Closing Process Flashcards
OVERVIEW OF CLOSING PROCESS
Concepts of clear, marketable title, title insurance, escrow functions and who can legally serve as an escrow agent.
Describe chain of title
Explain purpose of title insurance
Describe the difference types of title insurance policies
Define “closing”, “escrow”, and “settlement” as they relate to real estate
Describe escrow instructions
Identify participants in a closing
Describe role of the escrow agent in the closing process
TITLE INSURANCE
Usually the buyer gets a warranty deed from the seller.
This makes the seller liable for damages for breach of warranty if title is not marketable .
To be marketable the title must be free of reasonable objections meaning no encumbrances, liens or serous title defects clouding the title.
Chain of title
Is a complete record of all recorded instruments affecting subject property traced back to original source which is often conveyance from the government to a private person.
It consists of all recorded title transfers, encumbrances, satisfactions of liens, and court proceedings pertaining to the land and the owners.
Clouds on title may be removed in a number of ways:
- Unpaid liens can be removed by payment and recording a satisfaction lien to show payment
- A claim of a missing heir or gap in the chain of title might be resolved the quitclaim deed for a negotiated price.
- In the event persons are not cooperative in removing title defects, legal action can be taken. Court action to remove a cloud on title is called “quiet title action”
TITLE EVIDENCE. there are a number of forms of title evidence that are in use.
Abstract Title history of title. No guarantee or insurance of title
Certificate of Title states that title co.’s abstract or searched public records, studied title records and found title properly vested in present owner, subject to encumbrances cited in the title.
Title Registration (Torrens System) used in some states. Purported owner submits abstract title to court and files a quiet title suit. If court determines the applicant has title the court decree and other legal documents submitted as evidence are given to county registrar of title.
Title Insurance. Is most widely used type of evidence. It is an instrument/document that protects insured parties against loss by encumbrances, defective title, adverse claims to title resulting from defects in the title co’sexamination of the title record and against hidden risks. Title insurance grantees the insured party.
TITLE INSURANCE POLICIES. are designed to suit different needs.
Purchaser’s Title Insurance Policy: to protect buyer purchasing real estate under a contract for deed( or land sale contract.
Owners title insurance policy: is used to protect buyer who received deed upon closing against adverse claims except those exclusions listed in policy. Issued for full price of property to person listed , his heirs and devisees.
Mortgage title insurance policy: to protect lender whose lien is secured by borrower’s property. It also insures any person to whom the mortgage or deed of trust assigned. The policy insures lender against loss up to the amt. of mortgage balance.
Leasehold title insurance policy: used to protect a tenant who is entering into a long term lease. Coverage extends for the term of the lease.
Cost of title insurance is a one time premium.
2 TYPS OF INSURANCE COVERAGE
Standard Coverage: (ALTA American Land Title Assoc.)
Protects against loss by
Title to the estate or property being vested at date of policy
Any defect or encumbrance on title
Unmarketability of title
Lack of right of access to and from the land.
Policy Excludes any loss due to matters if not on public recorded:
Taxes or assessments
Claims of adverse possession or claim from unrecorded deed or contract
Easements and claims of easements or encumbrances
Discrepancies , conflicts of boundary lines, shortage in area, encroachments or any
other that a correct survey would disclose.
Unpatented mining claims
Water rights or claims thereof
Any lien, right to lien, for services, material and labor.
Extended Coverage. Is usually used in mortgagee’s policies. It includes all the standard coverage ALTA provides plus coverage not shown by public records.
CLOSINGS
The seller provides deed and buyer provide funds necessary to close. This is called closing or the “settlement process”.
Closing or settlement is completed when the deed is recorded and the sales proceeds are delivered to the seller.
With commercial transactions, there may be a tenancy statement called an “estoppel certificate”. When signed by both buyer and seller, this instrument prevents one party from claiming different facts than those,set out in the instrument.
CLOSING COST ESTIMATES
BUYERS ENTRIES: any amt paid for out of account are charges(debuts). All funds put into the account to pay off those charges are credits. Therefore every check written by someone other than escrow is a credit.
BUYERS CREDITS ARE:
Items for which he paid before closing
Items for which he will not pay until after closing
Items which are owed him by the seller
Cash he pays to close the transaction
SELLER ENTRIES:
credits to seller are all amounts he is receiving at closing. Any item that is paid into his escrow account is a credit. The debits reflect how funds owed him are to be disbursed. Any item paid out of his account , even if paid to him at closing is a charge or debit.
SETTLEMENT ITEMS
The selling price agreed to in the sales contract between seller and buyer.
This is both a charge(debit) to the buyer and a credit to the seller.
Anything the buyer uses o pay off the sales price is a credit to the buyer:
Earnest Money
New loan obtained by lender
Purchase money mortgage given to the seller
Contract for deed (real estate contract). Taken from the Seller.
Loan assumed by the buyer.
Check from the buyer
Some settlement items are also debits to the seller while some do not even appear on the seller’s closing statement.
For example:
Earnest Money:whether cash or property is a credit to the buyer. If it is cash, it would not appear on seller’s statement as it neither increases or decreases the amount of cash the seller receives at closing. However, if property the value of the property would be a debit on seller’s account.
Amount of new loan: Is a credit to buyer and does not appear on seller’s statement. The amount of any financing provided by the seller ( whether a purchase money mortgage or a contract for deed) and the amount of any loan or other encumbrances (unpaid taxes, special assessments, deeds of trust). Assumed by the buyer are credits to the buyer and debits to the seller.
Any encumbrances not assumed by the buyer that are paid off at closing by the seller would be as debits to the seller.
Often loan and inspection fees( home and pest/dry rot) are paid at time of the inspection for the loan application. If not the buyer is debited the cost at closing.
Another possible charge, which could be paid by either the buyer or the seller is the home warranty.
If buyer assumes the seller’s existing loan, he would be credited the amount of the loan being assumed and credited for unpaid interest from the date of the last payment, but debited the cost of an assumption fee charged by the lender for processing the paperwork.
LOAN-RELATED ITEMS
FEES LENDERS CHARGE TO PROCESS APPROVE AND MAKE THE MORTGAGE LOAN
Are debits to buyer
Items to a new loan include:
Loan origination fee
An appraisal fee
A credit report
An Inspection fee
Mortgage insurance premium
A Hazard insurance premium
A flood insurance premium
Discount points as a one time charge to adjust lender’s yield on loan
1 point is 1%
Interest that accrues on a new loan from the date of the settlement to the beginning of the period covered by the first monthly payment ( normally the 1st day of the month following closing)
TITLE CHARGES
At closing, there are a variety of services performed by title companies and others directly related to transfer of title( title examination, title search, doc preparation) as well as title insurance, legal charges and settlement fees ( aka closing fees or escrow fees)
Title charges differ per state.
In some states, attorneys may be allowed to prepare chain of title in lieu of using a title insurance company.
In escrow states, as opposed to attorney states, the escrow fee is charged by the escrow agent to have the legal documents prepared and recorded to collect funds, and to then disburse them to parties entitled to receive them. The fee is based on the dollar amount of the transaction.
A real estate entity must file an information report (form 1099-s) showing the sale pric on a real estate sale or exchange unless the transaction is $250,000.00 or less for an individual or $500,000.00 or less for a married couple and a signed 1099 certificate is signed by each person.
