Modern Real Estate Practice in Texas, 12th Edition Instructor’s Manual Chapter 20: Closing the Real Estate Transaction LEARNING OBJECTIVES Upon completion of this chapter, the student should be able to: • Define the term closing as it relates to a real estate transaction. • Identify the buyer’s issues for ensuring that the seller can deliver good title and that the property will be in the promised condition upon transfer. • Describe a closing. • Define escrow and describe the escrow procedure. • Discuss the broker’s role in the closing. • Explain the Good Funds Rule. • List and describe the basic provisions of RESPA. • List and explain the items included on a typical closing statement. • Solve proration problems. • Explain the entries on a HUD-1 closing statement. LECTURE OUTLINE I. The closing process A. Closing the loan B. Closing the sale II. Preclosing procedures A. Buyer’s issues 1. Title evidence and TRELA requirements Modern Real Estate Practice in Texas, 12th Edition Instructor’s Manual a. Abstract of title and attorney’s opinion b. Title insurance commitment c. Three searches of the title 2. Seller’s deed 3. Documents removing liens and encumbrances a. Payoff statement b. Estoppel certificate 4. Survey 5. Inspection reports a. For property condition and repairs b. For wood destroying insects c. For parties in possession d. Final walk-through 6. Leases if tenants reside on the premises B. Seller’s issues 1. Buyer’s financing approved, if any 2. Inspection and repair requirements III. Conducting the closing A. Where closings are held and who attends 1. Usually held at a title company or attorney’s office 2. Parties who might attend a. Buyer b. Seller c. Attorneys for both parties d. Real estate agent for client and/or customer e. Representative of lender f. Title insurance company representative 3. Possession delivered on closing and funding B. Closing in escrow (the escrow agent is neutral) 1. Escrow closings are very common in Texas 2. Escrow agent may be attorney, title company, trust company, lender's escrow department 3. Seller deposits a. Deed conveying title to property to buyer b. Title evidence c. Payoff statement or estoppel certificate d. Affidavits of title, if required (including an affidavit as to debts and liens) Modern Real Estate Practice in Texas, 12th Edition Instructor’s Manual e. Title curative documents, if required f. Evidence of completed repairs, if required g. Any other documentation required to close NOTE: The title company actually provides many of these documents, which are prepared by its attorney for the seller's signature 4. Buyer deposits a. Balance of the cash required to complete the purchase b. Loan papers if a new loan c. Fire and hazard insurance policy (flood insurance, if required) d. Survey if a new loan e. Any other documentation required to close NOTE: Title and mortgage companies actually provide some of these documents 5. Advantages of closing in escrow a. Parties may close separately b. Seller's title is not delivered until buyer's money has been paid c. Buyer's money is not paid until seller's title is cleared d. Technically, escrow closing is a simultaneous procedure regardless of when parties sign e. Each party pays a nominal fee for service rendered by title company 6. Good Funds Rule a. Promulgated by State Board of Insurance b. Requires title companies to disburse only after verification of funds received at closing including the buyer’s loan c. Permits title companies to accept buyer's personal check for less than $1,500; if more than that amount, bank cashier's check or certified personal check required 7. Doctrine of "relation back" a. Used if seller dies prior to closing b. Acceptable under valid escrow agreement if all conditions have been met c. Deed passes title to buyer as of the date of delivery to escrow agent C. Broker or salesperson's role 1. Should always review statements and documents prior to closing to avoid surprises (do not practice law) 2. Should always attend the closing Modern Real Estate Practice in Texas, 12th Edition Instructor’s Manual 3. Generally assists rather than conducts closing 4. Prepares IRS Form 1099-S if title company or lender does not and the transaction is reportable by the closing agent D. Lender's interest 1. Requires title insurance 2. Requires fire and hazard insurance policy 3. Requires survey 4. May require termite or other inspection report 5. May require establishment of an escrow, or reserve, account for the payment of taxes and insurance (not to be confused with escrow account for holding earnest money) IV. RESPA requirements—administered by HUD A. Provides disclosure of settlement costs to seller and buyer 1. To help consumers become better shoppers for settlement services 2. To eliminate kickbacks and referral fees B. Applies to purchases of a one- to four-family home, cooperative or condominium for investment or owner-occupancy and financed by a federally-related first- mortgage loan C. Exceptions to RESPA 1. A loan on property of 25 acres or more 2. A loan for business, commercial, or agricultural purposes 3. A temporary construction loan 4. A loan on vacant land 5. Assumption without lender approval 6. A conversion of a federally related mortgage loan to different terms 7. A transfer of a loan in the secondary market D. Disclosure requirements 1. At the time of loan application a. Special Information Booklet must be given to every loan applicant b. Borrower must be provided with good-faith estimate of settlement costs within three business days of the application c. Disclosure of the possibility of future transfer of loan servicing must be made at loan closing 2. Before closing occurs a. Loan closing statement must be on Uniform Settlement Statement, HUD-1 form (see Figure 20.1) (1) No charge can be made for the preparation of the HUD-1 Modern Real Estate Practice in Texas, 12th Edition Instructor’s Manual or related statements required by RESPA or Truth-in- Lending (2) Must be available for borrower inspection one day prior to closing if requested b. Affiliated Business Arrangement Disclosure (1) Must be given to a consumer at or prior to making a referral to a party with whom the referring party has an ownership or beneficial interest (2) Referrals from a lender to an attorney, credit reporting agency, or real estate appraiser are exempt 3. At closing a. HUD-1 shows actual closing costs; signed by buyer and seller b. Initial Escrow Statement itemizes taxes, insurance premiums, and other charges to be paid during the first 12 months 4. After closing a. Annual Escrow Statement summarizes deposits and payments over a 12-month period b. Servicing Transfer Statement if loan servicing is sold or assigned E. Prohibitions and restrictions 1. Prohibition against kickbacks 2. Seller cannot force the buyer to use a specific title company 3. Limitation on escrow account collections; the aggregate analysis accounting method must be used 4. CLO fees must be reasonably related to the value of services and disclosed on the HUD-1 5. CBAs are permitted if consumer is informed that other providers are available V. Preparation of closing statements A. How the closing statement works 1. Debit—amount charged; an expense 2. Credit—amount entered in a person's favor (the party that "gets" the money "gets credit") B. Normal closing charges 1. Broker's commission 2. Attorney fees 3. Recording fees 4. Title expenses 5. Loan fees a. Discount fee b. Origination fee Modern Real Estate Practice in Texas, 12th Edition Instructor’s Manual 6. Tax and insurance reserves 7. Appraisal fee 8. Settlement or closing fees 9. Survey fee 10. Repair fees C. Credits and debits at closing (see Table 20.1) 1. Buyer credits and debits 2. Seller credits and debits D. Prorations (expenses divided or apportioned between seller and buyer based on period of ownership in current year by each) 1. Accrued versus prepaid expenses 2. General rules for prorating a. TREC promulgated sales contracts provide for proration to be through the date of closing (seller owns property on that day) b. Statutory year versus calendar year (1) Statutory year required for computation of prepaid interest on sales to Fannie Mae and Freddie Mac (2) Calendar year used for most prorations of taxes and interest on assumed loans (3) Local custom may vary c. Accrued taxes not due are prorated and credited to buyer d. Unpaid back taxes are not prorated; the full amount is charged to the seller e. Special assessments—seller usually pays current installment and buyer commences with next year's installment unless contract states otherwise f. Rents—usually based on actual number of days in month g. Security deposits—transferred intact by seller to buyer with no proration h. Mortgage loan interest—usually paid in arrears; credited to buyer at closing on assumed loans 3. The arithmetic of prorating (see Chapter 19 for additional examples of prorations) a. Two basic methods (1) Yearly charge is based on 360-day year or 12 months of 30 days each (commonly called a statutory year) (2) Yearly charge is based on 365 days (366 in a leap year)— the calendar-year method b. Final figures will vary based upon the method used c. Final figures will vary depending upon the number of places to Modern Real Estate Practice in Texas, 12th Edition Instructor’s Manual which the division is carried; for consistency, use a minimum of five decimal places d. Accrued items are prorated; then credited to the buyer and debited to the seller e. Prepaid items are prorated; then credited to the seller and debited to the buyer VI. RESPA Uniform Settlement Statement (see Figure 20.1) (Figure 12.1 is the sales contract for this transaction; Figure 15.1, the note; and Figure 15.4, the deed of trust) A. Buyer’s and seller’s expenses are itemized B. Buyer's debits totaled and credits are totaled; difference is amount due from buyer at closing C. Seller's debits totaled and credits are totaled; difference is seller's net proceeds D. Aggregate adjustment calculation STUDENT WORKSHEET 1. What is a closing? 