© 2008 by South-Western, Cengage Learning Chapter 16 Charles J. Jacobus Thomas E. Gillett

© 2008 by South-Western, Cengage Learning Georgia Real Estate An Introduction to the Profession Seventh Edition Chapter 16 Closing the Transaction

© 2008 by South-Western, Cengage Learning Buyer’s Walk-Through Buyer’s Walk-Through Final Inspection prior to closing Vacant? Damage? Personal Property Real Property? Mechanical systems? Plumbing? Structure?

© 2008 by South-Western, Cengage Learning Closing Closing, Settlement, or Escrow Completion of the real estate transaction Closing Date Escrow Agent

© 2008 by South-Western, Cengage Learning Closing or Settlement Meeting Seller delivers the deed Buyer makes payment Real Estate Agents attend Attorney represents Lender Power of Attorney

© 2008 by South-Western, Cengage Learning Seller’s Responsibilities Seller & attorney prepare the deed Property tax bill Documents as required by the contract Loan pay-off Keys & garage door opener Condominium, cooperative or PUD

© 2008 by South-Western, Cengage Learning Buyer’s Responsibilities Settlement funds Loan commitment Real Estate Agent Represents the Broker Commission Check New loan Buyer signs note & mortgage

© 2008 by South-Western, Cengage Learning Real Estate Agent’s Duties Listing Agent: Seller is prepared Selling Agent: Buyer is prepared Keep all parties fully informed

© 2008 by South-Western, Cengage Learning The Closing The Transaction Settlement Statement Accounting of all monies paid by Buyer and Seller Dry Closing Close in escrow

© 2008 by South-Western, Cengage Learning Delays and Failure to Close Closing Date 30 – 60 Days from contract Delays Clear Title Loan Commitment Damage to property Termination & Release

© 2008 by South-Western, Cengage Learning Taxpayer Relief Act of 1997 IRS Form 1099-S Certification signed by Seller 2 of past 5 years No other principal residence in that time period Not used for business or rental purposes Price, Capital Gain, Marital Status

© 2008 by South-Western, Cengage Learning Prorating at the Closing Day of closing belong to the Seller Day of closing belong to the Seller Buyer: interest on new loan Buyer: interest on new loan Annual bills: 365 day year Annual bills: 365 day year Interest: 360 Day year Interest: 360 Day year Loan amount rounds down to nearest $100 Loan amount rounds down to nearest $100 Loan payments due 1 st of the month Loan payments due 1 st of the month Calculate to 4 digits past decimal Calculate to 4 digits past decimal

© 2008 by South-Western, Cengage Learning Prorating at the Closing Beginning Closing End Seller Buyer

© 2008 by South-Western, Cengage Learning Property Taxes Annual tax divided by 365 X # of days Jan 1 Dec 31 March 15 Seller 74 days $2,070 divided by 365 = X 74 days = $419.67

© 2008 by South-Western, Cengage Learning Property Taxes Annual tax divided by 365 X # of days Jan 1 Dec 31 September 10 $1,756 divided by 365 = X 112 days = $ Buyer 112 Days

© 2008 by South-Western, Cengage Learning Property Taxes $2,598 Mar 3 No $865 Oct 13 Yes $1,398 June 9 No $4,876 April 7 No $2,723 Aug 20 Yes $1,250 Nov 3 Yes Annual Tax Closing Date Taxes Paid? Who is Credited? Days Amount Buyer Seller Buyer Seller $ $ $ $12,95.81 $ $202.50

© 2008 by South-Western, Cengage Learning Hazard Insurance Annual premium divided by 365 X # of days June 15 June 14 January 27 $425 divided by 365 = X 138 days = $ Days

© 2008 by South-Western, Cengage Learning Hazard Insurance Annual premium divided by 365 X # of days April 23 April 22 December 11 $672 divided by 365 = X 132 days = $ Days

© 2008 by South-Western, Cengage Learning Hazard Insurance Begin Date Closing Date Annual Bill DaysAmount Oct 4Jan 17$317 Mar 22Aug 4$815 Jan10April 16$713 July 24Feb 7$476 Aug 7July 28$957 May 16Sep 16$ $ $ $ $ $23.60 $391.54

© 2008 by South-Western, Cengage Learning Accrued Interest Loan Amt X annual interest rate divided by 360 X # of days March 1 April 1 March 23 $79,265 X 7% = $5, divided by 360 = $ X 23 = $ days

