© 2013 rockwell publishing washington real estate practices lesson 11: closing the transaction
TRANSCRIPT
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© 2013 Rockwell Publishing
Washington Real Estate Practices
Lesson 11:
Closing the Transaction
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Introduction
Tasks to be completed before closing: arranging financing obtaining title insurance ordering inspections and repairspreparing legal documents
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Escrow
Some tasks completed by lender or parties, but most by escrow agent (closing agent). Escrow used to close most real estate
sales transactions in Washington.
Use closing checklist to keep track of closing process, noting when each item is completed.
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EscrowEscrow process
With escrow, parties need not be present at same time to close sale. Each party can deposit funds and sign
documents separately.
Escrow also makes it harder for one party to back out of transaction.
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EscrowEscrow agents
Escrow agent: neutral third party that holds funds and legal documents on behalf of buyer and seller.
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EscrowEscrow agents
An escrow agent:ensures legal documents are prepared
and executed arranges for documents to be recorded calculates settlement costsprepares settlement statements
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EscrowEscrow agents
Escrow may be handled by title insurance companies, independent escrow companies, or the escrow department of the institutional lender.
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EscrowEscrow agents
In Washington, escrow agents must be licensed and registered by the Department of Financial Institutions.
Exempt: Attorneys, title companies, banks, savings and loans, credit unions, insurance companies, federally approved lenders, and those acting under court supervision.
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EscrowEscrow agents
Also exempt: Real estate licensee providing escrow services for transaction she’s handling. May not charge additional fee for this
service.
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EscrowEscrow agents
If you are seller’s agent, would person performing escrow services need to be licensed in following situations?
1. Your designated broker agrees to act as escrow agent for the parties. He charges extra fee for this service.
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EscrowEscrow agents
2. Your designated broker arranges for another designated broker with no connection to the parties to act as escrow agent.
3. Your designated broker arranges for attorney that advised the parties on legal problem with transaction to provide escrow services.
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The Closing ProcessOpening escrow
Escrow usually opened when buyer’s lender delivers purchase and sale agreement to its escrow department, or when real estate agent delivers agreement to escrow agent parties chose.Escrow agent uses purchase and sale
agreement as basis for preparing escrow instructions.
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The Closing Process Escrow instructions
Escrow instructions: tells escrow agent what conditions must be fulfilled before purchase funds can be disbursed to seller and deed can be delivered to buyer.
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The Closing ProcessInspections
Any necessary inspections are ordered. If buyer’s lender requires particular
inspection, lender must receive copy of inspection report after it’s approved by buyer.
If report calls for repairs, proof of repairs must also be forwarded to lender.
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The Closing ProcessTitle report
Escrow agent will order title report if lender hasn’t already ordered one. Title report is sent to escrow agent, who
forwards a copy to buyer.
Buyer must approve title report. Any problems must be fixed by seller.
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The Closing ProcessSeller’s mortgage
If seller has mortgage, it must be paid off at closing with proceeds from sale.Escrow agent will get final payoff figure
from lender, using a “Demand for Payoff” or “Request for Beneficiary’s statement.”
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The Closing ProcessLoan documents
Once buyer’s loan is approved, lender sends loan documents to escrow agent to have buyer review and sign them.Signed documents are returned to
lender, who coordinates funding of loan with escrow agent.
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The Closing ProcessFunding loan
Once all contingencies have been fulfilled, buyer deposits funds for downpayment and closing costs into escrow account.Lender may then disburse loan funds to
escrow agent.But many lenders wait until new deed
and mortgage or deed of trust are recorded.
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The Closing ProcessRecording
Escrow agent sends documents to be recorded to title company.
Title company tells escrow agent how much title insurance policies cost and what recording fees will total.
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The Closing ProcessDisbursement of funds
Escrow agent then prepares settlement statements and disburses funds to seller, real estate brokerage, and other parties entitled to payment.
Title company files documents with county clerk for recording.
