Real Estate Closing Key Terms

Conveyance of Clear and Marketable Title

• Steps required to achieve conveyance of clear and marketable title, including complying with all laws.

Closing Procedures and Roles

• Closing procedures and the roles of all parties involved.

RESPA and MDIA

• Real Estate Settlement Procedures Act (RESPA)
• Mortgage Disclosure Improvement Act (MDIA)

Buyer and Seller Charges and Credits

• Identify buyer and seller charges and credits on the closing statement.

Financial Entries and Calculations

• Explain financial entries and mathematical calculations in a closing statement.

Key Terms

• Accrued items
• Affiliated business arrangement
• Closing
• The closing disclosure
• Closing statement
• Credit
• Debit
• Electronic fund transfer
• Escrow account
• Escrow closing
• Impound account
• Loan estimate
• Mortgage Disclosure Improvement Act (MDIA)
• Mortgage servicing transfer statement
• Prepaid items
• Prorations
• Real Estate Settlement Procedures Act (RESPA)
• Survey
• Truth in Lending and RESPA Integrated Disclosure Rule (TRID)

The Closing

• The closing is the end of the real estate sales transaction.
• Title to real estate is transferred in exchange for payment of the purchase price.
• Real estate professional's relationship is primarily with the client.
• During closing, new players come on the scene: appraisers, home inspectors, loan officers, insurance agents, and lawyers.
• Negotiations may continue usually based on issues revealed by home inspection right up until the time that the property is transferred.
• A thorough knowledge of the closing process is the best defense of the risk of a transaction failing.
• The deed from the seller to the buyer transfers title to the property.
• The purchase price is paid to the seller.
• The closing process is based on the provisions of the sales contract.

Buyer's Concerns

• Buyer and lender must be sure the seller can deliver promised title.
• Property is in the same condition as when the sale was agreed upon.
• Home inspection alerts buyer to issues.
• Examination of inspection results (termite, radon, water, septic, structural).
• Required repairs.
• Survey for property boundaries.
• Title evidence, including seller's deed.
• Documents demonstrating removal of liens and encumbrances.
• Lease if there's a tenant.

Home Inspection

• Opportunity for the buyer to learn about the house.
• Buyer should be present during the home inspection.
• Home inspector explains the house's systems and components.

Final Property Inspection

• Buyer reserves the right to a final inspection/walk-through before closing.
• Verify repairs are made, property is maintained, fixtures are in place.
• No unauthorized removal or alteration.

Brokerage Form

• Form tells the buyer why they need a home inspection.
• Appraisals are different from home inspections.
• FHA does not guarantee the value or the condition of the home.
• Radon gas testing.
• The survey will let them know all the boundaries.
• Shows easements.

Title Evidence

• Buyer and lender require seller's title to comply with contract terms.
• Most states require seller to produce a current abstract of title or title commitment.
• Buyer's attorney examines it and issues opinion of title.
• The title company is doing all that work.

Seller's Existing Loan

• When the buyer pays cash or obtains a new loan, the seller's existing loan is paid in full.
• The exact amount required to pay off the existing loan is provided in a current payoff statement.
• Statement notes the unpaid amount of the balance of the loan, the interest due to the day of closing.
• The buyer pay a fee, the seller pay a fee for issuing that certificate of satisfaction or the release deed.
• Seller get money back from their escrow account.

Title Search

• Closing agent examines the title commitment or abstract before closing.
• Two searches made on the public record.
• First search shows the status of the seller's title on that date.
• Second search known as a bring down, made after closing but before documents are filed.

Affidavit of Title

• Seller executes an affidavit of title.
• Sworn statement assuring no other defects in title have occurred since the first examination.
• No judgment, bankruptcy, divorce, unpaid improvements, etc.
• Gives title company basis to sue if statements are incorrect.

Seller's Concerns

• Receive payment for the property.
• Assurance buyer has financing and sufficient funds.
• Complete tasks from home inspection.
• Payoff statement from lender.
• Inspect disclosure statement prior to closing.

Real Estate Professional's Role

• Role varies depending on local practice.
• In states requiring an attorney, the real estate professional's responsibility is finished as soon as the contract is signed.
• Accompany buyer on home inspection and submit repair requests.
• Look at the appraisal.
• Stay involved until closing.

Lender's Interest

• Protect security interest and ensure mortgage lien has priority.
• May require pest inspection (wood-destroying insects).
• Buyer must provide fire and hazard insurance policy and receipt.
• All transactions are reported to the IRS.
• Some fees are tax deductible.

