Legal Aspects of Real Estate Chapter 12

What is escrow?

Escrow is 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.

Describe an escrow agent.

An escrow agent is a neutral third party who performs the duties necessary to transfer ownership between the parties in a fair, impartial manner.

When can a broker act as an escrow agent?

A broker can act as an escrow agent only if he or she is acting as the broker in that particular real estate transaction. When acting as an escrow agent, the broker cannot delegate any of the escrow duties to another person.

List the five basic steps of the escrow process.

1. Select the escrow company

2. Send the purchase contract to the escrow holder

3. Open the escrow

4. Complete all items outlined in the escrow instructions

5. Close the escrow

What are escrow instructions?

Escrow instructions are the written authorization and instructions for how an escrow agent will perform in the transaction.

What activities are all escrow agents prohibited from doing?

Escrow agents can never offer legal advice, settle disputes between the parties, change documents related to the transaction, show any bias toward one party, or release funds without authorization from all parties.

Besides the escrow agent, who else has responsibilities to ensure the closing occurs smoothly and on time?

Real estate agents, buyers, and sellers

ist three duties of real estate agents during the escrow process.

1. Communicate with their client and other agent

2. Make sure that the escrow instructions prepared by the escrow agent accurately reflect all of the terms of the purchase and sale agreement

3. Ensure contract deadlines, document requirements, and escrow funds are fulfilled

Explain marketable title.

A marketable title is one that is so free of defects that the buyer is certain he or she will not have to defend the title.

What is the purpose of the preliminary title report?

The report shows the condition of the title before the loan or sale transaction.

Describe a title insurance commitment. 

The title insurance commitment is an agreement by the insurer to issue a title policy for a specific premium. The commitment includes the conditions and exceptions the actual policy will have. The title commitment document is in the same format as the title insurance policy but it is NOT an insurance policy.

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.

Explain why title insurance is unlike other forms of insurance. 

Title insurance is unlike most forms of insurance because it protects against past events and is paid with a one-time premium.

Who typically pays for the homeowner’s title insurance at closing?

In southern California it’s more common for the seller to pay the premium; however, the buyer usually pays in northern California. The cost can also be divided between the seller and buyer.

However, buyers usually pay for lender title insurance policies.

What is the difference between CLTA and ALTA policies?

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

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

Although it’s not required, why is it a good idea for agents to attend escrow closings?

Not only may issues arise that the agent can quickly resolve without delaying closing, it’s an exciting time for clients to sign final paperwork and could lead to repeat business. It’s essentially a good business practice.

What are closing costs?

Fees and expenses to settle the transaction.

When does an escrow close?

An escrow only closes when all deeds associated with the transaction have been recorded.

What is the Foreign Investment in Real Property Tax Act?

The Foreign Investment in Real Property Tax Act prevents foreign investors from avoiding paying taxes on the sale of real property.  

If the seller is not a U.S. citizen or green card holder, the escrow agent must withhold 15% of the net proceeds of the sale and send it to the IRS within ten days of closing.

What does prorated mean?

Divided proportionally between the buyer and the seller

Name three items that are prorated for closing.

The most common items that are prorated include taxes, insurance, mortgage interest, and utilities.

How are prorated items shown on the closing statement?

As a debit to one party and a credit to the other party for the same amount

Closing agents and lenders typically use one of two methods when calculating items that need to be prorated. Name the two methods.

The 12- month/360 day method and the 365 day method

Explain the Real Estate Settlement and Procedures Act (RESPA).

The Real Estate Settlement and Procedures Act (RESPA) is of great benefit to consumers during the settlement process. It was created to ensure that the buyer and seller in a residential real estate transaction have knowledge of all settlement costs.

What types of closings must follow the TRID rule?

Any closed end-loan secured by real property, including unimproved property.

When must the Closing Disclosure be delivered to the borrower?

It must be delivered at least three business days prior to closing.

Define consummation.

The time that a consumer becomes contractually obligated on a credit transaction

Which pages of the Closing Disclosure will always look the same regardless of the loan type?

Pages 2 and 3 will always look the same, regardless of the loan type.

What information does the Loan Terms section of Page 1 provide?

It gives the exact figures for the loan amount, interest rate, and monthly principal and interest payment, and indicates 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.

What does the Other Costs section include on Page 2 of the Closing Disclosure?

• Taxes and other government fees

• Prepaids

• Initial escrow payment at closing

• HOA fees, home warranty fees, home inspection fees, and/or real estate commission

What is a borrower affirming by signing the Confirm Receipt section of the Closing Disclosure?

The borrower is signing to confirm receipt of the Closing Disclosure form. Signing the document does not indicate acceptance of the loan.