless custom (or the sales agreement) dictates otherwise, buyer expenses usually include:
Mortgage recording fees Title insurance Appraisal fees Credit fees Survey Loan origination Attorney fees Homeowner's insurance Reserves deposited with the lender, such as insurance, taxes, assessments Private Mortgage Insurance (PMI), if applicable
Note: For purposes of this rule, a loan application exists once consumer has submitted 6 items (3 pertaining to customer and 3 pertaining to property) to the lender. Those items are:
Name Borrower's Income Borrower's Social Security number Property address Estimated value of property Amount of mortgage loan sought by the consumer. Also, a business day is a day on which the creditor's offices are open to the public for carrying out substantially all of its business functions. This definition of "business day" applies only to the Loan Estimate or revision of the Loan Estimate. It does not apply to the Closing Disclosure.
The Loan Estimate must be delivered within three business days of loan application. Signature of the applicant(s) is permitted but not required. If a mortgage broker receives a consumer's application, either the creditor or the mortgage broker may provide a consumer with the Loan Estimate. If the Loan Estimate is not provided to the consumer in person, the consumer is considered to have received the Loan Estimate three business days after it is delivered or placed in the mail.
Note: For purposes of this rule, a loan application exists once consumer has submitted 6 items (3 pertaining to customer and 3 pertaining to property) to the lender. Those items are:
When does a loan application exist?
Once consumer has submitted 6 items (3 pertaining to customer and 3 pertaining to property) to the lender. Those items are: Name Borrower's Income Borrower's Social Security number Property address Estimated value of property Amount of mortgage loan sought by the consumer
What does it mean when the borrower signs the Loan Estimate?
Only that the borrower has received a copy of the form. It does not mean that the borrower has accepted the loan.
RESPA applies only to federally related mortgage loan financing and must be for a new loan, second mortgage, or a refinance.
RESPA/TRID requirements include the lender giving the borrower the "Your home loan toolkit" booklet providing a Loan Estimate of settlement costs within three days of application, and using the Closing Disclosure form. RESPA prohibits kickbacks and unearned fees paid to lender for customer referrals.
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
As we mentioned in the previous chapter, 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
For closed-end credit transactions secured by real property (other than reverse mortgages), the creditor is required to provide the consumer with good-faith estimates of credit costs and transaction terms on the Loan Estimate form. This form integrates and replaces the RESPA GFE and the initial TIL for these transactions. The creditor is generally required to provide the Loan Estimate within three-business days of the receipt of the consumer's loan application.
The Loan Estimate must contain a good faith estimate of credit costs and transaction terms. The Loan Estimate must be in writing and contain the information prescribed by the TRID rule. Delivery must satisfy the timing and method of delivery requirements. Creditors may only use revised or corrected Loan Estimates when specific requirements are met. In certain situations, mortgage brokers may provide a Loan Estimate.
The Loan Estimate and Closing Disclosure forms provide a means for borrowers to comparison shop more effectively for competing loan offers. The new forms clearly break down the costs of the loan, such as the interest rate, mortgage insurance costs, and closing costs. By comparing forms from different potential lenders, new homebuyers and consumers who are refinancing their existing mortgage can make better, more informed decisions about the loan offer that is best for them.
The consumer will also receive information regarding which closing services are required and the services for which they can shop around. The Consumer Financial Protection Bureau (CFPB) forms state in bold the monthly principal and interest payments. Forms provided for adjustable-rate loans must state the projected minimum and maximum payments over the life of the loan. In short, the forms are not only easier for the consumer to understand, but they are easier for industry professionals to explain to the consumer.
In order for the buyer to know how much money to bring to closing and the seller to know how much he or she will receive at closing, the entries on the settlement statement must be calculated.
The escrow agent will subtract the total of the buyer's credits from the total debits and the result will be what the buyer needs to bring to closing. Personal checks are usually not accepted at closing, so the buyer will need to bring a certified check or cashier's check. Similarly, the agent will subtract the seller's total debits from the total credits to arrive at what the seller will receive at closing.
What does page 2 of the Closing Disclosure show?
The details of the closing costs
What do you call those items that the seller has incurred but have not been 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.
Confirm Receipt
This section has a place for the borrowers to sign. However, signing means only that the borrower has received a copy of the form. It does not mean that the borrower has accepted the loan.
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.
Comparisons - This section has measures the borrower can use to compare the loan with other loan products. It shows:
Total of principal, interest, mortgage insurance, and loan costs the borrower will have paid and the principal that will have been paid off in 5 years Annual percentage rate (APR) Total interest percentage (TIP)
When is the creditor required to provide the borrowers with a Loan Estimate?