Conducting a Closing

• Closing referred to as consummation of the transaction.
• Sometimes called settlement and transfer.
• The closing process can also take other forms depending on state law, local custom, or the convenience of the parties.
• Face to face closing.
• Everyone involved in that transaction is there.
• Closing agent attorneys conduct the closing.
• Exchange made when parties are satisfied everything is in order.
• Seller signs the deed and delivers it to the buyer.
• All pertinent documents are recorded in the correct order to ensure continuity.
• Satisfaction of the mortgage must be recorded before the seller's deed to the buyer can be recorded.
• Seller's deed to the buyer must be filed in public records before the seller's buyer's mortgage can be filed.

Legislation Related to Closing

• Real Estate Settlement Procedures Act (RESPA).
  • Requires certain disclosures and prohibits practices that increase settlement costs.
• Mortgage Disclosure Improvement Act (MDIA).
  • Changed how everyone prepares for closing.
• Consumer Financial Protection Bureau issued the Truth in Lending Act.
  • Integrated disclosure rule (TRID).
  • Dodd Frank act intended to combine and clarify the close disclosure to consumers.

RESPA Regulations

• Apply to first lien residential mortgage loans for 1-4 family homes, cooperatives, condominiums, or second liens for home equity loans.
• Federally related mortgage loan is one made by a federally chartered bank or lenders insured by a federal agency (FDIC), FHA, VA, HUD, or sold to Fannie Mae or Freddie Mac.
• Administered by HUD.
• RESPA does not apply to:
  • Loans on large property (more than 25 acres)
  • Loans for digital agricultural
  • Construction loans or temporary financing
  • Vacant land unless you're gonna put a house there in two years
  • Transaction solely financed, that seller financing there
  • Mortgage taken back by the seller and installment contract
  • Buyer's assumption with seller's loan, unless terms are modified or lender charges over 50 for the assumption.

RESPA Prohibitions

• Prohibits kickbacks or fee splitting for referrals or unearned fees.
• Violators subject to criminal and civil penalties, up to $10,000 fine and one year in prison.
• Section 9 prohibits seller from requiring buyer to purchase title insurance from a particular company.
  • Buyer can sue seller for violation, liable for three times the amount paid for title insurance.
• Section 10 prohibits lenders from requiring excessive escrow account deposit for taxes and insurance.

Affiliated Business Arrangement

• Real estate firm, title insurance company, mortgage broker, home inspection company, and moving company may offer a package of services.
• Permitted when there is 1% or more common ownership interest.
• Consumer must be fully informed.
• Participation is not required.
• Only thing of value would be a term on the ownership interest.
• Affiliated business arrangement form is a disclosure.

RESPA Requirements on Escrow Accounts

• Lender may require only 1/12 of the total disbursement for the year.
• Plus any amount to cover any shortage.
• No more than 1/6 total of the disbursement may be held in a cushion (two months).
• Lender must perform an escrow account analysis and return any amount over $50 to the borrower.

Mortgage Servicing Transfer Statement

• Lenders often sell the loan after closing.
• Borrower receives a letter with instructions on where to submit payments.

TRID (Truth in Lending, RESPA Integrated Disclosure Rule)

• Know Before You Owe mortgage disclosure rule.
• Replaced four previous disclosure forms with two new forms.
  • Loan estimate.
  • Closing disclosure.
• Effective October 2015.
• Applies to most consumer mortgage transactions, but not HELOCs, reverse mortgages, or mortgages secured by a mobile home or dwelling not attached to land.
• Does not apply to creditors making fewer than five mortgages a year.

Loan Estimate Form

• Replaced truth in lending statement and good faith estimate.
• Highlights interest rate, monthly payment, and total closing costs.
• Must be provided to consumer three business days after loan application.
• Only fee lender may collect before loan estimate is credit report fee.
• Lender committed to loan terms and can only change in certain cases.
• Some closing costs and fees may or may not change prior to settlement.
• Broken into three categories
  • No tolerance.
    • These are lender fees. They cannot charge the consumer more for these lender fees than what they estimate initially.
  • 10% tolerance.
    • This is when the lender gives the buyer a list of title companies.
  • Unlimited.
    • These things are those that the buyer has to pay for themselves.

