TX 122 Real Estate Principles II-Lesson 10 Flashcards
What is the closing process in a real estate transaction?
It is the final step where the buyer pays the seller, and the property title is transferred.
What can help the closing process proceed smoothly?
Both buyer and seller making appropriate preparations in advance.
What is a seller’s primary concern in a real estate transaction?
Getting the highest possible purchase price.
Why should a seller verify a buyer’s financial status?
To ensure the buyer has the necessary funds or financing to complete the purchase.
What are some responsibilities of a seller before closing?
- Making agreed-upon repairs, - Conducting inspections (e.g., for rodents/insects), - Complying with buyer’s requirements
What is a buyer’s main responsibility before closing?
Demonstrating they can complete the transaction, typically by securing financing.
What is a “marketable title”?
A title that appears complete, without undisclosed defects, and can be transferred without litigation.
What does a marketable title ensure?
- The owner can sell or mortgage the property freely., - No undisclosed liens or encumbrances., - The buyer will not have to defend ownership in court.
What should a buyer do before closing?
- Ensure a title examination is done., - Verify the property survey’s accuracy., - Conduct a final inspection/walk-through.
What are the title company’s responsibilities before closing?
- Open file and assign a number, - Order survey, appraisal, and resale certificate, - Begin a title search
What does a title search include?
- Checking for liens, judgments, and legal claims, - Verifying ownership records and legal description, - Ensuring there are no undisclosed encumbrances
What is the purpose of a title commitment?
To inform the buyer and seller of the title’s status and any issues that need to be resolved before closing.
What are the four schedules in a title commitment?
- Schedule A: Actual facts (names, legal description, price, lender), - Schedule B: Buyer’s notice of items not covered by the title policy, - Schedule C: Issues that must be resolved before closing, - Schedule D: Disclosure of parties receiving a portion of the title insurance premium
What must lenders provide to FHA buyers?
The “Important Notice to Homebuyers” form explaining the difference between an appraisal and a home inspection.
What are lenders required to do before closing for FHA loans?
- Search for names, identities, and legal descriptions, - Verify any liens or judgments, - Ensure the buyer receives the title commitment
What does the title company do at closing?
- Collect and disburse funds, - Prepare and transfer the deed, - Ensure all required payments (taxes, loans, insurance) are settled
What does the lender’s closing document include?
A breakdown of all financial transactions, including costs paid by both buyer and seller.
What is the difference between a 360-day and 365-day year in prorations?
- 360-day year (banker’s year) – Seller pays for closing day
- 365-day year – Buyer pays for closing day
What is the purpose of a final walk-through?
To allow the buyer and their agent to inspect the property one last time before closing.
What should be checked during a final walk-through?
Property condition, agreed-upon repairs, missing items, and any damage.
How can last-minute damage be handled?
Either delay closing until repairs are made or escrow 1.5 times the repair amount.
What are the two parts of the final closing process?
1) Buyer and lender close on the loan, 2) Buyer and seller finalize the sale and transfer title.
What does a title company do at closing?
It handles closing, ensures proper fund distribution, and records legal documents.
Why is a resale walk-through important?
To ensure repairs are completed and that no one is living in the home without permission.
What is unique about a new construction walk-through?
Some contracts allow closing before the home is fully finished.
What financial requirements should a buyer be reminded of?
Cashier’s check, money order, or wired funds—no personal checks.
What should the seller do before closing?
Keep utilities on until the closing day.
What is a face-to-face closing?
A meeting where all parties sign documents and transfer funds in person.
What is an escrow closing?
A third party (escrow agent) handles funds and paperwork without all parties meeting.
What documents must a seller provide?
Title evidence, deed, hazard insurance, mortgage payoff statements.
What documents must a buyer provide?
Loan evidence, property insurance, required funds, and any additional documents.
What is TRID?
A regulation combining TILA and RESPA disclosures to improve transparency in real estate transactions.
What are the two key forms in TRID?