© 2008 by South-Western, Cengage Learning Accrued Interest Loan Amt X annual interest rate divided by 360 X # of days July 20 August 20 August 8 $248,937 X 6.5% = $16, divided by 360 = $ X 20 = $ Days

© 2008 by South-Western, Cengage Learning Accrued Interest Loan Amount RateDue DateClosing Date DaysAccrued Interest $274,9348%July 1July 22 $264, %April10April 27 $73, %Oct 3Nov 1 $86, %Feb 1Feb 17 $95, %Oct 1Oct 8 $194, %May 20June $13,44.12 $ $ $ $ $949.89

© 2008 by South-Western, Cengage Learning New Loans and Down Payment L/V: Loan to Value Ratio Higher L/V = higher risk Lower L/V = lower risk 80%, 90%, 95% L/V Loan Amount Sales Price = L/V ratio

© 2008 by South-Western, Cengage Learning New Loans and Down Payment Computing Down Payment ALWAYS compute loan amount first Round down to the nearest $100 Subtract from sales price

© 2008 by South-Western, Cengage Learning New Loans and Down Payment Computing Down Payment $157,000 Sales Price X 90% L/V $141, 300 Loan Amount $157,000 Sales Price - 141,300 Loan Amount $15,700 Down Payment

© 2008 by South-Western, Cengage Learning New Loans and Down Payment $172,400 Sales Price X 95% L/V $163,780 Loan Amount $172,400 Sales Price - 163,700 Loan Amount $ 8,700 Down Payment Round down to $163,700

© 2008 by South-Western, Cengage Learning Down Payments Sales PriceL/V RatioLoan Amount Down Payment $267,00090% $173,20095% $135,600$123,000 $385,000$327,000 $87,50095% $172,450$157,000 $240,300 $164,500 95% 90% 95% $83,100 $26,700 $8,700 $12,600 $57,400 $4,400 $14,550

© 2008 by South-Western, Cengage Learning Interest Adjustment If the closing date is the 1 st of the month… Buyer’s 1 st payment is due on the 1 st day of the following month 1 st Payment pays interest for the preceding month

© 2008 by South-Western, Cengage Learning Interest Adjustment If the closing is on any other day…. Buyer’s payment will skip 1 month 1st payment will be due the month after At closing, buyer will owe interest for the remaining days in the month of closing

© 2008 by South-Western, Cengage Learning Interest Adjustment Sales Price X L/V ratio = Loan Amount Loan Amount X Interest Rate = Annual Interest Annual Interest divided by 360 = Daily Interest Daily Interest X # of days owed = Int. Adjustment

© 2008 by South-Western, Cengage Learning Interest Adjustment $225,000 Sales Price X 90% L/V $202,500 Loan Amount X 6% Interest Rate $12,150 Annual Interest 360 $ X 25 days = $ Interest Adjustment

© 2008 by South-Western, Cengage Learning Interest Adjustment $176,900 Sales Price X 90% L/V $159,210 round down to X 6.625% Interest Rate $10, Annual Int. 360 $ X 25 days = $ Interest Adjustment $159,200 Loan Amount

© 2008 by South-Western, Cengage Learning Interest Adjustments Sales Price L/V Ratio RateClosing Date 1 st Pymt Loan AmtDaysAmt $295,00080%6.5%Mar 13 $172,50095%6.75%Oct 27 $223,50090%6.75%May 6 $88,70095%7%June 1 $675,80075%7.25Nov 17 $108,00090%5.75%Jan11 May 1 Dec 1 July 1 Jan 1 Mar 1 $236,000 $163,800 $201,100 $84,200 $506,800 $97, $ $ $ $1, $326.03

© 2008 by South-Western, Cengage Learning Rent Prorations Rent is paid in advance Seller is entitled to rent on the day of closing Monthly Rent divided by # of days in the mo. X the # of days from the day after closing until the end of the month

© 2008 by South-Western, Cengage Learning Rent Pro-ration $850 Monthly Rent 31 Days in March $ Rent per day X 11 Days owed $ Rent to Buyer = $ Rent per day

© 2008 by South-Western, Cengage Learning Rent Pro-ration $1,250 Monthly Rent 30 Days in Sept. $ Rent per day X 26 Days owed $1, Rent to Buyer = $ Rent per day

© 2008 by South-Western, Cengage Learning Interest Adjustments Closing Date Monthly Rent DaysAmount Oct 10$1,480 May 3$825 June 28$1,450 Feb 17$725 July 20$1,800 Sep 9$ $1, $ $96.67 $ $ $630.00