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The Closing ProcessFinal steps
Buyer receives copies of final loan documents, and each party gets settlement statement.
When buyer’s hazard insurance policy is issued, copy must be sent to buyer’s lender.
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SummaryEscrow and Closing
EscrowEscrow agentsClosing process
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The Closing ProcessInspections
Many real estate transactions are conditioned on one or more satisfactory inspections.May be required by buyer or buyer’s
lender.
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The Closing ProcessInspections
Fulfilling inspection contingency:initial inspection must be orderedinspection report must be approved or
rejected by buyer or lender any needed repairs must be completed
and reinspectedparties must be notified of reinspection
results
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The Closing ProcessInspections
Order inspections early in escrow process so any needed repairs can be completed and reinspected before closing.
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InspectionsTypes of inspections
Structural inspection: inspector identifies materials used, type of construction, and accessibility of areas to be inspected.
Inspector checks for problems in building’s structural systems, such as foundation, floor, wall, and roof framing.
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InspectionsTypes of inspections
Electrical and plumbing inspection: inspector checks electrical and plumbing systems for capacity, safety, life expectancy, and unsanitary conditions.
If water source is a private well, quality and quantity may be checked.
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InspectionsTypes of inspections
Interior inspection: inspector checks walls, floors, and ceilings for signs of water damage, fire hazards, or other problems.
Ventilation/energy conservation issues are noted, and appliances are checked for operation.
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InspectionsTypes of inspections
Pest inspection: inspector checks for damage from wood-eating insects such as termites, wood-boring beetles, and carpenter ants.
Soil inspection: inspector examines soil conditions for existing or potential settling or drainage problems.
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InspectionsTypes of inspections
Environmental inspection: addresses concerns about radon, urea formaldehyde, asbestos, lead-based paint, underground storage tanks, and contaminated water.
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InspectionsChoosing an inspector
Brokerage firm must have written policy on referring home inspectors.Agent must disclose in writing any
relationship that exists with inspector before buyer or seller hires inspector.
Agent must check the state licensing database to make sure any home inspector recommended is licensed.
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InspectionsChoosing an inspector
Inspections that buyer requires are usually ordered and paid for by buyer.
Questions buyer can ask home inspector:1. How long has firm or individual inspector
been in business? (Check license with Dept. of Licensing.)
2. Is firm member of American Society of Home Inspectors?
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InspectionsChoosing an inspector
3. Has firm changed name recently?
4. What type of report does firm use? How long to complete report and get it to client?
5. How many inspectors in firm? Full-time or part-time?
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InspectionsChoosing an inspector
6. Does firm engage in other business in addition to inspections?
7. Does firm also offer to make any repairs recommended by inspection?
8. Does firm provide references?
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InspectionsInspection reports
After completing inspection, inspector prepares and issues report.
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InspectionsInspection reports
Inspection report should:
1. Summarize any major concerns or areas needing repair. Include info about substandard
workmanship and problems such as rot, pest damage, faulty electrical systems, or lead plumbing materials.
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InspectionsInspection reports
2. Put condition of home into perspective by comparing to homes of similar style and age.
3. Project a five-year budget for any anticipated repair work and identify potential remodeling problems.
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InspectionsInspection reports
Party who requested report will approve or disapprove it. If disapproved, repairs may be required
before transaction can close.
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The Closing ProcessFinancing
Most buyers get preapproved for financing before seriously looking for home. Preapproval like applying for loan:
choose lender, submit loan application, and undergo analysis of income, net worth, and credit reputation.
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The Closing ProcessAppraisal
Lender won’t fund loan unless appraisal shows property is adequate security for loan.Lender orders appraisal as part of the
loan underwriting process.
Residential appraisal very similar to competitive market analysis, but with more selective data and a more detailed report.
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The Closing ProcessHazard insurance
Lenders require security property to be insured up to replacement cost.
Usually minimum insurance policy is HO-3 policy, which covers against most common hazards.