Loan Estimate (LE) and Closing Disclosure (CD).
What is the Closing Disclosure (CD)?
A standardized form showing the borrower’s and seller’s charges in a real estate transaction.
Who is responsible for the Closing Disclosure under TRID rules?
The TRID rules make the lender responsible for both the information and the delivery of the CD to the borrower. Real estate professionals should discuss responsibilities with lenders.
When must the Closing Disclosure be provided?
The CD must be provided no later than 3 business days before consummation. A revised CD triggers an additional 3-day waiting period if: APR increases by more than 0.125%, Loan product changes, A prepayment penalty is added.
What are the components of the Closing Disclosure?
Loan Terms, Projected Payments, Costs at Closing, Loan Costs, Other Costs, Calculating Cash to Close, Summaries of Transactions, Loan Disclosures, Loan Calculations, Other Disclosures, Contact Information, Confirm Receipt.
What does the Loan Terms section of the Closing Disclosure provide?
Provides final loan figures: loan amount, interest rate, monthly payments, prepayment penalty, and balloon payment.
What does the Projected Payments section show?
Provides updated monthly payment details, similar to the Loan Estimate section.
What is covered in the Costs at Closing section?
Final figures for total closing costs and cash required to close, similar to Loan Estimate.
What does the Closing Cost Details section show?
Lists loan costs, other costs, paid before and at closing, including seller and other parties’ payments.
What is shown in the Calculating Cash to Close section?
Shows calculations of cash to close, comparing figures from the Loan Estimate with final costs.
What does the Summaries of Transactions section show?
Breaks down the buyer’s cash due and seller’s proceeds at closing.
What is included in the Loan Disclosures section?
Includes details on: Assumability, Demand feature, Late payments, Negative amortization, Partial payments, Escrow account details, Future changes in taxes/insurance.
What is shown in the Loan Calculations section?
Provides total payments, finance charges, total amount financed, APR, and total interest percentage.
What does the Other Disclosures section include?
Offers advice on appraisal, contract details, liability after foreclosure, refinancing, and tax deductions.
What information is provided in the Contact Information section?
Lists contact info for lender, brokers, and settlement agent (including license numbers).
What is the purpose of the Confirm Receipt section?
The borrower confirms receipt of the Closing Disclosure.
What is RESPA (Real Estate Settlement Procedures Act)?
Enacted in 1974 to protect consumers by providing information on settlement services. It aims to eliminate referral fees and unnecessary charges.
What loans does RESPA cover?
RESPA applies to most loans secured by a mortgage on 1-4 family residential properties, including purchase loans, refinancing, and equity lines of credit.
What are the RESPA disclosure requirements?
Requires lenders to provide a special information booklet, Loan Estimate, and Mortgage Servicing Disclosure Statement to the borrower.
Who must receive the Closing Disclosure under RESPA?
RESPA requires both the borrower and seller to receive a Closing Disclosure at closing.
What happens if RESPA regulations are violated?
RESPA prohibits giving or accepting fees or kickbacks for settlement service referrals. Violations can lead to fines or prison.
What is a Controlled Business Arrangement (CBA)?
Refers to businesses that combine multiple services (real estate brokerage, insurance, mortgage, title/escrow) but cannot “steer” the customer into using specific services. The customer must be free to choose other service providers.
Eight Factors for Qualified Mortgage (QM)
Current or expected income and assets, Current employment, Monthly mortgage payment, Monthly payment on other simultaneous financing, Monthly payment on property taxes, insurance, etc., Non-housing debts (alimony, child support), Debt-to-Income ratios, Credit history of applicant
Lender Requirements for Qualified Mortgage
The lender must show that these eight factors were integrated into the lending decision.
TRID CFPB Ruling Effective Date
October 3, 2015.
Disclosures Consolidated into TRID
Early TILA Disclosure, Good Faith Estimate, Late TILA Disclosure, HUD-1
Loan Estimate Delivery
No later than the third business day after receiving the consumer’s application.
