Term
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Definition
The title closing is the culmination of the real estate transaction. At the title closing:
The buyer completes his or her financing arrangements (referred to as closing the loan).
The seller transfers the title.
Both the buyer and seller pay the necessary taxes, fees and other charges. |
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Term
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Definition
The primary attendees at the closing are the
Buyer - Pays for the property and receives clear title.
Seller - Conveys the property and receives payment.
Closing agent - Prepares all the documents that need to be signed at the closing, including the actual settlement statements that show all the debits and credits assigned to the buyer and seller in the transaction. |
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Term
| Others who may attend the closing are: |
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Definition
Attorneys for the parties – Examine the documents to ensure that the best interests of the clients are being met
Lender representative – Examines documents and makes sure the property getting the loan has clear title
Real estate licensee – Collects commission
Title company representative – Reviews documents and answers questions about the title |
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Term
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Definition
| The deed is the most important document at closing since it transfers the property to the purchaser. The deed is usually prepared by the seller's attorney, who uses the old deed as a template to prepare the new one. |
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Definition
| The purchaser, purchaser's lender, or title company may require a survey to verify the location and size of the property. The survey also identifies any easements, encroachments, or flood plain hazard. |
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Term
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Definition
Broker's commission statement
Certificate of occupancy
Flood insurance policy
Homeowner's insurance
Lead-based paint disclosure
Lease
Lien waivers
Mortgage documents
Property inspection
Settlement statement
Title insurance policy |
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Term
| true or false: After the closing, the broker, or whoever acted as the closing licensee, has the task of reporting the transaction to the IRS. |
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Definition
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Term
| what is constructive notice? |
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Definition
Recording the deed to a property gives an owner protection from any other titles to the property that are not recorded in the public record. This is done through constructive notice.
Constructive notice, or legal notice, is knowledge of a fact that a person could have or should have obtained. The foremost method of imparting constructive notice is by recordation of ownership documents in public records, specifically, title records. Since public records are open to everyone, the law generally presumes that when evidence of ownership is recorded, the public at large has received constructive notice of ownership. By the same token, the law presumes that the owner of record is in fact the legal owner. Thus, if John Doe records the deed of conveyance, he has given constructive notice of ownership. |
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Term
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Definition
| A person who has received actual notice has actual knowledge of something. Receiving actual notice means learning of something through direct experience or communication. In proving real estate ownership, a person provides actual notice by producing direct evidence and the other party receives actual notice by seeing direct evidence, such as by reviewing the deed, reading title records, or physically visiting the property to see who is in possession. |
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Term
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Definition
Certain states and counties use the Torrens System of recording. The Torrens system differs from other title recording systems in that title passes only when the conveyance has been duly registered on the title certificate itself. Encumbrances likewise have no legal effect until they are recorded. In effect, the Torrens title record is the title itself. It is not necessary to search public records to ascertain the status of title; it is all reflected on the title certificate.
To enter a property in the Torrens system, a court action must first clear title by giving notice to all potential interest holders that they must express their claims. At the end of the proceeding, the court decrees that the title is accepted into Torrens registration. The Torrens registry retains the original registration documents and provides copies to the recorder or other appropriate office. All subsequent transactions affecting title must follow the proper Torrens recording procedures and requirements. |
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Term
| If there is a missing link in the chronology of owners, or if there was a defective conveyance, the chain is said to be broken, resulting in a clouded title to the property. |
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Definition
To remove the cloud, an owner may need to initiate a suit to quiet title, which clears the title record of any unrecorded claims.
The two forms of evidence most used in this process are the abstract of title with attorney's opinion and the title insurance policy. |
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Term
| attorney's opinion of abstract |
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Definition
| An attorney's opinion of abstract states that the attorney has examined a title abstract, and gives the attorney's opinion of the condition and marketability of the title. As we said, an opinion is not a proof or guarantee of clear title. Further, it offers no protection in the event title turns out to be defective. |
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Term
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Definition
| a written, chronological summary of the property's title records and other public records affecting rights and interests in the property. It includes the property's chain of title and all current recorded liens and encumbrances, by date of filing |
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Term
| What happens at the title closing? |
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Definition
The buyer completes his or her financing arrangements (referred to as closing the loan).
The seller transfers the title.