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The Closing ProcessHazard insurance
However, policy typically doesn’t cover floods or earthquakes.
Does cover personal property on premises, and provides limited coverage for personal injury and property damage caused by policy holder.
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The Closing ProcessTitle insurance
Either escrow agent or lender orders title report from title company.Title report shows condition of seller’s
title. Order early enough to address title
problems before closing.
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The Closing ProcessTitle insurance
Seller must pay off any outstanding liens to deliver clear title to buyer. Clearing liens can usually be arranged
through escrow.
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Title InsuranceLender’s policy
Lender will require buyer to purchase lender’s title insurance policy.Also referred to as mortgagee’s policy.
Lender’s policy protects lender’s security interest against loss due to title defects that were not discovered at time of sale.
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Title InsuranceOwner’s policy
Usually seller buys owner’s title insurance policy for buyer.
Owner’s policy protects buyer against undiscovered title problems that arose during seller’s period of ownership or earlier.
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Title InsuranceOwner’s policy
The type of owner’s policy commonly purchased also protects against encroachments and unrecorded liens.
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Title InsuranceOwner’s policy
If claim covered by policy is asserted against buyer’s title, title company will pay legal fees to defend buyer’s title. If necessary, title company will pay off
claim, up to face amount of policy.
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Title InsuranceStandard coverage
Standard coverage title insurance: protects policy holder against problems that concern matters of record (deeds, liens, and other interests that appear in public record).
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Title InsuranceExtended coverage
Extended coverage title insurance: protects against same things as standard coverage policy, plus matters discoverable through actual inspection.Examples: encroachments or adverse
possession.
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Title InsuranceExtended coverage
Lender will usually require lender’s policy to be extended coverage policy.
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Title InsuranceHomeowner’s coverage
Homeowner’s coverage title insurance: similar to extended coverage policy, but also covers additional issues such as violations of restrictive covenants.Available only in 1- to 4-unit residential
transactions. In WA, owner’s title insurance policy is
usually homeowner’s coverage.
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SummaryThe Closing Process
InspectionsFinancingAppraisalHazard insuranceTitle insurance
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Closing Costs
Incidental expenses of closing include inspection fees, title insurance fees, recording fees, escrow fees, and loan fees. Some fees are paid by buyer, some by
seller, and some are shared.
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Closing CostsSettlement statements
Each party’s closing costs are listed in settlement statement prepared by escrow agent.Buyer’s settlement statement shows how
much buyer will have to pay at closing. Seller’s statement shows how much cash
seller will take away from closing.
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Closing CostsProration
Some expenses are prorated between buyer and seller.
Proration: dividing and allocating expense proportionately, according to time, interest, or benefit.
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Closing CostsProration
Three steps in prorating costs:
1. Divide expense by number of days to determine per diem (daily) rate. Annual expense usually divided by 365
days; monthly expense divided by number of days in specific month.
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Closing CostsProration
2. Determine how many days one party is responsible for expense.
3. Multiply number of days by per diem rate to calculate that party’s share of expense.
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Closing CostsProration
Example: Property’s annual property tax bill is $1,200. Seller has already paid taxes through end of property tax year (Jan 31 in WA).
Closing is on July 14. If buyer is responsible for day of closing, how much will buyer owe seller for taxes at closing?
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Closing CostsProration
Determine per diem rate by dividing $1,200 by 365 to get $3.29.
Next, find number of days that are buyer’s responsibility—from July 14 forward, there are 171 days until the end of the year.
Finally, multiply $3.29 by 171 days. Buyer must pay seller $562.59 for property taxes.
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Buyer’s Net Cost
Buyer’s costs include:purchase priceloan costsprepaid interestrecording and escrow feesproperty taxes
Use worksheet to list items and calculate buyer’s net cost.
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Buyer’s Net CostPurchase price and financing
Buyer’s largest cost is purchase price.
Buyer usually gives seller earnest money deposit when purchase agreement is signed. So the deposit is subtracted from
purchase price on worksheet.
