Unit 23 - Closing the Real Estate Transaction
The Closing Statement
A detailed cash accounting of the parties' debits and credits, and all cash paid out in the transaction. includes: Broker's Commission, Attorney's Fees, Recording Expenses, Transfer Tax, Title Expenses, Loan Fees, Tax Reserves and Insurance Reserves (Escrow or Impound Accounts), Appraisal Fees, Survey Fees, Additional Fees
If a seller collected rent of $1,400 payable in advance, from an attic tenant on April 1, which of these is TRUE at the closing on April 15? a. Seller owes buyer $700. b. Buyer owes seller $700. c. Seller owes buyer $1,400. d. Buyer owes seller $1,400.
a. Seller owes buyer $700.
In Illinois, which party customarily prepares the closing statement? a. Seller's attorney b. Buyer's attorney c. Listing broker d. Seller's lender
a. Seller's attorney
The document that provides borrowers with general information about their loan is the a. mortgage disclosure statement. b. Loan Estimate. c. Good Faith Estimate (GFE). d. closing statement.
b. Loan Estimate.
closing statement in IL
customarily prepared by seller's attorney includes expenses and prorations of costs to close real estate licensees can't complete formal ones but make estimates often
Appraisal Fees
customarily required by lender and paid by buyer if paid at time of loan application shows already paid on closing statement
A building was purchased for $285,000 with 10% down and a loan for the balance. If the lender charged the buyer two discount points, how much cash did the buyer need to come up with at closing if the buyer incurred no other costs? a. $28,500 b. $30,200 c. $31,700 d. $33,630
d. $33,630
Closing Agent/Officer
may be a representative of the title company, the lender, the real estate broker, or the buyer's or the seller's attorney. Orders and reviews the title insurance policy or title certificate, surveys, property insurance policies, and other items. After reviewing the agreement of sale (purchase agreement), they prepare a closing statement indicating the division of income and expenses between the parties.
TILA-RESPA Integrated Disclosure Rule (TRID)
is a consumer protection ruling that gives more transparency to the loan process. It does not apply to cash transactions. intended to combine and clarify financing disclosures to consumers issued by The Consumer Financial Protection Bureau (CFPB)
payoff statement (estoppel certificate or certificate of no defense)
lender provides current statement, effective on the date of closing. Notes the unpaid amount of principal, the interest due through the date of payment, the fee for issuing the certificate of satisfaction or release deed, credits (if any) for tax and insurance reserves, and the amount of any prepayment penalties.
TRID Disclosures
The Loan Estimate (LE) and the Closing Disclosure (CD).
Additional Fees
- FHA borrowers owe lumps for payment of mortgage insurance premium if not financed as part of loan -VA mortgagor pays a funding fee directly to VA at closing - If conventional loan carries PMI buyer prepays one years premium at closing
seller usually provides to escrow agent
- the deed conveying the property to the buyer, - title evidence (abstract and attorney's opinion of title, certificate of title, title insurance, or Torrens certificate), - existing hazard insurance policies, - a letter or mortgage reduction certificate from the lender stating the exact principal remaining (if the buyer assumes the seller's loan), - affidavits of title (if required), - a payoff statement (if the seller's loan is to be paid off), - bill of sale, - survey, - transfer tax declarations, - paid water bill, - other instruments or documents necessary to clear the title or to complete the transaction.
Key Terms in RESPA
-Good Faith Estimate (GFE) -Controlled Business Arrangement (CBA) -Computerized Loan Origination (CLO) -Settlement Statement (HUD-1)
buyer provides to escrow agent
-the balance of the cash needed to complete the purchase, usually via wire transfer or in the form of a certified check; - loan documents (if the buyer secures a new loan); - proof of hazard insurance and flood insurance (if required); - other necessary documents, such as inspection reports required by the lender.