Both the buyer and seller pay the necessary taxes, fees and other charges. |
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Term
| What is the most important document at closing and why? |
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Definition
| The deed is the most important document because it transfers the property to the purchaser. |
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Term
| Define the term marketable title. |
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Definition
| A marketable title is one that is so free of defects that the buyer is certain he or she will not have to defend the title. |
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Term
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Definition
The title search reveals:
The legal description of the property
The owners of record
Any outstanding liens or encumbrances on the property |
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Term
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Definition
indication of debt secured by the property. Examples of liens include:
Outstanding property tax bills
Mortgage loans
Court-ordered judgments |
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Term
| true or false:Both the buyer and the lender should have title insurance. |
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Definition
| true, Insurance for the buyer ensures a clear title and protects his or her investment. Insurance for the lender protects the lender's interest in the property. |
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Term
| true or false: Title insurance is paid for one time, when the property passes from one owner to another. It stays in effect until the property sells again. |
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Definition
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Term
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Definition
A standard policy may be issued to a lender only, a buyer only or jointly to lender and buyer (called a joint-protection standard coverage policy).
The standard policy covers items of record as well as some risks that are not of record, such as:
Forgeries
Acts of minors and incompetents
Failure of delivery of a prior deed
Federal estate tax liens
Acts of a licensee whose authority has terminated |
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Term
| what is an extended policy? |
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Definition
An extended coverage policy insures against many of the items excluded in the standard policy. Lenders require their mortgagee polices to be extended coverage policies.
Unrecorded liens
Off-record easements
Mining claims
Water rights
Rights or claims of persons in physical possession of the property
Unrecorded claims that could be discovered by physical inspection or correct survey |
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Term
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Definition
| The term escrow is defined as the process in which a disinterested third party holds all money and documents relating to a transaction until all of the terms and conditions of the escrow instructions have been satisfied. |
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Term
| Depending on an individual state's laws, the entities or individuals that can act as escrow agents include: |
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Definition
Attorneys
Banks
Credit unions
Federally-approved lenders
Insurance companies
Persons acting under court supervision (such as probate administrators)
Title companies
Trust companies
Savings and loan associations |
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Term
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Definition
| Also referred to as closing or settlement, this is the process of signing and transferring all documents and distributing the funds. |
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Term
| What does a title search reveal? |
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Definition
The legal description of the property.
The owners of record.
Any outstanding liens or encumbrances on the property |
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Term
| Who needs title insurance and why? |
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Definition
| Both the buyer and the lender need title insurance. Insurance for the buyer ensures a clear title and protects his or her investment. Insurance for the lender protects the lender's interest in the property |
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Term
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Definition
| The process in which a disinterested third party holds all money and documents relating to a transaction until all of the terms and conditions of the escrow instructions have been satisfied. |
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Term
| List three activities that take place during the escrow period. |
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Definition
Getting an appraisal.
Ordering pest control and other inspection reports.
Obtaining property insurance. |
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Term
| in regards to property insurance, what is the co-insurance clause? |
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Definition
Most homeowner's polices also have what's called a coinsurance clause. This clause requires that the homeowner have insurance that is equal to 80% of the home's replacement value. This does not include the price of the land.
If an owner has this type of policy, he or she could make a claim for the full cost of the repair or replacement without deduction for depreciation.
If the owner does not carry this type of insurance – he or she carries less than the 80% figure – any claim will be handled in either of these two ways:
The loss will be settled for actual cash value.
The loss will be prorated.
For example, if a person's home is insured for only 70% of its replacement value and the owner suffers a loss of $15,000, the insurance will pay $13,125. (70% ÷ 80% = .875 x $15,000 = $13,125) |
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Term
| Factors that will determine whether the company will issue a policy and what premium they will charge include: |
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Definition
Current condition of the property
Claim history on that property
Owner's claim history
Owner's credit history |
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Term
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Definition
Private companies offer flood insurance that is subsidized by the federal government. This insurance protects the owner from damage caused by floods or tidal waves.
Lenders that are regulated by the government require insurance on any property located within areas identified by the Federal Emergency Management Agency (FEMA) as being flood prone.
Flood insurance is not included in a basic homeowner's policy. Therefore, any homeowner who does not purchase this insurance for a property identified as being in a flood plain will not be eligible for any financial assistance. |
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Term
| true or false: Lenders can also require the borrower to maintain an escrow account for property taxes and insurance, so that the lender is sure money will be available for the payments. These are referred to as reserves. Depending on the type of loan being issued, the lender may also require private mortgage insurance. |
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Definition
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Term
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Definition
Real Estate Settlement Procedures Act (RESPA)
RESPA applies to purchases:
Of residential property – that is, one-to-four family homes, cooperatives and condominiums.
Involving first or second mortgages.
Financed by a federally-related loan – that is, loans that are insured by a federal agency, those that are insured or guaranteed by VA or FHA, HUD-administered loans, or those that will be sold to Fannie Mae, Freddie Mac or Ginnie Mae.