© 2008 by South-Western, Cengage Learning Mortgage Insurance Conventional Loans with greater than 80% L/V ratio Upfront Charge (.5% - 1%) Annual Premium (.3% - 1%)

© 2008 by South-Western, Cengage Learning Mortgage Insurance Upfront Charge 1.5% Annual Premium.5%

© 2008 by South-Western, Cengage Learning Mortgage Insurance Loan Amount X the Percentage = Mortgage Insurance

© 2008 by South-Western, Cengage Learning Upfront PMI $175,000 Sales Price X 90% L/V $157,500 Loan Amount X.8% Upfront Premium $1,260 Upfront PMI

© 2008 by South-Western, Cengage Learning Annual PMI $157,500 Loan Amount X.65% Annual Premium $1, Annual Premium

© 2008 by South-Western, Cengage Learning MIP $116,400 Loan Amount X 1.5% Upfront Premium $1,746 Upfront MIP $116,400 Loan Amount X.5% Annual Premium $582 Annual Premium

© 2008 by South-Western, Cengage Learning Mortgage Insurance Sales Price TypeLoan Amount Upfront % Annual % Upfront Amount Annual Amount $225,00090%.75%.5% $420,00095%.9%.75% $142,000FHA$135,400 $284,50095%085%065% $94,300FHA$90,000 $88,25090%.6%.45% $202,000 $399,000 $270,200 $79, %.5% $1, $3, $2, $2, $1, $ $1, $2, $ $1, $ $357.30

© 2008 by South-Western, Cengage Learning Tax Escrow 1/12 of annual property taxes, homeowners insurances, and mortgage insurance

© 2008 by South-Western, Cengage Learning Tax Escrow Annual tax bill divided by 12 X the number of months $2,275 divided by 12 = $ X 7 months = $1,327.08

© 2008 by South-Western, Cengage Learning Tax Escrow Annual TaxesNumber of Months Tax Escrow $2,7503 $1,6359 $1,39713 $4,2865 $3,2648 $98210 $ $1, $1, $1, $2, $818.33

© 2008 by South-Western, Cengage Learning Insurance Escrow Annual Insurance bill divided by 12 X 3 $450 divided by 12 = $ X 3 months = $112.50

© 2008 by South-Western, Cengage Learning Tax Escrow Annual Insurance BillInsurance Escrow $865 $504 $1,649 $973 $2974 $776 $ $ $ $ $ $194.00

© 2008 by South-Western, Cengage Learning Transfer Tax Sales price minus any assumable loan = Adjusted Sales Price 10 cents per $100 or any portion thereof 2008 GAR Contracts – paid by buyer

© 2008 by South-Western, Cengage Learning Transfer Tax Sales Price - Assumed Loan = Adjusted Sales Price divide by 100 Round up to the next whole number X.10 = Tax owed

© 2008 by South-Western, Cengage Learning Transfer Tax $126, = $126,700 divided by 100 = $1,267 X $.10 = $126.70

© 2008 by South-Western, Cengage Learning Transfer Tax $98,700 - $73,214 = $25,286 divided by 100 = round up to X.10 = $25.30

© 2008 by South-Western, Cengage Learning Transfer Tax Sales PriceExisting Loan Assumed?Transfer Tax $265,800$174,473No $163,700$149,576Yes $125,000$95,674Yes $374,700$202,395No $254,600$201,578Yes $96,500$79,746No $ $14.20 $29.40 $ $53.10 $96.50

© 2008 by South-Western, Cengage Learning Intangibles Tax New loan divided by 500 Rounded up to the next whole number X $1.50 $1.50 per $500 or any part thereof on a new loan

© 2008 by South-Western, Cengage Learning Intangibles Tax $225,000 Sales price X 90% L/V = $202,500 divided by 500 = 405 X $1.50 = $ Intangibles Tax

© 2008 by South-Western, Cengage Learning Intangibles Tax $167,400 Sales price X 90% L/V = $150,660 rounded down to $150,600 $150,600 divided by 500 = rounded up to 302 X $1.50 = $ Intangibles Tax

© 2008 by South-Western, Cengage Learning Transfer Tax Sales PriceNew Loan Type Loan Assumed Intangibles Tax $88,50090% $165,00080% $126,20095% $458,50080% $217,200100% $95,50090% $79,600 $132,000 $119,800 $366,800 $217,200 $85,900 $ $ $ $1, $ $258.00

© 2008 by South-Western, