LESSON 10: TRANSACTION PROCESS & CLOSING Flashcards
What documents have a direct impact on the closing and transaction process?
The contract to purchase, addendums, and amendments.
What is the first step in most real estate transactions?
The listing of the property by a potential seller or an inquiry by a potential buyer.
What should you do to ensure a smooth transaction?
Create a checklist that is compatible with the type of transactions you broker and ensure it’s monitored until completion.
What is important about the checklist in real estate transactions?
It should cover all necessary items and be tailored to the specific types of transactions (e.g., condos, vacant land, etc.).
What is one item a buyer should do in the transaction process?
Review the Seller Disclosure and Lead-Based Paint Disclosure.
What is required for a buyer to submit an offer in a real estate transaction?
The buyer must provide earnest money and option money, payable to the title company.
What does the title company do in the process?
It conducts title research, sends the title commitment, orders the survey, checks tax and HOA dues, and coordinates closing.
What does the buyer need to do before closing?
They must complete inspections, order property insurance, get loan approval, and schedule the final walk-through inspection.
What is “loan approval” in a real estate transaction?
Loan approval consists of two components: property approval and buyer approval (income, assets, and credit).
What is an example of non-traditional loans?
Seller financing, interest-only loans, assumption transactions, or loans from friends and family.
According to the TREC Third Party Financing Addendum, what are the two types of approval required?
Property approval and buyer approval.
What is the purpose of RESPA?
To educate consumers on closing and settlement services, aiming to eliminate excessive and deceptive fees.
What does RESPA apply to?
Most loans secured by a mortgage lien on a one-to-four family residential property.
What major rule did the CFPB implement in 2013 regarding mortgage transactions?
The TILA-RESPA Integrated Disclosure Rule (TRID).
What are the two main forms created by the TRID rule?
Loan Estimate and Closing Disclosure.
What does the Loan Estimate form do?
It provides the borrower with a breakdown of estimated closing costs within three days of application.
What must the lender provide under the TRID rule?
A Special Information Booklet titled “Know Before You Owe.”
What does RESPA control in mortgage transactions?
It controls closing costs and settlement procedures, and requires lenders to provide a Loan Estimate and Closing Disclosure.
What is prohibited under RESPA in relation to mortgage transactions?
Kickbacks that increase the cost of the mortgage loan.
What does RESPA require lenders to disclose to borrowers?
RESPA requires lenders to disclose the Annual Percentage Rate (APR) to borrowers in the Loan Estimate Form.
How is APR different from the interest rate?
APR is the ratio of the total cost of financing to the loan amount, including interest, discount points, and loan fees, but excluding other fees like title insurance or home inspection.
What fees are usually included in the calculation of APR?
Common fees included in the calculation of APR are the application fee, discount points, document preparation fees, origination fee, PMI premiums, processing fee, and underwriting fee.
What is the maximum amount a lender can keep in an escrow account under RESPA?
RESPA limits the amount a lender can keep in an escrow account to 14 months of payments (one year of payments plus a maximum cushion of one-sixth).
What happens if there is an excess amount in an escrow account under $50?
If the excess is less than $50, the lender may return the money to the borrower or apply it to future payments, reducing the monthly escrow amount.
What must a lender do if the excess escrow amount is greater than $50?
The lender must return the excess funds to the borrower within 30 days.
What happens if a borrower owes less than one month’s escrow payment?
If the borrower owes less than one month’s escrow payment, the lender may request the borrower to pay within 30 days, or the repayment will be spread over 12 months, increasing the monthly escrow payment.
What is the purpose of the field trip between RESPA and TILA?
The purpose is to review the interaction between the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA).
What should you look for during a property inspection before accepting a listing?
Look for cracks, odors, water spots, missing shingles, mold, uneven doors/windows, black burn marks, and issues with plumbing, decks, ceilings, and flooring.
Why is it important to consult experts when evaluating property conditions?
Real estate professionals should not consider themselves experts on all property issues; experts like structural engineers or inspectors should be consulted to avoid liability.
