Real Estate Practice pre-licensing class

1. The Real Estate School
U N I T 2 1
CLOSING THE REAL ESTATE
TRANSACTION
1
Page 413

2. OVERVIEW
• Closing is the point at which ownership of a property is
transferred in exchange for the payment of the selling price
2
Page 413

3. THE CLOSING PROCESS
• Buyer’s Issues
• The buyer will want to inspect the following:
• Title evidence
• Seller’s deed
• Survey (if applicable)
• Inspection results
• Leases (if applicable)
• Removal of liens & encumbrances
3
Page 414
(Lancaster Co. – Buyer Exp.)

4. THE CLOSING PROCESS
• Buyer’s Issues (cont’d)
• Final Property Inspection – Conducted shortly before the closing
takes place
• Verifies repairs completed,
property maintained,
fixtures are in place, and
no alterations made
4
Page 414

5. THE CLOSING PROCESS
• Buyer’s Issues (cont’d)
• Survey – Provides information about the exact location and size
of the property
• Indicates location of buildings, driveways, fences, easements,
and encroachments
• Cost is negotiated in the contract
(NOTE: Surveys are not required to close a real estate transaction and are seldom
performed as a condition of settlement in our geographic region. In Maryland, it is
a requirement to transfer property.)
5
Page 416

6. THE CLOSING PROCESS
• Seller’s Issues
• Main interest is to receive payment for
the property by verifying that buyer has
sufficient funds to close
• Inspect the closing statement to make
sure all monies are accounted for
properly
6
Page 416

7. THE CLOSING PROCESS
• Title Procedures
• Title or Opinion of Title discloses all liens, encumbrances,
easements, conditions, and restrictions on the property
• Many states require the Seller to produce a current abstract of
title or title commitment from the title insurance company
(NOTE: In Pennsylvania, Buyers are responsible for obtaining a current abstract of title or title
commitment from the title insurance company.)
7
Page 416

8. THE CLOSING PROCESS
• Title Procedures (cont’d)
• The seller’s existing loan (if
any) is paid in full and
satisfied on the record
8
Page 416

9. THE CLOSING PROCESS
• Title Procedures (cont’d)
• If buyer is assuming seller’s loan, the buyer needs to know the
exact balance of the loan as of the closing date
• Lender provides buyer with
a Mortgage Reduction
Certificate
9
Page 416

10. THE CLOSING PROCESS
• Title Procedures (cont’d)
• Two searches of public record are
usually made:
1. Shows status of the seller’s title
on a date prior to settlement
2. A Bring Down is made after
the closing and before any
new documents are filed
10
Page 416

11. THE CLOSING PROCESS
• Title Procedures (cont’d)
• Affidavit of Title – Sworn statement
in which the seller assures the
title insurance company that
no other defects in the title
have occurred since the date
of the title examination
11
Page 417

12. THE CLOSING PROCESS
• Conducting the Closing – Closing may be referred to as:
• Settlement and transfer
• Passing papers
• Closing escrow
12
Page 417

13. THE CLOSING PROCESS
• Face-to-Face Closing – Typical attendees at a closing include:
• Buyers
• Sellers
• Salespeople
• Attorneys
• Lender
• Title officer
13
Page 417

14. THE CLOSING PROCESS
• Closing Agent or Closing Officer – Orders and reviews various
documents to prepare a closing statement indicating the division
of income and expenses
14
Page 418

15. THE CLOSING PROCESS
• The Exchange – The seller delivers the signed deed to the buyer,
who accepts it after the parties are satisfied that everything is in
order
15
Page 418

16. THE CLOSING PROCESS
• IRS Reporting Requirements – Real estate closings must be
reported to the Internal Revenue Service on
Form 1099-S
• Included on the form is the sales price, property tax
reimbursement, and seller’s
social security number
• Closing agent is responsible
for filing the form
16
Page 418

17. THE CLOSING PROCESS
• Broker’s Role at Closing
• On behalf of their clients, licensees arrange for title evidence,
surveys, appraisals, and inspections and their subsequent
repairs
• Licensees should be familiar
with the process involved in
preparing a closing statement
so they can advise their clients
17
Page 418-419

18. THE CLOSING PROCESS
• Lender’s Interest in Closing
• In order to protect its security interest in the property, the
lender may require:
• Survey
• Inspection
• Certificate of occupancy
• Title insurance policy
• Fire & hazard insurance policy (w/ paid receipt)
• Reserve accounts
18
Page 419