final inspection/walk-through
Accompanied by the licensee, the buyer verifies that necessary repairs have been made, that the property has been well maintained, that all fixtures are in place, and that no unauthorized removal or alteration of any part of the improvements has taken place shortly before the closing
RESPA does not apply to
Loans on large properties (i.e., more than 25 acres) Loans for business or agricultural purposes Construction loans or other temporary financing Vacant land (unless a dwelling will be placed on the lot within two years) A transaction financed solely by a purchase money mortgage taken back by the seller An installment contract (contract for deed) A buyer's assumption of a seller's existing loan (If the terms of the assumed loan are modified, or if the lender charges more than $50 for the assumption, the transaction is subject to RESPA regulations.)
bring-down
Second search of public records to ensure marketable title after closing and before documents are recorded paid for by purchaser may require affidavit of title from seller
the exchange
Seller delivers the signed deed to the buyer then all pertinent documents are recorded in correct order to ensure continuity of title. Buyer's new mortgage or deed of trust must be recorded after the deed (cant pledge property as security for loan until he owns it)
through the day of closing vs. to the day of closing.
Very important when calculating the days owed. When prorating through the day of closing, the seller is responsible for the day of closing. When prorating to the day of closing, the buyer is responsible for the day of closing.
Computerized Loan Origination (CLO)
a computer or electronic lending provider in a transaction and are covered under RESP can be offered by real estate licensees
Real Estate Settlement Procedures Act (RESPA)
a federal law that requires certain disclosures about the mortgage and settlement process and prohibits certain practices that increase the cost of settlement services, such as "kickbacks" and referral fees.
escrow
a method of closing in which a disinterested third party is authorized to act as escrow agent and to coordinate the closing activities.
Good Faith Estimate (GFE)
a pre-closing disclosure required from lenders that discloses the key terms of the loan and closing costs
opinion of title
a statement of the status of the seller's title. It discloses all liens, encumbrances, easements, conditions, or restrictions that appear on the record and to which the seller's title is subject
affidavit of title
a sworn statement in which the seller assures the title insurance company (and the buyer) that there have been no judgments, bankruptcies, or divorces involving the seller since the date of the title examination. Promises that no unrecorded deeds or contracts have been made, no repairs or improvements have gone unpaid, and no defects in the title have arisen that the seller knows of. Affirms that he is in possession of the premises. Gives the title insurance company the right to sue the seller if his statements in the affidavit are incorrect.
If the annual real estate taxes on a property were $2,129 last year, what would be the per diem amount for prorations this year using the actual-number-of-days method? a. $5.83 b. $4.90 c. $5.86 d. $5.98
a. $5.83
A buyer of a $300,000 home has paid $22,000 as earnest money and has a loan commitment for 70% of the purchase price. How much more cash does the buyer need to bring to the closing, provided the buyer has no closing costs? a. $68,000 b. $30,000 c. $58,000 d. $61,600
a. $68,000
Which of these formulas BEST expresses the statutory month variation method of calculating a daily prorated charge for an annual prepaid expense? a. (Total charge ÷ 12) ÷ actual days in month of closing = daily prorated charge b. (Total charge ÷ 360) × 12 = daily prorated charge c. (Total charge ÷ 360) × actual days in month of closing = daily prorated charge d. (Total charge ÷ 365 = y) (y ÷ 12) × actual days in closing month = daily prorated charge
a. (Total charge ÷ 12) ÷ actual days in month of closing = daily prorated charge
At the closing of a real estate transaction, the person performing the settlement gave the buyer a credit for certain accrued items. These items were a. bills relating to the property that will have to be paid by the buyer. b. bills relating to the property that have already been paid by the seller. c. all the seller's real estate bills. d. all the buyer's real estate bills.
a. bills relating to the property that will have to be paid by the buyer.
All encumbrances and liens shown on the report of title (other than those waived or agreed to by the purchaser and listed in the contract) must be removed so that the title can be delivered free and clear. The removal of such encumbrances is the duty of the a. seller. b. buyer. c. broker. d. title company.
a. seller.
statutory month variation
acceptable in Illinois. yearly charge is divided by 12 to determine a monthly amount. The monthly charge then is divided by the actual number of days in the month in which the closing occurs. This final number is the daily charge for that month.
escrow agent
aka escrow holder neutral third party who coordinates closing activities may be an attorney, a title company, a trust company, an escrow company, or the escrow department of a lending institution.