What does the “as-is” clause in a contract entail?
The “as-is” clause allows a buyer to accept a property in its current condition or with required repairs. However, non-disclosed or concealed material defects may lead to a fraud claim or contract termination.
What type of inspections should a buyer have conducted on a home?
A buyer should have a general home inspection and any additional inspections suggested by the inspector, such as for the roof, foundation, or electrical systems.
What hazardous conditions should inspectors look for in a home?
Inspectors should look for issues such as malfunctioning GFCI or AFCI devices, improper glass in safety areas, malfunctioning fire safety equipment, and poor electrical or gas pipe bonding.
What is the Texas Real Estate Consumer Notice?
The notice informs buyers about hazards that may be present in the home, such as faulty electrical systems, safety hazards, and lack of fire or carbon monoxide safety features.
Can a buyer terminate a contract if the seller does not provide the required disclosure notice?
Yes, if the seller does not provide the required notice, the buyer can terminate the contract at any time before closing, and the earnest money will be refunded.
What is the Seller’s Disclosure of Property Condition form?
The Seller’s Disclosure form, promulgated by TREC, lists known property conditions that could be of concern to a potential homebuyer.
What must the Seller’s Disclosure Notice include according to Texas Property Code?
The notice must include details about the property’s condition, with a disclaimer regarding death by natural causes or HIV-related illnesses, and must be completed to the seller’s best knowledge.
What is the effect of not providing the Seller’s Disclosure Notice by the seller?
If the seller fails to provide the disclosure notice, the buyer can terminate the contract within seven days of receiving the notice or before closing.
When is the Seller’s Disclosure Notice not required?
The notice is not required in transfers such as court orders, foreclosure sales, or transfers between spouses or governmental entities.
What does the TREC One to Four Family contract form say about inspections?
It grants the buyer the right to access the property for inspections and requires the seller to ensure utilities are turned on during the contract period.
What is required regarding the seller’s disclosure of property condition?
The seller must provide a disclosure of property condition, but the form used is optional.
Who is responsible for advising the seller about the necessity of the disclosure notice?
The real estate licensee is responsible for advising the seller about the necessity of the disclosure notice.
When should the seller provide the completed disclosure form to the buyer?
The completed disclosure form should be given to the prospective buyer prior to placing an offer.
What should be attached if the property was built before 1978?
A Lead-Based Paint Addendum should be attached to the contract for properties built before 1978.
What does the Lead-Based Paint Addendum inform the buyer?
It informs the buyer that they have up to 10 days to inspect the property for lead.
What does the Federal law require regarding lead-based paint for properties built before 1978?
Federal law requires a lead-based paint disclosure for properties built before 1978.
What act protects families from exposure to lead from paint, dust, and soil?
The Residential Lead-Based Paint Hazard Reduction Act of 1992, also known as Title X.
What pamphlet must sellers provide to potential buyers regarding lead-based paint?
Sellers must provide the “Protect Your Family From Lead In Your Home” pamphlet.
What must sellers disclose about lead-based paint?
Sellers must disclose any known information about lead-based paint, its location, and the condition of painted surfaces.
How long does the buyer have to conduct an inspection for lead-based paint?
The buyer has 10 days to conduct an inspection, unless mutually agreed otherwise.
How long must sellers retain the lead-based paint disclosure records?
Sellers must retain the records for at least three years from the date of sale or lease.
What does “title work” mean in real estate?
Title work means the seller must provide a title insurance commitment and ensure the title is clear of liens and encumbrances.
What does a title insurance commitment include?
It includes facts about names, legal description, price, lender, items not covered, and things that need resolution.
What are the four main sections of a title commitment?
Schedule A (actual facts), Schedule B (items not covered), Schedule C (things to resolve), and Schedule D (title insurance premium disclosures).
Why is title insurance preferred over abstract opinions in real estate?
Title insurance is more comprehensive and provides coverage for issues that abstracts may miss, such as fraud or misfiled documents.