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Buyer’s Net CostPurchase price and financing
Buyer’s loan amount (including seller financing or assumed seller’s loan) is also subtracted from purchase price on worksheet.
Financing in any form is credit for buyer, offsetting purchase price.
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Buyer’s Net CostLoan costs
Loan costs (appraisal, credit report, origination fee, and discount points) are usually paid by buyer.
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Buyer’s Net CostPrepaid interest
Real estate loan interest is paid in arrears—interest that accrues each month is paid at end of month.
Buyer’s first mortgage payment isn’t due until first day of second month following closing. Gives buyers chance to recover from
closing costs.
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Buyer’s Net CostPrepaid interest
So if transaction closes on March 15, first payment is due on May 1, covering interest that accrued in April (but not for March 15–March 31).
Lender requires buyer to pay interest for those 17 days in March at closing. Called prepaid interest or interim interest.
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Buyer’s Net CostOther closing costs
Buyer may also pay for lender’s title insurance policy, inspection fees, and hazard insurance policy.
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Buyer’s Net CostRecording and escrow fees
Recording fee is usually paid by party benefiting from recording. Fees for recording deed and new
mortgage or deed of trust normally paid by buyer.
Parties typically split escrow fee.
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Other Closing CostsProperty taxes
Seller responsible for property taxes up to day of closing; buyer responsible for day of closing and thereafter. If seller has already paid that year’s
taxes, he gets prorated refund from buyer at closing.
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Buyer’s Net CostTotal
Once worksheet is completely filled out, calculate buyer’s net cost—amount needed to close sale.
Tell buyer type of check required at closing—probably certified check or cashier’s check. Personal checks usually not acceptable.
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Seller’s Net Proceeds
Use worksheet to list items and calculate seller’s net proceeds. Seller’s largest credit is sales price.Seller’s proceeds may be increased by
refunds, such as for prorated property taxes.
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Seller’s Net ProceedsReserves
Most lenders make borrower pay portion of property taxes and hazard insurance every month. Payments go into reserve account.
When seller’s loan is paid off, unused balance in reserve account is refunded to seller.
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Seller’s Net ProceedsLoan payoff
Finally, add up seller’s credits to get seller’s proceeds. Then deduct costs seller must pay at closing.
Seller usually pays off existing loan. Payoff amount = current unpaid principal
balance, plus any unpaid interest.
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Seller’s Net ProceedsLoan payoff
Escrow agent obtains payoff figure from seller’s lender.
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Seller’s Net ProceedsUnpaid interest
If transaction closes in middle of month, seller will owe lender some interest.
Example: Transaction closes on March 15. Seller’s March 1 payment covers interest from February, but seller owes lender interest for March 1–March 15.
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Seller’s Net ProceedsUnpaid interest
Some loan programs—such as FHA—require seller to pay full month’s interest at closing, regardless of closing date.
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Seller’s Net ProceedsPrepayment penalty
Seller may have to pay prepayment penalty for paying loan off before end of term.
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Seller’s Net ProceedsCommission
Seller pays real estate brokerage firm’s commission, which is calculated by multiplying purchase price by commission rate.
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Seller’s Net ProceedsTitle insurance
The seller usually pays the premium for owner’s title insurance policy.
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Seller’s Net ProceedsExcise tax
Washington imposes excise tax on sale of real property.Excise tax typically paid by seller.
Tax rate varies depending on location of property.
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Seller’s Net ProceedsRecording and escrow fees
Seller pays his share of recording fees and half of escrow fee.
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Seller’s Net ProceedsTotals
Subtracting the seller’s loan payoff and closing costs from seller’s total proceeds results in seller’s net proceeds—the amount he can expect to take away from closing.
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SummaryClosing Costs
Settlement statementProrationPurchase price and financingPrepaid interestProperty taxesExcise tax
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Federal Laws and Closing
Three federal income tax laws that affect closing: Form 1099 reportingForm 8300 reportingForeign Investment in Real Property Tax
Act
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Federal Laws and ClosingForm 1099 reporting
Escrow agents generally must report sales of real property to IRS (exemptions exist).