Under TRID, if the APR increases by .125 percent, how many business days does the lender have to reissue another LE? a. Two b. Three c. Four d. Five
b. Three
Consummation may occur how many days after the issuance of the Closing Disclosure? a. Seven business days b. Three business days c. Three business days after closing d. Three business days before consummation
b. Three business days
The earnest money left on deposit with the seller's real estate broker is a a. credit to the seller. b. credit to the buyer. c. balancing factor. d. debit to the buyer.
b. credit to the buyer.
Legal title passes from seller to buyer a. on the date of execution of the deed. b. when the deed is delivered and accepted. c. when the closing statement has been signed. d. when the deed is placed in escrow.
b. when the deed is delivered and accepted.
Which of these would a lender generally require at the time of closing? a. Market value appraisal b. Application c. Title insurance d. Credit report
c. Title insurance
Security deposits are listed on a closing statement as a credit to the a. seller. b. lender. c. buyer. d. broker.
c. buyer.
The principal amount of a purchaser's new mortgage loan is a a. credit to the seller. b. debit to the seller. c. credit to the buyer. d. debit to the buyer.
c. credit to the buyer.
owners title policy
clear and valid policy to new owner comes as close as any document can to providing evidence of ownership of a property that is unencumbered by any past liens or potential claims.
calendar year
contains 12 months with 28 to 31 days in each month for a total of 365 days. The total number of days in a calendar leap year is 366
statutory year (banker's year)
contains 12 months with 30 days in each month, for a total of 360 days.
escrow procedure
contract signed -> borrower turns over earnest money to escrow agent -> seller and buyer deposit/provide documents to agent -> agent examines title evidence -> marketable title is shown in name of buyer + all other conditions of escrow agreement met -> agent disburses purchase price to seller minus all charges + expenses -> agent records deed and mortgage or deed of trust (if new loan obtained)
In Illinois, which party usually pays the state and county transfer taxes? a. Buyer b. Buyer pays state taxes; seller pays county and municipal taxes c. Whichever party is specified in the local ordinance d. Seller
d. Seller
At closing, the listing broker's commission usually is shown as a a. credit to the seller. b. credit to the buyer. c. debit to the buyer. d. debit to the seller.
d. debit to the seller.
The purpose of TRID is to a. make sure buyers do not borrow more than they can repay. b. make real estate licensees more responsive to buyers' needs. c. establish standard escrow and appraisal procedures. d. give more transparency to the loan process.
d. give more transparency to the loan process.
The Closing Disclosure (CD) may be used to illustrate all settlement charges for a. every real estate transaction. b. transactions financed by VA and FHA loans only. c. all transactions involving commercial property. d. residential transactions financed by federally related mortgage loans.
d. residential transactions financed by federally related mortgage loans.
Broker's Commission
determined by previous agreement seller is normally responsible for paying commission may be distributed as an expense between both parties or according to some other arrangement
Accrued items
expenses to be prorated that are owed by the seller but later will be paid by the buyer. The seller therefore pays for these items by giving the buyer credits for them at closing. BUYER CREDITS
Prepaid items
expenses to be prorated that have been prepaid by the seller but not fully used up. They are therefore credits to the seller. SELLER CREDITS
RESPA regulations apply to
first-lien residential mortgage loans made to finance the purchases of one- to four-family homes, cooperatives, and condominiums, for either investment or occupancy, as well as second or subordinate liens for home equity loans when a purchase is financed by a federally related mortgage loan.
real estate closings that must be reported to IRS
form 1099-S - land (improved or unimproved), including air space; - an inherently permanent structure, including any residential, commercial, or industrial building; - a condominium unit and its appurtenant fixtures and common elements (including land); or - shares in a cooperative housing corporation.
mortgage reduction certificate
from the lender certifies the amount owed on the mortgage loan, the interest rate, and the last interest payment made.