What is the primary purpose of title insurance policies?
The primary purpose is to insure the title to the property against defects and to pay to cure defects or damages.
What is the difference between an owner’s title policy and a loan policy?
The owner’s policy insures the ownership of the property, while the loan policy insures the lien’s validity and priority.
What protection does title insurance provide against mechanic’s liens?
Title insurance provides protection against mechanic’s liens, which could otherwise have priority over a loan.
How does mechanic’s lien priority affect title insurance?
A mechanic’s lien could have priority over a loan if work started before the deed was recorded, making title insurance necessary for protection.
What should be verified before closing regarding the sales contract?
Ensure all information is correct (legal descriptions, parties’ names, financing figures, closing dates, etc.).
What should be done if any information on the contract changes?
Send a copy of the amendment to the title company.
When should the buyer obtain fire or homeowner’s insurance?
During the option period, early in the process.
What is the process if the parties close with a power of attorney?
Ensure the documentation is approved by the title company well before closing.
When should you ask the title company about funding?
Do not assume funding will be the same day as closing, confirm with the title company.
What should the buyer do with the title commitment and survey?
Review them promptly within the required time frame.
What should be used when closing and possession dates are not the same?
Temporary lease agreements should be used.
What should be done regarding insurance when using a temporary lease?
Ensure someone has insurance on the contents and the dwelling during the lease period.
What needs to be submitted to the title company for commission at closing?
Deliver a commission breakdown from your broker to the title company prior to closing.
What are acceptable forms of payment for closing?
Cashier’s check, money order, or wired funds. No personal checks.
When should the Closing Disclosure Statement be delivered to the borrower?
It should be delivered three days before closing.
What should the buyer provide regarding the Closing Disclosure Statement?
Provide a copy to the agent for review.
What should the seller do with utilities before closing?
Keep utilities on until the day of closing.
What should the buyer do regarding utilities on the day of closing?
Ensure utilities are turned into their name on the day of closing.
Why is it important to attend the closing with your client?
A question may arise that the client is unsure about, and your attendance shows you care beyond just the commission.
What is proration in real estate?
The fair division of costs and benefits between buyer and seller, such as taxes and association fees.
How are proration calculations similar to dividing cookies?
Each party receives a fair share based on their contribution, similar to dividing cookies based on the amount of money contributed.
How do you calculate interest using a statutory year (360 days)?
Divide the annual interest rate by 360 days and multiply by the number of days for the calculation.
How do you calculate interest using a calendar year (365 or 366 days)?
Divide the annual interest rate by 365 or 366 days and multiply by the number of days for the calculation.
How is prorated interest calculated on a mortgage loan for the first payment?
Interest for the period from the closing date to the end of the month is prorated and collected from the buyer at closing.
How are property taxes handled when closing in Texas?
The seller pays taxes up until the day of closing, and taxes for the rest of the year are credited to the buyer.
What happens if a buyer has an escrow account for taxes and insurance?
The buyer’s lender will collect the prorated amount for property taxes and homeowner’s insurance.
How are homeowner’s fire insurance premiums typically handled at closing?
The seller cancels the policy and receives a refund for the unused portion, while the buyer purchases a new policy, typically paying for the first year at closing.
How are prorations handled for interest and taxes at closing?
Interest and taxes are prorated through the day of closing, with the seller paying for the day of closing.
What documents are required from the seller and buyer at closing according to Paragraph 9 of the One to Four Residential Contract?
The seller must provide a general warranty deed, tax statements, and ensure no liens. The buyer pays in good funds, signs required documents, and ensures title policy issuance.
What happens if funding does not take place the same day as closing?
The buyer may not receive the keys until the funding is complete, unless a temporary lease agreement is in place.
What is the seller’s net proceeds?
The seller’s net proceeds is the amount of money the seller will receive at the closing table after all customary costs are subtracted from the sale price.
Are computations of net proceeds binding?
No, net proceeds calculations are just approximations and are not binding on the license holder as many items are negotiable and set by lenders for specific loans.
Who typically pays the seller’s closing costs?
There are basic costs that the seller almost always pays, though some costs may be negotiable depending on the type of loan and the agreement.
What might affect a seller’s closing costs?
The type of loan the buyer obtains can affect the seller’s closing costs, and some expenses are required by law.
Can the seller pay the buyer’s closing costs?
Yes, the seller can agree to pay some or all of the buyer’s closing costs in exchange for a benefit.
What is included in a typical Closing Disclosure Statement?
It includes buyer’s and seller’s costs, lender fees, title company charges, invoices, payoff payments, commissions, property taxes, HOA fees, and other fees.
What should you check regarding your name on the Closing Disclosure?
Ensure the spelling of your name is correct, as even minor errors can cause issues later.
How should you verify the loan details on the Closing Disclosure?
Compare the loan terms, amount, interest rate, and fees with your most recent loan estimate to ensure they match.
What should you do if your loan amount increases?
If your loan amount has increased, ask the lender why, as it could indicate that closing costs have been rolled into the loan.
What should you check about the interest rate on the Closing Disclosure?
Ensure the interest rate matches what you were expecting. If it doesn’t, contact your lender immediately for an explanation.
What are prepayment penalties?
Prepayment penalties are fees charged if you pay off your loan early. It’s important to understand these penalties and explore options with your lender.
What is a balloon payment in a loan?
A balloon payment is a large lump sum payment due at the end of a loan term. It is risky and should be discussed with the lender.
What is the “Estimated Total Monthly Payment” on the Closing Disclosure?
It’s the total monthly payment that includes loan principal, interest, taxes, and insurance, and it should match your expectations.
What does “Service Borrowers Did Not Shop For” mean?
These are third-party services required by the lender, which you did not choose. Check these against your loan estimate to ensure accuracy.
What should you check regarding seller credits on the Closing Disclosure?
Ensure the seller credit matches what you agreed upon with the seller, whether it’s a general contribution or payment for specific costs.
What happens if you make a late mortgage payment?
A late payment may result in a fee and could negatively impact your credit record.
Can you make partial mortgage payments?
Some lenders may not accept partial payments or may hold them in a separate account, which could result in additional fees.
What is an escrow account in a mortgage?
An escrow account is a special account where you pay property taxes and homeowner’s insurance, typically as part of your monthly mortgage payment.
What if you don’t have an escrow account but would prefer one?
If you don’t have an escrow account but want one, discuss it with the lender to see if they can accommodate your request.
What is the escrow waiver fee?
Some lenders charge a fee if you choose not to have an escrow account. You should discuss this option with your lender.
What should you check in the contract details of the mortgage?
Carefully review the note and security instrument (mortgage or deed of trust) to understand the terms and obligations.
What is the broker’s commission?
The broker’s commission is the amount agreed upon in the listing agreement that the broker earns upon the sale’s completion, paid at closing by the title company.
Who pays the closing fee in VA loan transactions?
In VA loan transactions, the seller is responsible for paying the closing fee, not the buyer.
What does the title search and insurance binder cover?
It ensures the seller is conveying clear title to the buyer, free from encumbrances, and may include a mortgagee’s title policy for the lender.
What are document preparation and attorney’s fees?
These are fees for preparing legal documents such as the deed and releasing liens, typically charged by an attorney.
What are recording fees?
Recording fees are paid to the county for filing the deed and lien release in the public record, typically charged per page.
When might the seller pay loan fees?
Although rare, the seller might be required to pay certain loan fees, like prepayment penalties or discount points.
What are appraisal fees?
Appraisal fees are typically paid by the buyer, but in certain cases, the seller may be required to pay them, such as in VA loans.
When are survey fees necessary?
Survey fees are needed if the property requires a new survey for sale, especially for acreage or if there are significant improvements.
What are pest inspection fees?
Pest inspection fees may be required by the lender, especially if there are concerns about pests. A seller might voluntarily cover this cost.
What taxes and dues are the seller responsible for?