19. WIRE FRAUD IS REAL
19
Page 419

20. TOTAL LOSSES DUE TO BUSINESS EMAIL COMPROMISE
20
Page 419

21. THE CLOSING PROCESS
• Cybersecurity Issues
• The real estate industry is a prime target
• Typical phishing scam – buyer receives email from an agent or title
company that looks legitimate
• Never wire money
to an account
without verifying
the instructions
21
Page 419

22. THE CLOSING PROCESS
• Cybersecurity Issues (cont’d)
• Educate your clients in
advance of closing not to wire
funds unless they confirm the
transfer with you or the title
company
• Confirm all wiring instructions
by phone
22
Page 420

23. THE CLOSING PROCESS
• Cybersecurity Issues (cont’d)
• Wiring instructions don’t
change at the last minute
• After sending the wire, call
the title company to
confirm receipt
23
Page 420

24. THE CLOSING PROCESS
• Cybersecurity Issues (cont’d)
• Do not email financial info
or security number
• Do not click on links or
download files in an email
attachment from an
unknown sender
24
Page 420

25. THE CLOSING PROCESS
• Cybersecurity Issues (cont’d)
• Links may closely replicate a trusted website’s address
• REGULARLY CHANGE YOUR PASSWORDS
25
Page 420

26. FEDERAL LAWS THAT IMPACT CLOSINGS
• Real Estate Settlement Procedures Act (RESPA) - Requires certain
disclosures about the mortgage and settlement process and
prohibits certain practices that increase the costs of settlement
services
26
Page 420

27. • RESPA regulations apply to first-lien residential mortgage loans
that finance the purchases of one to four family homes
• Also applies to investment or
owner-occupied loans
• Also applies to second or subordinate
liens for home equity loans
27
Page 420
FEDERAL LAWS THAT IMPACT CLOSINGS

28. • RESPA does not apply to:
• Loans on large properties (over 25 acres)
• Business or agricultural loans
• Construction loans
• Vacant land loans
• Owner financing
• Assumable mortgages
28
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FEDERAL LAWS THAT IMPACT CLOSINGS

29. • RESPA prohibits certain practices that increase the cost of
settlement services:
• Section 8 – Prohibits kickbacks and fee-splitting for referrals of
settlement services
• Section 9 – Prohibits sellers from requiring that buyers buy title
insurance from a particular vendor
• Section 10 – Prohibits lenders from requiring excessive escrow
account deposits
29
Page 421
FEDERAL LAWS THAT IMPACT CLOSINGS

30. • Effective October 3, 2015 the RESPA-required forms have been
consolidated into the TILA-RESPA Integrated Disclosure Rule
(TRID)
30
Page 421
FEDERAL LAWS THAT IMPACT CLOSINGS
Good Faith
Estimate
Uniform Settlement
Statement (HUD-1)
TRID

31. • Under TRID, lenders are required to provide borrowers with Your
Home Loan Toolkit: A Step-by-Step Guide booklet and a Loan
Estimate (LE)
31
Page 421
FEDERAL LAWS THAT IMPACT CLOSINGS

32. • Affiliated Business Arrangement (AfBA) – A package of real
estate services offered to consumers which may include
mortgage, title, insurance, and warranty services
32
Page 421
FEDERAL LAWS THAT IMPACT CLOSINGS

33. • Affiliated Business Arrangement (AfBA) (cont’d)
• Permitted as long as consumer is clearly informed of:
• the relationship among the service providers
• participation is not required
• other providers are available
• the only thing of value received by one business entity from
others is a return on ownership interest
33
Page 422
FEDERAL LAWS THAT IMPACT CLOSINGS

34. • Affiliated Business Arrangement (AfBA) (cont’d)
• Consumer Financial Protection Bureau (CFPB) has been
aggressively pursuing ‘sham’ companies that profit from internal
referrals
34
Page 422
FEDERAL LAWS THAT IMPACT CLOSINGS

35. • TILA-RESPA Integrated Disclosures (TRID) Rule
• Rule making responsibility was moved to the Consumer
Financial Protection Bureau (CFPB)
• Goal is to make it easier for borrowers to understand loan and
settlement costs
35
Page 422
FEDERAL LAWS THAT IMPACT CLOSINGS

36. • TILA-RESPA Integrated Disclosures (TRID) Rule (cont’d)
• Applies to any federally related loan made to the majority of
homebuyers
• Does NOT apply to:
36
Page 466
FEDERAL LAWS THAT IMPACT CLOSINGS
• Home equity lines of credit
• Reverse mortgages
• Mobile homes not attached to land
• People who make five or fewer loans a year
• Cash transactions