RESPA does not apply to seller-financed loans. It also does not apply to a loan assumption, unless the lender has changed the terms of the assumed loan or charges more than $50 for the assumption. |
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Term
| true or false: (RESPA) is administered by the Consumer Financial Protection Bureau (CFPB). |
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Definition
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Term
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Definition
TILA/RESPA Integrated Disclosure (TRID) Rule.
According to the TRID rule:
Lenders must give a copy of the booklet, “Your home loan toolkit” to every person at the time of application for a loan.
Lenders must provide a Loan Estimate of settlement costs at the time of loan application or within three business days of application.
A Closing Disclosure, a form designed to detail all financial particulars of a transaction, must be delivered to the borrower at least three days before closing. The actual time frame is based on the method of delivery. The settlement agent must also provide the seller with the Closing Disclosure, which may be done at consummation. |
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Term
| true or false: RESPA specifically prohibits any payment or receiving of fees or kickbacks when a service has not been rendered. For example, an insurance company cannot pay a kickback to a real estate agent or to a lender for referring a client to their agency. |
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Definition
true; Referral fees are strictly forbidden for these services:
Title search
Title insurance
Inspection
Survey
Appraisal
Loan
Credit report
Attorney |
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Term
| Computerized Loan Originations |
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Definition
A real estate firm may offer a computerized loan origination system (CLO) that:
Provides a prospective borrower information about mortgage loan products
Prequalifies a borrower
Initiates a loan application process for a fee
However, RESPA allows only the borrower to pay the fee for such a service. In addition, the broker must disclose the fact that there are competing mortgage products that are not part of the system. |
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Term
| Disclosures After Settlement |
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Definition
| Loan servicers must provide borrowers with an annual escrow statement which summarizes all inflows and outflows in the prior 12-month period. The statement must also disclose shortfalls or overages in the account, and how the discrepancies will be resolved. |
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Term
| Gary carries an insurance policy that equals 60% of the replacement value of his home. He suffers $8,000 in damage on his home after a windstorm. How will his insurance claim be handled? |
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Definition
It will probably be prorated as follows to give him $6,000:
60% ÷ 80% = 75% x $8,000 = $6,000 |
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Term
| What factors determine whether a company will issue an insurance policy on a property and what premium the company will charge? |
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Definition
Current condition of the property
Claim history on that property
Owner's claim history
Owner's credit history |
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Term
| What does RESPA require lenders to give to borrowers? |
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Definition
| The correct figures pertaining to their closing costs. |
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Term
| RESPA does not apply to what kinds of loans? |
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Definition
| Seller-financed loans or loan assumptions (unless the lender has changed the terms of the assumed loan or charges more than $50 for the assumption). |
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Term
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Definition
list of the debits and credits for both the buyer and the seller.
A debit is money that the buyer or seller needs to pay at closing.
A credit is money that the buyer or seller receives at closing, either because it was already paid, it's being reimbursed or there is a promise to pay.
In order for the buyer to know how much money to bring to closing and the seller to know how much he or she will receive at closing, the entries on the settlement statement must be calculated. |
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Term
| what items does the seller usually pay? |
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Definition
Unless custom (or the sales agreement) dictates otherwise, seller expenses usually include:
Transfer taxes (state and local)
Broker commission
Attorney fees
Recording documents to clear the title
Satisfaction of existing liens
Special fees, such as coop or condo fees |
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Term
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Definition
give you an idea of the items that are typically debited
Broker's commission
Delinquent taxes
Document preparation fees
Loan balance
Pest inspection
Soil test
Survey
Termite treatment
Transfer tax
Unpaid utility bills |
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Term
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Definition
Contract sales price
Items paid for in advance, such as insurance premiums |
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Term
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Definition
This tax is imposed on any deed or instrument which conveys interest in real property in that state. The amount of the tax is based on how much money the seller gets in the transaction. In some states, if the seller's mortgage is being assumed by the buyer, the state will subtract the amount of the assumed loan from the sale price of the property before the tax is computed.
Oklahoma transfer tax = $0.75/per $500
The transfer tax is also known as a conveyance tax or as revenue stamps. Even though the seller typically pays the tax, it is common for builders to require the buyer to pay the tax on new construction.
The tax is due at the time of the filing of the deed or instrument and is collected by county clerks throughout the state. |
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Term
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Definition
In 1985, Congress passed the Foreign Investment in Real Property Tax Act (FIRPTA) to eliminate the problem of collecting delinquent taxes from foreigners who owned and sold property in the US and left the country without paying the taxes due on the sale.