2. What serves as the blueprint for the completion of a real estate transaction? 3. Who attends the closing? 4. Where are most closings held? 5. What is the broker's role at closing? 6. Title companies conduct multiple searches of public records to determine the encumbrances filed against a property that is being sold. When are the three searches conducted? 7. Who should inspect the property prior to closing to determine the "rights of parties in possession"? 8. What is the significance of the "affidavit as to debts and liens" that a seller signs at closing? 9. What is the purpose of the doctrine of “relation back”? 10. What is meant by “closing in escrow”? Modern Real Estate Practice in Texas, 12th Edition Instructor’s Manual 11. Describe each of the three most significant disclosure provisions of RESPA: a. Special Information Booklet b. Good-faith estimate of settlement costs c. Uniform Settlement Statement (HUD-1) 12. Under RESPA rules, what are the limitations on lenders for the amount to be held in an escrow account? DISCUSSION QUESTIONS 1. What is the difference between closing a sale and a real estate closing or settlement? 2. Who normally handles the closing of real estate transactions in your area? Who else is legally authorized to do so? 3. What type of title evidence is usually required in your area? 4. How has RESPA proven helpful to both buyers and sellers of real estate? Do you think its purposes are being fulfilled? 5. Differentiate between escrow as it relates to a title company and as it relates to a mortgage company. 6. Compare items that are debited to one party and credited to the other with those items that are just debited to one party with no credit to the other party. Why is this? 7. How does the Good Funds Rule affect a real estate closing? 8. Explain why the buyer should check the property prior to closing. 9. Explain how existing liens and encumbrances are dealt with during the closing process. 10. Explain the doctrine of "relation back" as it applies to a real estate closing. REFERENCES Collins, Brian. “Jackson Sets Timetable for RESPA Reform.” Origination News, May 2005. Collins, Brian. “30 Years with RESPA, TILA.” Origination News, June 1998. Modern Real Estate Practice in Texas, 12th Edition Instructor’s Manual Harris, Jack C. “One-Stop Real Estate Shop: Home Buying Streamlined, Simplified, and Shortened.” Tierra Grande, July 1998. House Bill 950 (2005), amends the Local Government Code, relating to fees for filing certain documents with a county clerk. Effective September 1, 2005. Office of the Assistant Secretary for Housing--Federal Housing Commissioner, Department of Housing and Urban Development. "Real Estate Settlement Procedures Act (Regulation X); Final Rule." Federal Register, Vol. 57, No. 212, November 2, 1992. Office of the Assistant Secretary for Housing--Federal Housing Commissioner, Department of Housing and Urban Development. "Real Estate Settlement Procedures Act, RESPA Interpretive Rule 1993-2; Effective Date of Application of the Real Estate Settlement Procedures Act (RESPA) To Subordinate or Junior Lien Loans." Federal Register, Vol. 58, No. 48, March 15, 1993. Office of the Assistant Secretary for Housing--Federal Housing Commissioner, Department of Housing and Urban Development. "Amendments to Regulation X, Real Estate Settlement Procedures Act Regulation (Subordinate Liens); Final Rule; Correction." Federal Register, Vol. 59, No. 61, March 30, 1994. Real Estate Center. “No Private Cause of Action for Breach of RESPA.” Letter of the Law, April 1998. Real Estate Center. “Relation Back Doctrine.” Letter of the Law, Fall 1997. Riley, Jeff. “Learning ‘Affinity’ Rules.” Origination News, July 2001. Riley, Jeff. “RESPA vs. Steak Dinner.” Origination News, September 2001. Sichelman, Lew. “HUD May Be Stepping Up Its Scrutiny of RESPA Violations.” Origination News, June 2002. United States Department of Housing and Urban Development. “Buying Your Home: Settlement Costs and Information.” May 2002. “YSPs Spark Hot Debate.” Origination News, September 2005.
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