Attorney's Fees
if either party's attorney will be paid from closing proceeds that party will be charged with the expense in closing statement expense may include feeds for prep or review of documents or for representing parties at settlement
information to be reported on 1099-S
includes the sales price, the amount of property tax reimbursement credited to the seller, and the seller's Social Security number.
Loan Fees
new loans - charged origination fees and possibly discount points assumption fee- may be charged if assuming existing loan prepayment charge/penalty - may be charged to seller for paying of mortgage early
survey
provides information about the exact location and size of the property. indicates location of all buildings, driveways, fences, and other improvements located on the premises. encroachments will be noted. Contract specifies who will pay
title insurance
required by lenders in the event any "clouds" on the title (encumbrances on the real estate or claims on the title) should come up during the course of ownership.
Tax Reserves and Insurance Reserves (Escrow or Impound Accounts)
required by most lenders, account started at closing pay extra at closing then 1 months worth of estimated taxes and insurance with every mortgage payment that is held by lender in account until bills are due
Title Expenses
seller - usually required to furnish evidence of good title and pay for title search, customarily pays for owners title insurance policy buyer - may be charged for their attorney inspecting evidence or purchase of title insurance policy, usually pays for lenders policy
Loan Estimate (LE)
shows the consumer the amount of money borrowed, the interest rate, the amount of interest paid, the number of payments, the individual amount of those payments, any associated costs for the loan, an estimate of closing costs, and an estimate of the cash needed to close.
Closing Disclosure (CD)
shows the loan terms and charges , the costs associated with closing and the cash needed to close. lists the sales price, earnest money deposit, and all adjustments and prorations due between buyer and seller. It shows the net amount due the seller at closing. Accounts for all debits and credits, that are distributed to participants at the closing.
affiliated business arrangement (ABA)
system that offers a package of services to consumers to streamline the settlement process can include real estate firm, title insurance company, mortgage broker, home inspection company, moving company permitted by RESPA
Mortgage Servicing Disclosure Statement
tells the borrower whether the lender intends to service the loan or to transfer it to another lender. also provides information about resolving complaints.
Closing
the date of the transfer of title can be same as consummation but doesn't have to be
"Consummation"
the date that the borrower and lender are contractually obligated to each other through the signing of the mortgage documents can be same as closing but doesn't have to be
Prorations
the division of financial responsibility between the buyer and the seller for such items as loan interest, taxes, rents, fuel, and utility bills. Necessary to ensure that expenses are divided fairly between the seller and the buyer.
Settlement Statement (HUD-1)
the required disclosure that itemize all charges and fees to the buyer and seller in a transaction show fees including : Commissions, Attorney Fees, Real Estate Taxes, Title Expense, Appraisal Fees, Transfer Taxes, Recording Fees, Loan Origination Fees, Closing Agent Fees, Survey Fees, Title Expense, Mortgage Insurance Fees, Home Warranty
Pursuant to the 2010 "Good Funds" amendment to the Title Insurance Act,
the title insurance agent or independent escrowee acting as the closing agent may not make disbursements at closing when the amounts held for disbursement include funds from any single party in excess of $50,000, unless those funds (called good funds) - are wired funds unconditionally held by and credited to the closing agent; - are in the form of a check issued by the state of Illinois, the United States, or a political subdivision of Illinois or the United States; - are in the form of a check drawn on the fiduciary account of another title insurance company or title insurance agent so long as there are reasonable grounds to believe the funds are available to back the check; or - have been received by the closing agent and are finally settled and credited to the account of the closing agent.
Recording Expenses
usually paid by seller necessary to clear all defects and furnish purchaser with marketable title
Transfer Tax
usually paid by the seller cities and local municipalities can charge local ones (who pays varies)
Survey Fees
usually paid for by buyer obtaining new mortgage financing NOT normally done in property sales in IL; usually just take info from deed
"Intent to Proceed"
what the borrower must provide the lender with after they receive the LE and they intend to use the mortgage product the lender is then required to document it
Application
when the lender has received the following information regarding the loan: address of the property, loan amount, income of the borrower, contract value of the property, name of the borrower, and the Social Security number of the borrower.
