Unit 22 Flashcards
Learning Objective: Identify the documents required from the buyer and the seller as a real estate transaction closes.
Answer: The documents required include the deed, title evidence, payoff statements from the seller’s lender, affidavits of title, a bill of sale for personal property, the buyer’s loan documents, proof of hazard insurance, and closing disclosures for both parties.
Learning Objective: Describe RESPA—its purpose, covered transactions, major provisions, and forms required—as well as the related requirements and prohibitions of Regulation Z of the Truth in Lending Act and of the Texas Department of Insurance.
Answer: RESPA (Real Estate Settlement Procedures Act) ensures transparency by mandating disclosures of settlement costs, prohibiting kickbacks, and regulating escrow account practices. It applies to federally related mortgage loans. Required forms include the Loan Estimate and Closing Disclosure. Regulation Z of TILA focuses on accurate loan disclosures, capping finance charges and APR changes, and ensuring consumers understand loan terms. The Texas Department of Insurance regulates title insurance rates and policy forms.
Learning Objective: Identify at least six types of expenses incurred by the buyer and/or the seller at closing and who pays each one.
Answer: Typical expenses include:
Loan origination fees (Buyer) – Fees for processing the buyer’s loan.
Title insurance premiums (Split or Negotiated) – Protects the buyer and lender against title defects.
Property taxes (Prorated) – Prepaid or accrued taxes are allocated based on the closing date.
Attorney fees (Split or Negotiated) – Fees for legal services in preparing and reviewing documents.
Recording fees (Buyer) – Costs for recording the deed and any new mortgage documents.
Broker commissions (Seller) – Paid to the listing and buyer’s agents based on the sales contract.
Learning Objective: Distinguish between prepaid and accrued expenses and between statutory- and calendar-year proration methods; compute common prorations, referencing the debit and credit distributions.
Answer:
Prepaid Expenses: Costs the seller has already paid for the benefit of the buyer, such as property taxes or HOA dues, credited to the seller at closing.
Accrued Expenses: Costs incurred by the seller but unpaid at closing, such as unpaid property taxes, debited from the seller at closing.
Proration Methods:
Statutory-Year Method: Uses a 360-day year with 12 months of 30 days each.
Calendar-Year Method: Uses the actual 365 (or 366 in leap years) days of the year.
Prorations allocate these expenses between buyer and seller based on the closing date, with debits and credits applied accordingly.
Key Term: Accrued Item
Meaning: Expenses owed by the seller but will be paid later by the buyer, such as property taxes or interest.
Key Term: Closing
Meaning: The final step in a real estate transaction where legal title is transferred, funds are disbursed, and all necessary documents are executed.
Key Term: Closing Agent
Meaning: A neutral third party who facilitates the closing process by preparing documents, disbursing funds, and ensuring compliance with legal and contractual obligations.
Key Term: Closing Statement
Meaning: A detailed summary of all financial transactions and adjustments in a real estate transaction, including debits and credits for both buyer and seller.
Key Term: Consumer
Meaning: An individual obtaining a financial product or service, such as a mortgage, primarily for personal, family, or household purposes.
Key Term: Credit
Meaning: A sum entered on the closing statement in favor of a party, indicating funds received or expenses paid on their behalf.
Key Term: Closing Disclosure
Meaning: A standardized form provided to buyers and sellers at least three days before closing, detailing all costs and terms of the transaction.
Key Term: Consummation
Meaning: The point at which a borrower becomes contractually obligated to a creditor on a loan, typically at closing.
Key Term: Creditor
Meaning: A lender who extends credit, such as a mortgage company or bank in a real estate transaction.
Key Term: Debit
Meaning: A sum entered on the closing statement as a charge to a party, indicating expenses they must pay.
Key Term: Doctrine of Relation Back
Meaning: A legal doctrine that considers the effective date of title transfer as the date when a deed is delivered into escrow, even if the seller dies before closing.
Key Term: Escrow
Meaning: A process in which a neutral third party holds funds and documents related to a real estate transaction until all conditions are met.
Key Term: Escrow Agent
Meaning: A neutral party responsible for managing the escrow process, including holding funds and documents, and ensuring contractual obligations are fulfilled.
Key Term: Loan Estimate
Meaning: A standardized form provided to borrowers within three days of a loan application, summarizing loan terms, estimated costs, and APR.
Key Term: Prepaid Item
Meaning: Expenses paid in advance by the seller for the benefit of the buyer, such as property taxes or homeowner’s insurance, prorated at closing.
Key Term: Prorate
Meaning: The process of dividing and allocating prepaid or accrued expenses, such as taxes or rent, between the buyer and seller based on the closing date.
