Ch 18: Closing the Transaction

Question 1

All of the following Closing Costs are generally charged to the Buyer, EXCEPT:

a. Owners title insurance premium
b. Loan origination fee
c. Lenders title insurance premium
d. Hazard insurance premium

Answer 1

a. Owners title insurance premium

An owner’s title policy premium is charged by the title insurance company to insure the buyer of marketable title up to the date the conveying instrument is recorded. It is generally a seller’s cost.

Question 2

All of the following closing costs are generally charged to the Seller, EXCEPT:

a. Termite inspection fee
b. Tax and insurance reserves required for a new budget mortgage
c. Real estate brokerage commission
d. Prepayment penalty for early pay-off of an existing loan

Answer 2

b. Tax and insurance reserves required for a new budget mortgage.

Tax and insurance reserves are required when the purchase is financed with a budget mortgage. The reserves are a buyer’s cost.

Question 3

Loans covered by RESPA must comply with the following:

a. A Uniform Settlement Statement must be used as the closing statement.
b. A good faith estimate (GFE) of settlement costs when the lender makes a commitment to offer the loan on a form approved by the CFPB.
c. Lender must supply the mortgagor with the booklet titled “Settlement Costs and You”.
d. All of these answers

Answer 3

d. All of these answers

Question 4

The RESPA statute considers the term settlement services as:

a. Loan origination services only
b. Title insurance services only
c. Any service provided in connection with a real estate settlement
d. Escrow services only

Answer 4

c. Any service provided in connection with a real estate settlement.

Under RESPA settlement services are any service provided in connection with a real estate settlement.

Question 5

What would be violated if a bank required that title insurance be obtained from a particular provider?

a. Federal Fair Housing Act
b. Equal Credit Opportunity Act
c. Real Estate Settlement Procedures Act
d. REALTOR Code of Ethics

Answer 5

c. Real Estate Settlement Procedures Act

The Real Estate Settlement Procedures Act (RESPA) prohibits a lender from requiring that the title insurance be acquired from a specific title insurer.

Question 6

A penalty for violating the kickback section of RESPA is:

a. A fine of $10,000 and 6 months in prison or both
b. A fine of $5,000 and 1 year in prison or both
c. A fine of $1,000 and 6 months in prison or both
d. A fine of $10,000 and 1 year in prison or both

Answer 6

d. A fine of $10,000 and 1 year in prison or both

The penalty for violating the kickback section is a fine of $10,000, one-year imprisonment or both.

Question 7

The primary responsibility for RESPA disclosures rests with the:

a. Buyer
b. Selling broker
c. Lending institution
d. Escrow company

Answer 7

c. Lending institution

The lending institution has primary responsibility for compliance with the RESPA disclosure requirements.

Question 8

Conduct prohibited under RESPA includes all of the following EXCEPT:

a. Referral to a loan originator in exchange for free office rent at the brokerage
b. Referral to an escrow office at a company in which the licensee owns 5% of the company
c. Requiring that title insurance be purchased by the buyer from a particular title company
d. A mortgage banker providing free continuing education to real estate licensees that have referred them 5 transactions in the past year.

Answer 8

b. Referral to an escrow office at a company in which the licensee owns 5% of the company

Under RESPA regulations, a referral by someone who owns a 1% or greater interest in the company receiving a referral, such as an escrow or title company, must make a disclosure to the buyer/borrower. These referrals are not prohibited under RESPA, but the buyer must be furnished with a disclosure of the ownership interest among other disclosures.

Question 9

In a transaction closing September 10th, how much interest will be prorated to the seller from a $30,000 second trust deed with a quarterly interest only payment of $750 due October 1.

a. $175
b. $75
c. $575
d. $675

Answer 9

c. $575

Question 10

Which of the following MOST likely would be prorated on a closing statement?

a. Income tax liens
b. Title insurance
c. Homeowner Association monthly fee
d. Loans being assumed

Answer 10

c. Homeowner Association monthly fee

Homeowner Association fees are collected in advance and would need to be prorated on the closing statement. The loan being assumed would not be prorated, but the interest on the loan assumed would. Income tax liens and title insurance are not prorated items.

Question 11

For which of the following items would there NOT be a proration charge at closing?

a. Recording fees
b. Fire insurance premium
c. Assessments
d. Taxes

Answer 11

a. Recording fees

A proration is an allocation of a total amount, which is the case for the Assessments, Taxes and Fire Insurance Premium. The Recording Fees are an expense that is paid by either the buyer or the seller depending on who is benefiting from the recording.

Question 12

Jack is selling his small apartment complex with 12 units that rent for $450 per month. The sale closes on April 18th. His vacancy is 25% but all rent due April 1st is paid. How much rent will be charged to Jack at the closing?

a. $2,295
b. $1,755
c. $3,060
d. $1,620

Answer 12

b. $1,755

Jack will be charged for rent paid in advance for 13 days at $135 per day.

Question 13

All of the following would be debits on a seller’s closing statement EXCEPT:

a. Prepaid rents
b. The purchase price
c. Loans to be assumed by the buyer
d. Seller carry-back financing

Answer 13

b. The purchase price

The purchase price to be received by the seller is always a credit on the seller’s closing statement. Anything that increases the amount that the seller is to receive at the close of escrow is also a credit. Anything that decreases the amount the seller is to receive at the close of escrow is a debit.

Question 14

A mortgage assumption on a settlement statement would appear as a:

a. Debit to the buyer
b. Balance factor
c. Credit to the seller
d. Credit to the buyer

Answer 14

d. Credit to the buyer

A mortgage assumption means that the seller is no longer responsible for the mortgage debt and the buyer is responsible for the debt. Therefore the seller’s relief of the obligation for the debt reduces the amount of cash that the seller will receive from the sale and is therefore a Debit to the Seller, which is not an answer choice. The assumption of the debt by the buyer reduces the amount of cash that the buyer must pay at the closing so it is a Credit to the buyer.

Question 15

In the settlement of the sale of commercial property, which of the following statements is CORRECT?

a. The seller is credited with security deposits
b. The seller is charged with prorated insurance premiums
c. The buyer is charged with prorated rents
d. The seller is charged with prorated property taxes

Answer 15

d. The seller is charged with prorated property taxes

The seller is charged with the amount of property taxes for the period of the year that the seller owned the property. Property taxes in Arizona are paid in arrears. The other answer choices are incorrect.

Question 16

Marketable Title is free from all of the following EXCEPT:

a. Taking under Eminent Domain
b. Doubtful questions of law
c. Serious title defects
d. Undisclosed encumbrance

Answer 16

a. Taking under Eminent Domain

Title insurance does not and cannot protect an owner from taking under eminent domain, a government power.

Question 17

The amount of earnest money appears on closing statements as a:

a. Debit to the buyer
b. Credit to the seller
c. Debit to the seller
d. Credit to the buyer

Answer 17

d. Credit to the buyer

The earnest money that has been deposited in escrow reduces the additional funds that the buyer must deposit by the closed of escrow. Any amount that reduces the amount of funds required at closing is a credit to the buyer.

Question 18

A transaction involving a commercial office building will close on June 13th. The building has 24 leases with total annual rentals of $2,256,000. Monthly rentals are current as of June 1st. Security deposits total $1,804,800. The leases begin to expire in August; all of them must be rewritten by October 1st. How much will be charged to the seller at closing for rents collected and security deposits?

a. $917,600
b. $1,880,000
c. $1,992,800
d. $1,917,600

Answer 18

d. $1,917,600

The seller is to be charged with the amount of the rent that is paid in advance for the month of June plus the security deposits. The rent per day is computed by dividing the annual rent of $2,256,000 by 360 days. The rent per day is$6,266.666. The rent that is due the buyer and should be charged to the seller is computed by multiplying the days the building belongs to the buyer in June which is 18 days (30 days in June les 12, remember the day of closing belongs to the buyer). The June rent that is to be a charge to the seller and credited to the buyer is $112, 799.99 computed by multiplying $6,266.666 times 18 days. Then add the $1804,800 of security deposits to the rent amount of $112,800 to get the total amount of $1,917,600

Question 19

A buyer assumed a seller’s existing 7%, $180,000 first deed of trust on the settlement date of June 13. The seller made the monthly payment due on June 1 with interest in arrears. Which of the following is a CORRECT settlement entry for the interest?

a. $630 seller’s credit
b. $630 seller’s debit
c. $420 buyer’s debit
d. $420 seller’s debit

Answer 19

d. $420 seller’s debit

The buyer by assuming the loan will make the next payment that is due on July 1st and since interest is paid in arrears that payment will include the interest for the month of June. In the closing statement, the interest expense for the portion of June that the seller owned the property must be computed and charged to the seller. The buyer will obtain credit for the same amount because the buyer pays the total interest for the month and is reimbursed for the seller’s portion in the closing statement.
The interest to be charged to the seller is computed by multiplying the interest per day times the number of days the seller owned the property ($35 times 12 days). The answer is $420 and it is a debit to the seller because it is the seller’s expense and it reduces the amount of the sales proceeds that the seller will receive at the close of escrow.

Question 20

When completing a debit/credit closing statement, an amount that decreases the amount of funds required from the buyer and decreases the cash to be received by the seller would be:

a. A credit to the buyer and a debit to the seller
b. A debit to the buyer and a debit to the seller
c. A credit to the buyer and a credit to the seller
d. A debit to the buyer and a credit to the seller

Answer 20

a. A credit to the buyer and a debit to the seller

An amount that decreases the amount of funds required from the buyer is a credit. An amount that decreases the cash to be received by the seller is a debit.

Question 21

A property is sold for $100,000 with 5% being paid with the offer as a good faith deposit and then 20 days later an additional $10,000. How much does he pay at closing?

a. $95,000
b. $80,000
c. $85,000
d. $90,000

Answer 21

c. $85,000

The buyer is purchasing the property for $100,000 and has paid into escrow 5 percent of the purchase price, which is $5,000 ($100,000 times 5%). The purchaser paid into escrow an additional $10,000, so the amount due at closing is $85,000 ($100,000 less $15,000).

Question 22

A buyer is to assume a seller’s existing loan with an outstanding balance of $120,000 as of the date of closing. The interest rate is 9% and payments are made in arrears with the last payment made on October 1. Closing is set for October 11. What will be the entry in the seller’s closing statement?

a. $900 debit
b. $300 credit
c. $900 credit
d. $300 debit

Answer 22

d. $300 debit

The buyer by assuming the loan will make the next payment that is due on November 1st and since interest is paid in arrears that payment will include the interest for the month of October. In the closing statement, the interest expense for the portion of October that the seller owned the property must be computed and charged to the seller. The buyer will obtain credit for the same amount because the buyer pays the total interest for the month and is reimbursed for the seller’s portion in the closing statement.
The interest to be charged to the seller is computed by multiplying the interest per day times the number of days the seller owned the property ($30 times 10 days). The answer is $300 and it is a debit to the seller because it is the seller’s expense and it reduces the amount of the sales proceeds that the seller will receive at the close of escrow.