Form 1099-S used to report seller’s name and social security number and sale’s gross proceeds.Escrow agent can’t charge separate fee
for filling out 1099-S form.
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Federal Laws and ClosingForm 8300 reporting
Closing agent must file IRS Form 8300 if she receives more than $10,000 in cash.
Form due within 15 days of receiving the cash. Copy should be kept five years.
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Federal Laws and ClosingFIRPTA
Foreign Investment in Real Property Tax Act (FIRPTA): requires escrow agent to determine whether seller is U.S. citizen or resident alien. If seller not citizen or resident alien,
escrow agent must withhold 10% of amount realized (generally, the sales price) and give to IRS.
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Federal Laws and ClosingFIRPTA
Residential sales exempt if:buyers will occupy property as their
home, and sales price is $300,000 or less.
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Federal Laws and ClosingRESPA
Real Estate Settlement Procedures Act (RESPA): helps provide borrowers with closing cost information, and eliminate kickbacks and referral fees. RESPA applies to most residential
mortgage loans made by institutional lenders.
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Federal Laws and ClosingRESPA
Exceptions: Loan for business, agricultural, or
commercial purposes.Loan used to purchase 25 acres or more.Loan used to purchase vacant land for
investment purposes, construction loan when borrower already owns lot, or assumption of existing mortgage that does not require lender’s approval.
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RESPA Requirements
HUD booklet: lender must give HUD-approved booklet to loan applicant within 3 days of receiving written loan application. Booklet explains RESPA, closing costs, and the uniform settlement statement.
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RESPA Requirements
Good faith estimate: lender must give applicant good faith estimate (GFE) of closing costs within 3 days of receiving application.
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RESPA Requirements
Mortgage servicing disclosure: lender must inform borrower of likelihood that lender will service loan or sell it to another investor.
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RESPA Requirements
Required provider: if lender or other settlement provider requires use of particular appraiser, title company, or other service provider, this must be disclosed at time of application or agreement.
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RESPA Requirements
Referral: if any service provider is in position to refer borrower to “affiliated” provider, joint business relationship must be fully disclosed.Must also disclose fee estimates and
language that referral is optional.
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RESPA Requirements
Uniform settlement statement: escrow agent must itemize all closing costs on uniform settlement statement form, given to parties at closing. Escrow agent must allow borrower to
inspect uniform settlement statement one business day before closing, if borrower asks to do so.
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RESPA Requirements
No excessive deposits: if borrower must make impound account deposits for taxes, insurance, and other recurring costs, lender can’t require larger deposits than necessary.
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RESPA Requirements
No kickbacks or referral fees: if loan is covered by RESPA, lenders and other settlement services providers can’t pay kickbacks or referral fees, accept unearned fees for services not actually provided, or charge fee for preparing uniform settlement statement.
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RESPA Requirements
No title company requirements: seller can’t require buyer to use particular title company.
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RESPA RequirementsGood Faith Estimate form
Lenders and mortgage brokers must provide the required good faith estimate of closing costs on a GFE form published by HUD.
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RESPA RequirementsGood Faith Estimate form
The GFE form provides consumers with detailed information about their loan and closing costs, making it easier for borrowers to shop around. Lenders and mortgage brokers should
give borrowers the GFE form early in the lending process so borrowers have time to obtain multiple GFEs and compare costs.
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RESPA RequirementsGood Faith Estimate form
HUD limits how much certain good faith cost estimates can increase by the closing date. Loan originators can avoid penalties for
excessive cost increases by amending the GFE form and issuing refunds to borrowers within 30 days of closing (if excessive costs were paid).
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SummaryFederal Laws and Closing
1099 reporting8300 reportingFIRPTARESPARESPA requirementsUniform settlement statement
formGFE form
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