Chapter 15 Closing the Real Estate Transaction Flashcards
Closing Settlement
1) Promises made in the sales contract are fulfilled
2) mortgage loan funds if any are distributed to the buyer for use
*documents are recorded in the correct order to ensure continuity of title
- buyers new mortgage or deed of trust must be
recorded after the deed because the buyers
cannot pledge the property as security for the
loan until they own it.
Title of real estate is transferred in exchange for payment of the purchase price.
Transaction is closed when all documents have been recorded.
3) settlement costs or funds are disbursed
NC Due Diligence Period (DDP)
Standard Form 2 T states that a buyer can investigate the property under contract.
- Negotiations of repairs must be made.
- if buyer is not satisfied with property condition they have until 5pm of DDP.
Buyers Loan
Buyer should exercise the right of DDP and terminate the contract before the expiration of the DDP, otherwise if no financing is approved after expiration they will be in breach of contract.
Soil Suitability Test: Percolation Test
measures the soils ability to absorb and drain water.
*septic permit issued by county health department for a certain number of bedrooms.
Right to Terminate
by 5pm of the DDP
Broker Responsibility
broker is held responsible by the NCREC for the accuracy and delivery of the closing statement either at closing or within 5 days after closing
Documents: Sellers responsibility
*Deed
*Affidavit as to mechanics lien
*Bill of sale of personal property (if any transferred)
*Leases and related documents
* Payoff Statement from Sellers Lender (Loan
payoff balance)
* Proof of Repairs or services
Documents: Buyers responsibility
- Financing documents
- Title Insurance Policy
- Property Insurance Policy
- Wood destroying insect inspection report
(paid by buyer unless a VA loan, then seller
pays) - Property Survey
Settlement Meeting aka Face to Face closing
NC a lawyer frequently represents the buyer although the settlement agent does not have to be an attorney.
Escrow Settlement
Settlement agent uses this when parties cannot attend the settlement meeting.
- escrow agent is a designated impartial third party who conducts the settlement.
- Relation Back Doctrine
Settlement Agent
Non lawyer assistant under the direct supervision of an active member of the Bar may conduct the settlement meeting as long as person does not engage in unauthorized practice of law
- identify documents to be signed
- indicate the correct place to sign
- disburse proceeds
NC Good Funds Settlement Act
settlement agent can only disburse funds to the appropriate parties after recordation of the deed and the deed of trust.
IRS Reporting
Settlement agent must report on Form 1099-S
*if closing agent does not notify the IRS, the responsibility for filing the form falls on the mortgage lender, although the brokers or the parties to the transaction ultimately could be held liable.
RESPA : Regulation X
- For Federally related loans whose deposits are insured by federal agencies
- Enacted to protect consumers from abusive lending practices.
- aids consumers during the residential mortgage loan settlement process.
- Ensures that consumers are provided with important, accurate, and timely information (Uniform Settlement Statement) about the actual costs of closing the transaction.
- Eliminates kickbacks and referral fees
- Prohibits lenders from requiring excessive escrow account deposits. DOES NOT require that escrow accounts be set up.
*for second or subordinate liens for HELOC
*DOES NOT cover a
-transaction financed solely by a purchase
money mortgage taken back by seller
- Installment contract/contract for deed.
- buyers assumption of the sellers existing loan
- loans for business, commercial or agric
- property of 25 acres or more
Controlled Business Arrangements (CBA)
Permitted by RESPA as long as the consumer is clearly informed of the relationship among the service providers and that the other providers are available.
Disclosure Requirements: RESPA
- at time of loan application and loan closing or within 3 business days of receiving the loan application.
- if lender denies the loan within 3 days then RESPA does NOT require that the lender provide the documents.
- Special Information HUD Booklet. Shopping for your home loan. - Line by line USS
- Good Faith Estimate (GFE) uses exact HUD language making it easier for consumers to compare loans
- No Tolerance
- 10 % Tolerance
- Unlimited Tolerance
- Uniform Settlement Statement
- ONLY fee that the lender may collect before applicant receives the GFE is for a credit report.
Uniform Settlement Statement (HUD-1)
required by RESPA
itemize all charges that are normally paid by a borrower and a seller in connection with the closing.
*Lenders are permitted to correct any violation of the tolerances by reimbursing the borrower within 30 days of settlement.
*If tolerances are not cured at settlement, settlement attorney must issue a corrected HUD-1 after the lender reimburses the borrower for the overcharges.
* Borrowers have right to inspect completed HUD- 1 form, one business day before settlement (SELLERS are NOT entitled to view)
*Lenders must retain HUD 1 statements for two years after closing date
*NC license law requires that agents retain for 3 years.
Paid Outside of Closing (POC)
Charges required by the lender that are paid before settlement
Yield Spread Premium
Fee paid to mortgage brokers for making loans to subprime borrowers at ABOVE MARKET interest rates.
*RESPA now requires that the loan originator give the borrower a credit against the loan origination fees for the full amount of any yield spread premium.
- CREDIT must appear in loan origination section
of the GFE
Escrow Account Restrictions
RESPA says,
- on a monthly basis lender may require only 1/12th of the total of disbursements for the year, plus an amount necessary to cover a shortage in the account.
- No more than 1/6th of the years total disbursements may be held as a cushion (not required)
- once a year the lender must perform an escrow account analysis and return any amount over $50 to the borrower.
Kickbacks and Referal Fees
Prohibited by RESPA
*Prohibits referral fees when no services are
actually rendered.
Penalties for violating RESPA
- Criminal fines up to $10,000 per violation
- imprisonment up to one year
- injunctions against illegal activity and orders to
compensate victims for illegal profits - civil lawsuits that may award treble damages
plus legal fee reimbursement.
Excise Tax: Revenue Stamps
- Deed transfer tax
- $1 per $500 of value
- will always round up to next whole dollar amount.
MIP/ Mortgage Insurance Premium
Conventional loan: buyer prepays one years insurance premium at settlment
FHA loan : borrower owes a lump sum
VA loan: borrower pays a funding fee directly to VA
Prorations
division of financial responsibility between the buyer and seller for such items as loan interest, taxes, rents, and fuel or utility bills.
1) nature of item being prorated
2) accrued item (unpaid) that requires the determination of earned amount (advance payment to the buyer)
3) prepaid item (overpaid) that requires a refund amount to seller
4) arithmetic processes that must be used.
Accrued Items
unpaid items to be prorated that are owed by seller but will be paid later by the buyer.
Seller pays- buyer gets credit
Seller is debited for share and buyer given equal amount as credit.
Accrued items are from Jan 1st to day of closing
Proration Rules
in NC the seller owns the property on the day of settlement and prorations or apportionments are usually made through and including the day of settlement.
*Prorate for the seller first
- if accrued item the buyers portion will be the
same but opposite entry
* Prorate prepaid item subtract the sellers portion from the total bill to determine the buyers portion. credit to seller and debit to buyer.
* accrued or prepaid real estate taxes are prorated at settlement.
* rents- security deposit tranfserred to a buyer by double entry.
*SPECIAL ASSESSMENTS are not prorated at settlment - seller pays balance due
Summary of Items to be Prorated DEBIT Seller
Real Estate Taxes UnPd
Rents collected by seller
Interest on Assumed loans
HOA dues UnPd
Items Prorated CREDIT to Seller
Real estate Taxes, Prepaid
Rents Collected buyer
Owners association dues, prepaid