Within three business days of the receipt of the consumer's loan application
Section J
gives the total closing costs to the borrower (D + I from above).This total is the same as what appears at the bottom of page 1 under the heading "Estimated Closing Costs."
The Loan Estimate is a
three-page document. Note: Depending on the type of loan the borrower is receiving, pages 2 and 3 of the disclosure could look different. Page 1 will be essentially the same, regardless of the loan type. This particular sample is a statement of the estimated costs for a 30-year fixed rate loan. Let's look at the information for these borrowers and this loan.
As with the Loan Estimate, it might help in understanding the charges if you can look at a sample Closing Disclosure. Click on the link to the Closing Disclosure example and print off a copy to look over as we continue our discussion.
As with the Loan Estimate, it might help in understanding the charges if you can look at a sample Closing Disclosure. Click on the link to the Closing Disclosure example and print off a copy to look over as we continue our discussion.
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
Now let's look at those items that the seller usually pays. Unless custom (or the sales agreement) dictates otherwise, seller expenses usually include:
Broker commission Title fees, such as for clearing the title Fees for preparing the deed Attorney fees
What are three things the seller usually pays at closing? (See page 6 for other correct answers.)
Broker commissionTitle fees, such as for clearing the titleFees for preparing the deed
The Loan Estimate and Closing Disclosure forms provide a means for borrowers to comparison shop more effectively for competing loan offers. The creditor is generally required to provide the Loan Estimate within three-business days of the receipt of the consumer's loan application. The Loan Estimate is a three-page document. However, depending on the type of loan the borrower is receiving, pages 2 and 3 of the disclosure could look different. Page 1 will be essentially the same, regardless of the loan type.
For loans that require a Loan Estimate and that proceed to closing, creditors must provide a final disclosure reflecting the actual terms of the transaction called the Closing Disclosure. The creditor is generally required to ensure that the consumer receives the Closing Disclosure no later than three business days before consummation of the loan. The Closing Disclosure is a five-page document. However, 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. IMPORTANT: Prior to continuing, you will want to click here for a quick review of RESPA and TRID. Included is information that may be tested on your licensing exam.
This section is divided into two columns. The left column summarizes the borrower's transaction and includes:
K. 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. L. 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 you see on the bottom of page 1 under the heading "Costs at Closing - Cash to Close."
Effective October 3, 2015, the CFPB outlined 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.' As before, RESPA prohibits kickbacks or unearned fees paid to lender for referring customers to insurance agencies, etc. R E S P A K (a memory tool to help you remember that RESPA prohibits KICKBACKS to real estate licensees.)
The first section deals with the loan costs:
Origination charges - Items such as points, application fee, and underwriting fee B. Services the borrower did not shop for - These are items the lender requires for the loan, such as appraisals and credit reports. C. 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. D. The total of the costs of A, B, and C above
For loans that require a Loan Estimate and that proceed to closing, creditors must provide a final disclosure reflecting the actual terms of the transaction called the Closing Disclosure. The form integrates and replaces the HUD-1 and the final TIL disclosure for these transactions. The creditor is generally required to ensure that the consumer receives the Closing Disclosure no later than three business days before consummation of the loan.
The Closing Disclosure generally must contain the actual terms and costs of the transaction. The Closing Disclosure must be in writing and contain the information prescribed in the TRID Rule. If the actual terms or costs of the transaction change prior to consummation, the creditor must provide a corrected disclosure that contains the actual terms of the transaction and complies with the other requirements of the TRID Rule. If the creditor provides a corrected disclosure, it may also be required to provide the consumer with an additional three-business-day waiting period prior to consummation.
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.
Required delivery time frame for the Closing Disclosure is based on the method of delivery. It must be delivered at least three days prior to closing. Having their final loan terms and costs available three days prior to closing enables consumers to review their final loan costs and terms and ask questions prior to coming to the closing table. It provides time for the consumer to get answers to any questions and possibly negotiate any changes that occurred.
The creditor is generally responsible for insuring that the Closing Disclosure is delivered to the buyer no later than three business days before consummation. The creditor may contract with a settlement agent to provide the Closing Disclosure on behalf of the creditor.
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. These calculations are given for years 1-7 and then for years 8-30 of the loan term. 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' estimated closing costs and the estimate of the total amount of cash the buyers need to bring to closing.
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. These calculations are given for years 1-7 and then for years 8-30 of the loan term. 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).