Closing Disclosure Timing
At least three business days prior to consummation.
Loans Not Covered by TRID
Home Equity Lines of Credit (HELOCs), Reverse mortgages, Chattel-dwelling loans (mobile homes), Loans made by entities making 5 or fewer mortgages a year
New Restrictions under TRID
Prohibitions on imposing fees before loan estimate is received, Providing written estimates before receiving the loan estimate without notice of potential changes, Requiring submission of documents before providing the loan estimate
Legitimate Loan Application Requirements
Consumer’s name, Consumer’s income, Social Security number, Property address, Estimated property value, Mortgage loan amount sought
Revised Loan Estimate Timing
The revised LE must be received no later than four business days prior to consummation.
Prohibited Actions Before Intent to Proceed
Imposing fees on the consumer.
LE After Loan Lock
The LE must be re-disclosed within three business days.
Model Forms for TRID Loans
Any loans subject to TILA and RESPA that are federally-related mortgage loans.
CFPB Comparison Using LE and CD
Proper spelling of names, Loan terms and purpose, Loan amount, Interest rate, Prepayment terms, Balloon payment terms, Estimated monthly payment, Tax, insurance, and assessment amounts, Closing costs, Cash necessary to close
CFPB TILA/RESPA Integrated Mortgage Disclosure Rule
A rule enacted by the CFPB in 2015 to combine Truth in Lending (Reg Z) and RESPA disclosures, requiring TILA-RESPA Integrated Disclosures (TRID) for nearly all residential transactions.
Closing
The day the borrower becomes obligated to the loan note.
Business Days
The days when the US Postal Service is delivering mail, including Saturdays.
Loans Covered by TRID
Includes purchase money loans, refinances, loans secured by 25 acres or less, loans secured by vacant land, construction-only loans, and timeshare loans.
Loans Not Covered by TRID
Reverse Mortgages, HELOCs, Mobile Home only loans, and creditors who originate less than 5 loans per calendar year.
Required Loan Disclosures
Lenders must provide the Loan Estimate within 3 days of application and the Closing Disclosure at least 3 days before closing. The forms must be available in English and Spanish.
Purpose of Closing Statement
To provide a financial breakdown for the buyer and seller, showing all calculations of the transaction and allocating dollar amounts between the parties.
Settlement Statement
A detailed document summarizing each party’s debits and credits, and the funds each party has contributed to the transaction.
Settlement Agent
The individual responsible for conducting or handling the settlement of the transaction. Typically, the lender is considered the settlement agent unless otherwise designated.
Closing Statement Review
The buyer and seller should carefully review the closing statement with their attorneys and brokers to ensure accuracy. The settlement agent should provide copies to both parties.
Common Seller Charges/Debits
Seller’s title policy, payoff of seller’s existing loan, deed preparation, property taxes due, brokerage commission, etc.
Common Buyer Charges/Debits
Purchase price, loan fees, recording fees, appraisal, credit report, hazard insurance, etc.
Broker’s Commission
The compensation agreed upon between the seller and the broker in the listing agreement, which must be paid upon consummation of the sale.
Closing Fee
The fee charged by the title company or closing entity to facilitate the closing, typically split between the seller and buyer unless otherwise negotiated.
Title Search & Insurance
The fee charged by the title company to search public records and issue a policy ensuring the seller conveys good title to the buyer. This may include a mortgagee’s title policy for the lender.
Document Preparation/Attorney’s Fees
The amount charged by an attorney for preparing the documents needed for the sale, such as transferring the deed and releasing liens.
Recording Fees
Fees paid to the county for filing the deed and release of the lien in public records.
Loan Fees
Rarely a seller expense, but may include discount points or prepayment penalties for the seller’s existing loan.
Appraisal Fees
Normally paid by the buyer to reimburse the lender, but may be negotiated as a seller expense.
Survey Fees
Often connected with the buyer’s loan, but may be negotiated for the seller to pay if an update is required.