The seller is responsible for paying property taxes, HOA dues, and any condominium or townhome dues up to the closing date, usually prorated.
How does the seller calculate prorated taxes and dues?
The title company usually handles prorating taxes and dues, subtracting those paid in arrears and crediting those paid in advance.
What is the typical timeline for closing?
The closing typically occurs between 90 to 120 days from the listing date, and sellers should be prepared for prorated costs.
What are the seller’s expenses in a real estate transaction?
Seller’s expenses include release of existing loans, pre-payment penalty, recording fees, release of seller’s loan liability, tax statements, deed preparation, and half of escrow fees.
What expenses might be included as per the contract for the seller?
Additional expenses may include survey, title policy, and repairs.
What are the buyer’s typical expenses in a real estate transaction?
Buyer’s expenses include loan origination fee, discount points, appraisal fees, loan application fees, credit reports, and others.
What are prepaid items for the buyer?
Prepaid items for the buyer include interest, mortgage insurance, taxes, homeowner’s insurance, and flood insurance premiums.
What are some additional expenses that might be incurred by the buyer?
Additional buyer expenses might include survey, title policy, repairs, and various inspections.
What should a license holder do before closing?
The license holder should review the closing statement to ensure the costs apply to their clients.
What information should be checked for accuracy before closing?
Ensure the sales contract is correct, including legal descriptions, names, items staying or leaving, financing, dates, and disclosures.
What is important to ensure regarding amendments before closing?
Ensure all amendments are signed by both parties, and the title company receives copies.
When should the buyer get homeowner’s insurance?
Advise the buyer to get homeowner’s insurance to begin the day of closing and funding.
What should the seller do regarding utilities before closing?
Advise the seller to leave utilities on until the day of closing.
What should the buyer do about utilities before closing?
The buyer should contact the utility company to transfer utilities into their name.
What is important regarding the seller’s moving out of the property?
The seller must move out by the contract date, not on the day of closing. Sometimes, a temporary lease is necessary.
What should be checked if the parties expect to close with a Power of Attorney?
The title company and lender must approve the Power of Attorney.
What should be reviewed by the buyer before closing?
The buyer should review the title commitment, survey, Homeowner’s Association documentation, resale certificate, and any applicable notices from municipal utility districts.
What should be coordinated carefully regarding the closing?
Coordinate closing and possession dates, use temporary lease agreements if applicable, and keep insurance companies informed.
What should the buyer bring to closing?
The buyer should bring a certified cashier’s check, money order, or follow the title company’s instructions for wired funds.
What should the real estate agent do regarding the Closing Disclosure Statement?
The agent should review the Closing Disclosure Statement with their client prior to closing.
What should be done with the commission payment during closing?
Instruct the title company on how to deliver the commission, ensuring it is not done in front of the client.
What is the significance of the contract in a real estate transaction?
The contract serves as the map for the transaction, helping all parties adhere to the process and assisting the lender and title company in their tasks.
What services can the borrower shop for in a real estate transaction?
Services the borrower can shop for include surveys, title policy, and repairs, among others.
What services are the borrower unable to shop for?
Services the borrower cannot shop for include appraisal fees, credit report fees, government funding fees, and lender’s title insurance policy.
What are seller credits in the context of a loan?
Seller credits are the total amount the seller will pay for items included in the Loan Costs and Other Costs tables, displayed as a negative number.
What changes occurred in closing procedures after October 1, 2015?
After October 1, 2015, the Closing Disclosure (CD) replaced the HUD-1 form, and lenders became responsible for providing the closing details.
What are the two business day definitions used in the TRID rules?
The two definitions are “general” (used for Loan Estimate delivery) and “precise” (used for delays like mailing or closing).
What is considered “substantially open for business” by a creditor?
It includes the availability of personnel to make loan disbursements, open new accounts, and handle credit transaction inquiries.
What happens when a consumer amends an application?
If the application is amended and can proceed, the creditor must deliver a new Loan Estimate within three business days.