Closing Disclosure Form

• Itemizes all charges paid by buyer and seller in connection with settlement.
• Replaced HUD-1 settlement statement and final truth in lending.
• Provides information about costs of taxes and insurance, and how interest rates/payments may change.
• Warns about prepayment penalties.
• Borrower must receive completed closing disclosure at least three business days before closing.
• CFPB created the Home Loan Toolkit, provided to borrower by lender.
• Provides general information about settlement and how to find the best mortgage.
• Line-by-line description of loan disclosure form.
• Summary tells the loan amount, interest rate, and payment.
• Closing cost and cash to close.

Kickbacks and Referral Fees

• RESPA prohibits kickbacks or unearned fees for real estate settlement services.
• Prohibits referral fee when services are actually rendered.
• Includes mortgage loans, title searches, title insurance, attorney services, surveys, credit reports, and appraisals.

Mortgage Disclosure Improvement Act

• Effective 2009, changed how everyone prepared for closing.
• Prevents enticingly low interest rates at initial loan application followed by higher fees at settlement.
• Requirements now incorporated into CFPB disclosure requirements.
• Lender can only collect the fee for the credit report until the buyer has received a loan estimate.
• Lender must indicate applicant is not obligated to complete the transaction.
• If APR increases by more than a certain percentage or if they provide a new APR, then we gotta wait another three days to close.

Closing Statement

• Typical transaction requires accounting for all expenses incurred by both parties.
• All expenses must be itemized.
• Probated items those prepaid by the seller are highlighted.

Debits and Credits

• Debit is a charge and amount that must be paid.
• Credit is an amount entered into someone's favor or amount that's already been paid.
• To determine what the buyer must bring to closing: add any buyer expenses and prorated amount for prepaid items by the seller to the purchase price.

Proration

• Dividing financial responsibility between buyer and seller for loan interest, tax, fuel, and utility bills.
• Rules for prorating:
  • In most states, the seller owns a property on a day of closing.
  • Computed using 360 days a year or 30 days a month.
  • On almost every mortgage loan, interest is paid in arrears (after the fact).
  • Accrued or prepaid real estate taxes are usually probated at closing.

Maryland Property tax payment schedule

• Taxes on residential property are paid in two equal installments in Maryland.
• The first payment is due July 1, and it can be paid as late as September 30 without penalty.
• The second payment is due January 1 and can be paid as late as January 31.

Accrued and Prepaid Items

• Accrued items: expenses to be prorated (water bill, interest, taxes) that are adding up but haven't been paid yet.
• Prepaid item: something paid in advance.

Arithmetic of Proration

• Involves identifying a yearly charge for the item, then dividing it by 12 to come up with a monthly charge.
• Then take that monthly charge and divide it by the number of days in the month to find the daily charge.

Sample of taxes being unpaid

• Sale closes September 17.
• Using 360 day year
• Prorate current real estate tax of 3,600 for accrued period of eight months and seventeen days.
• Eight months from January to August plus 17 days of September.
• The bill is 3,600 / 12 months = $300 a month.
• 30 days in September/30 days = $10 a day.
• Eight months * 300 = $2,400 plus seventeen days in September (170).
• Of that 3,600 bill, the seller owes $2,570. That's a debit.

Sample of taxes being prepaid

• Entire tax for the whole year is prepaid.
• Buyer has to reimburse the seller for the three months remaining.
• October, November, December, plus the 13 days left in September.
• Three * 300 = $900, plus 13 * 10 = $130. So the buyer owes the seller $1,030. It's gonna be a credit to the seller.

Maryland book takeaways

• Buyer's right to select their title insurance company, title agent, mortgage company.
• Closing and tax statements

Withholding taxes from out of state owners

• If a Maryland property is being sold by individual out of state owners, Maryland law requires that 8% of the total payment be withheld for taxes.
• If the out of state seller is not a natural person, but an entity such as the Corporation Partnership LLC or trust, Maryland's gonna withhold eight and a half percent of the taxes from the proceeds of the sale.

Representation

• Settlement officers usually owe certain fiduciary duties to several parties but exclusive loyalty to none.
• *When they order and evaluate the abstract of title, they owe the buyer due care.
• When they issue title insurance, they're acting as agents of the title insurance company In collecting the taxes for the state and federal tax information for the IRS, they're responsible for gathering and handling those funds and that information with due care.
• They owe the duty of paying off the old liens and recording the releases of those liens satisfied by those payoffs.
• They owe the buyers the duty of recording their new deeds.
• They must also record any mortgages that were given to lenders at settlement.
• In addition to their obligation to all these parties, settlement officers represent themselves in their title company.
• The buyer is your client only, We're the only one that has client in the real estate transaction.