Pest Inspection Fee
A fee that may be required by the lender if an infestation or damage is noted, or if the seller voluntarily provides it to facilitate the loan process.
Taxes and Dues
Property taxes and HOA dues prorated between the seller and buyer based on the closing date.
Credits and Debits
Credits are amounts owed to an individual, reducing their expenses, while debits are amounts owed by an individual, increasing their expenses.
Prorating Expenses
Dividing accrued or prepaid items between the buyer and seller based on the settlement date, using either a 360-day year or 365-day year for calculation.
Prorated Items (Accrued)
Items owed by the seller but paid by the buyer after closing, such as unpaid taxes and interest on an assumed mortgage.
Prorated Items (Prepaid)
Items that have been prepaid by the seller and typically credited to the buyer, such as homeowner’s insurance or prepaid property taxes.
Calculating Prorations
To calculate prorations, divide the annual charge by 12 (monthly) or 365/360 (daily), and then multiply by the number of days or months for the item being prorated.
Proration Methods
The 360-day year method is used for financial calculations, while the 365-day method reflects the actual calendar year.
What is prorating an accrued item?
Prorating an accrued item means calculating the seller’s responsibility for an expense (e.g., water bill) based on the time they occupied the property before the closing date.
What are the steps for prorating an accrued water bill?
- Calculate the monthly charge: $300 ÷ 12 = $25. 2. Calculate the daily charge: $25 ÷ 30 = $0.833. 3. Multiply by the number of months and days (6 months × $25 = $150; 2 days × $0.833 = $1.666). 4. Add the totals ($150 + $1.666 = $151.666, rounded to $151.67).
What is the total prorated water bill in this scenario?
The total prorated water bill is $151.67.
What is prorating a prepaid item?
Prorating a prepaid item means calculating the amount of an expense (e.g., taxes) that the seller has already paid for the period after the closing date, which will be credited to the seller and debited to the buyer.
What are the steps for prorating prepaid taxes?
- Calculate the monthly charge: $2,000 ÷ 12 = $166.666. 2. Calculate the daily charge: $166.666 ÷ 30 = $5.555. 3. Multiply by the number of months and days (2 months × $166.666 = $333.332; 25 days × $5.555 = $138.875). 4. Add the totals ($333.332 + $138.875 = $472.207, rounded to $472.21).
What is the total prorated prepaid taxes in this scenario?
The total prorated prepaid taxes is $472.21.
What is the seller’s responsibility on the closing date in many states?
In many states, the seller is responsible for any expenses incurred on the closing date.
How are rents typically prorated?
Rents are usually prorated using a 365-day year, which reflects the actual number of days for rent collection.
How are expenses like water bills, utilities, and taxes prorated?
These expenses are often prorated using a 360-day banking year, although some areas may require a 365-day year.
What is the ALTA Settlement Statement?
The ALTA Settlement Statement is a document itemizing all fees and charges that both the homebuyer and seller face during the closing of a real estate transaction.
How is the ALTA Settlement Statement used?
It provides uniformity, helps closing agents itemize costs, and ensures transparency in the transaction. The totals must match the Closing Disclosure.
What is the role of TRID in real estate transactions?
TRID (TILA-RESPA Integrated Disclosure) streamlines mortgage lending and closing processes, requiring the lender to provide disclosures like the Closing Disclosure to the buyer three days before closing.
What is a HUD-1 Settlement Statement?
The HUD-1 was a document used to report all costs in a real estate transaction, but it is now outdated and replaced by the Closing Disclosure for the buyer.
What is the difference between ALTA Settlement Statements and net sheets?
ALTA Settlement Statements contain final transaction costs, while net sheets provide estimated amounts throughout the sale process.
What might create a cloud on the title?
A cloud on the title may be caused by a claim, an unreleased lien, or an encumbrance.
What is a cloud on title?
A cloud on title is any document, claim, or lien that might impair the title to real property or make it questionable. It is usually discovered during a title search.