37. • The Toolkit
• Lenders are required to deliver Your Home
Loan Toolkit: A Step-by-Step Guide no later
than three (3) days after receipt of
application
• Helps consumers decide which mortgage is
best for their situation
37
Page 422
FEDERAL LAWS THAT IMPACT CLOSINGS

38. • The Loan Estimate (LE) – Breaks down loan
costs to better compare loan offers
• Lender must mail or deliver LE to the
borrower no later than three (3) business
days after application
38
Page 431
FEDERAL LAWS THAT IMPACT CLOSINGS
Figure 21.2 (page 423)

39. • The Loan Estimate (LE) (cont’d)
• Closing Costs – Costs required to complete a mortgage loan
39
Page 431
FEDERAL LAWS THAT IMPACT CLOSINGS
Origination Fees
Inspections
Homeowner’s Insurance
Settlement Services
Taxes
Title Insurance
Appraisal Costs

40. • The Loan Estimate (LE) (cont’d)
• Information on the Loan Estimate
40
Page 475
FEDERAL LAWS THAT IMPACT CLOSINGS
PAGE 1
• Loan Terms
• Mo. Payments
• Costs at Closing
PAGE 2
• Good Faith
Itemization of Loan
Costs
• All Other Costs
to Close
PAGE 3
• Calculations to Assist
in Comparing Loans
• Signatures

41. • The Closing Disclosure (CD) – Formatted
similarly to the Loan Estimate so consumers
can easily compare documents
41
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FEDERAL LAWS THAT IMPACT CLOSINGS
Figure 21.3 (page 426)

42. • The Closing Disclosure (CD) (cont’d)
• Must be delivered three (3) business days before settlement
42
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FEDERAL LAWS THAT IMPACT CLOSINGS

43. • The Closing Disclosure (CD) (cont’d)
• Three changes that will trigger an additional three-day waiting
period:
1. Substantial increases to the APR
2. Change to the loan product
3. Addition of a prepayment penalty
43
Page 432
FEDERAL LAWS THAT IMPACT CLOSINGS
NOT IN
BOOK

44. (Deduct)
PREPARATION OF THE CLOSING DISCLOSURE
• How the Closing Disclosure (CD) Works
44
Page 432-33
Credit
Debit
Amount
Paid by the
Buyer or Seller
Amount
Payable to the
Buyer or Seller

45. PREPARATION OF THE CLOSING DISCLOSURE
• How the Closing Disclosure (CD) Works
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Page 433
• The Closing Disclosure must conform to the Loan Estimate
previously given to the Buyer

46. PREPARATION OF THE CLOSING DISCLOSURE
46
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Item Credit to
Buyer
Debit to
Buyer
Credit to
Seller
Debit to
Seller
Prorated
Principal amount of new mortgage ✓
Payoff of existing mortgage ✓
Unpaid principal balance if assumed mortgage ✓ ✓
Accrued interest on existing assumed mortgage ✓ ✓ ✓
Tenants’ security deposit ✓ ✓
Purchase money mortgage ✓ ✓
Unpaid water and other utility bills ✓ ✓ ✓

47. PREPARATION OF THE CLOSING DISCLOSURE
47
Page 433
Item Credit to
Buyer
Debit to
Buyer
Credit to
Seller
Debit to
Seller
Prorated
Buyer’s Earnest Money ✓
Selling Price of Property ✓ ✓
Fuel oil on hand (valued at current market price) ✓* ✓* ✓*
Prepaid insurance and tax reserve for mortgage assumed by
buyer ✓ ✓ ✓
Refund to seller of prepaid water charges and similar utility
expenses ✓ ✓ ✓
Prepaid general real estate taxes ✓ ✓ ✓
* Pennsylvania agreement of sale indicates buyer gets what is left of fuel oil on day of settlement

48. PREPARATION OF THE CLOSING DISCLOSURE
• Expenses
• Broker’s Commission – The responsibility for paying the broker’s
fee(s) will have been determined by previous agreement
• Attorney’s Fees – Paid by
the party being represented
48
Page 433-434

49. PREPARATION OF THE CLOSING DISCLOSURE
• Expenses (cont’d)
• Recording Expenses:
• Seller usually pays recording
charges to clear all defects and
furnish clear title
• Buyer pays to record the new deed
and mortgage
49
Page 434

50. PREPARATION OF THE CLOSING DISCLOSURE
• Expenses (cont’d)
• Transfer Tax - 1% State Transfer Tax;
the amount of Local Transfer Tax
varies
• Either party may pay although it
is customary to divide these
taxes evenly
50
Page 434