The seller must deliver a FIRPTA Certificate to the buyer. In general, FIRPTA requires a buyer to withhold estimated taxes equal to 10% of the sale price in any sale or exchange of property owned by a foreigner (not a US citizen). The IRS keeps this 10% to ensure that any capital gains on the sale are paid. The liability for this withholding is shared by both the buyer and the broker. If the 10% is not withheld, the broker could be held liable for the full amount of any taxes not paid.
Note: Residential property that sells for under $300,000 and will be used as the buyer's personal residence is exempt from the FIRPTA requirement. |
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Term
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Definition
| Condominiums have special maintenance fees due to the homeowner's association. These fees are called assessments. If the seller owes of these fees, he or she will pay them at closing. If the seller has prepaid these fees, an adjustment will be made at closing. |
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Term
| items that the buyer usually pays. |
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Definition
Appraisal and credit report fees
Inspections
Mortgage recording fees
Title insurance
Attorney fees
Lender fees
Recording
Private Mortgage Insurance (PMI), if applicable
Special fees, such as coop or condo fees |
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Term
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Definition
Contract sales price
Credit report
Recording of deed and mortgage documents
Homeowner's insurance
Other expenses, such as loan origination fee, closing fee, recording fee, attorney fees |
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Term
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Definition
Earnest money or deposit
Loan amount |
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Term
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Definition
| The buyer will pay for the structural inspection of the home. These inspections cost from $250 to $400. If the buyer had any other inspections done, such as pest or termite inspections, water quality or radon testing, the buyer will pay those additional costs at closing. |
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Term
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Definition
Many states assess a mortgage recording tax for any mortgages recorded in their state. Typically, the tax is made up of several taxes added together and are based on the taxes that are in effect in the county or city where the property is located.
buyer pays |
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Term
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Definition
| As we mentioned earlier in this chapter, both the buyer and the lender should have title insurance. Many lenders require it. The buyer pays for the lender's policy, and the buyer typically pays for the title search. The title search and lender's policy typically cost upwards of $350. |
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Term
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Definition
The fees associated with recording the deed.
buyer pays |
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Term
| Some expenses paid at closing must be prorated |
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Definition
divided proportionately between the buyer and the seller. The most common items that fall into this category include:
Taxes
Insurance
Mortgage interest
Utilities |
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Term
| 12-month/30-day method for proration |
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Definition
| calculates the amounts due based on a 360-day year and a 30-day month. The steps of this method are as follows. |
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Term
| If an item is paid for in advance by the seller, how will it be handled on the settlement statement? |
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Definition
| The buyer will receive a debit and the seller will receive a credit. |
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Term
| What do you call those items that the seller has incurred but have not been paid, and how will they be handled on the settlement statement? |
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Definition
These items are paid in arrears. The buyer will get a credit and the seller will get a debit.
property tax |
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Term
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Definition
The title to the property has transferred when the deed is delivered and accepted by the buyer. Delivery and acceptance must occur during the lifetime of the seller.
The seller must sign the deed, which must have the names of the seller and buyer, the words of conveyance and the correct legal description.
It is not a legal requirement that a deed be recorded in the County Clerk's office. However, recording the deed could offset any future problems. |
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Term
| IRS Reporting Requirements |
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Definition
All real estate sales must be reported to the Internal Revenue Service after closing. The sale must be reported on a Form-1099. The responsibility for filling out and submitting the form generally falls to the person who conducted the closing, which could be any one of the following persons.
Closing officer
Lender
Selling/Listing broker
Buyer's broker
The form could also be filed by a U.S. Treasury designee.
There is no charge to the buyer for submitting this form to the IRS. |
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Term
| Interest Payment Notification |
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Definition
| Each January, the servicing lender must provide a Form 1098 to the borrower to include in his or her federal income tax return. The 1098 notifies the borrower of the total amount of interest and property taxes paid in the previous year. Interest and property taxes are both tax deductible. |
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Term
| What does page 2 of the Closing Disclosure show? |
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Definition
| The details of the closing costs |
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Term
| What does page 3 of the Closing Disclosure contain? |
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Definition
| Calculations of the amount of cash the buyer needs to bring to closing and summaries of all the transactions for both the buyer and the seller |
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Term
| When has the title to the property officially transferred? |
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Definition
| When the deed is delivered and accepted by the buyer |
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Term
| Who is responsible for reporting the real estate sale to the IRS? |
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Definition
| The responsibility for filling out and submitting the form generally falls to the person who conducted the closing. |
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