51. PREPARATION OF THE CLOSING DISCLOSURE
• Expenses (cont’d)
• Deed Preparation Fee – Customarily paid by the seller (Lancaster
County – paid by buyer)
• Loan Fees – Lender is required to discuss all loan costs within
three days of application (i.e. application fee, points, origination
fees)
51
Page 434

52. PREPARATION OF THE CLOSING DISCLOSURE
• Expenses (cont’d)
• Tax and Insurance Reserves – Most lenders require that
borrowers provide a reserve fund to pay future taxes and
insurance premiums
• Funds are held in an escrow account
• The first year’s insurance premium is paid at or before closing
52
Page 434

53. PREPARATION OF THE CLOSING DISCLOSURE
• Expenses (cont’d)
• Appraisal Fees – Buyers usually pay for an appraisal at the time
of loan application
• Lender is required to provide a
copy of the appraisal to the buyer
three business days before closing
53
Page 435

54. PREPARATION OF THE CLOSING DISCLOSURE
• Expenses (cont’d)
• Survey Fees – Negotiable item
• Additional Fees – FHA, VA, and Conventional loans may have
mortgage insurance premiums depending on the loan-to-value
54
Page 435

55. PRORATIONS
• Accrued Items – Expenses owed by the seller but will be paid later
by the buyer (i.e. water bills, interest on assumed mortgages)
• Prepaid Items – Expenses
prepaid by the seller but
not fully used (i.e. real
estate taxes)
55
Page 435-436

56. PRORATIONS
• In Pennsylvania, the following are typical:
• Seller owns the property on the day of closing
• Local custom determines whether a 360 day year (statutory
year) or a 365 day year (calendar year) is used
• Seller pays current payments for municipal special assessments
and buyer pays for all future payments
• Rents are adjusted as of the date of settlement
56
Page 436

57. PRORATIONS
• In Pennsylvania, the following are typical: (cont’d)
• Security deposits on rental properties are generally transferred
by seller to buyer
• Evidence of monthly/quarterly municipal utility charges may be
required at closing
57
Page 436

58. PRORATIONS
• Real Estate Taxes – Proration varies widely depending on how the
taxes are paid in the area where the real estate is located
• Paid in Advance – Taxes are paid at
the beginning of the taxing period
• Paid in Arrears – Taxes are
paid at the end of the taxing
period
58
Page 436

59. PRORATIONS
• Real Estate Taxes (cont’d)
• Real estate taxes in Pennsylvania are handled as follows:
• County & Municipal Taxes – levied and assessed on a calendar
year basis (January 1 – December 31)
• School Taxes – levied and assessed on a fiscal year basis (July
1 – June 30)
59
Page 437

60. PRORATIONS
• Mortgage Loan Interest
• Interest on mortgage loans is generally paid in arrears
• Rent is generally paid in advance
60
Page 482
May August
July
June
Mortgage Payment
May August
July
June
Rent Payment

61. PRORATIONS
• Consider the following when prorating:
1. What item is being prorated?
2. Is it an accrued amount? (i.e. not paid
yet)
3. Is it a prepaid amount? (i.e. paid in
advance)
4. What arithmetic processes must be
used?
61
Page 437

62. PRORATIONS
• Two methods of calculating prorations:
1. 360 day year where each month had 30 days (statutory year)
2. 365 day year where each month’s actual number of days is
used (calendar year)
(NOTE: On Pennsylvania licensing examinations, tax prorations are usually based on a 30-day
month unless specified otherwise)
62
Page 437

63. PRORATIONS
• Accrued Items – Credited to the buyer; debited from seller
• Prepaid Items – Debited from the buyer; credited to the seller
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Page 437-438

64. CALCULATING COMMISSIONS
64
The salesperson received $13,282.50 commission on her 55% share of the total
commission on the sale of a property that sold for $420,000. What was the
commission rate?
Get rid of the words:
Salesperson Commission Amount: $13,282.50
Salesperson Commission Split: 55%
Sale Price: $420,000
Commission Rate: ?

65. .55 of the total commission
CALCULATING COMMISSIONS
65
The salesperson received $13,282.50 commission on her 55% share of the total
commission on the sale of a property that sold for $420,000. What was the
commission rate?
$13,282.50
? 1.00 is the total commission
=
=
X
÷
$13,282.50 X 1.00 = $13,282.50
$13,282.50 ÷ .55 = $24,150 total commission

66. CALCULATING COMMISSIONS
66
The salesperson received $13,282.50 commission on her 55% share of the total
commission on the sale of a property that sold for $420,000. What was the
commission rate?
$24,150 total commission
$420,000 sales price
= .0575 commission rate
5.75%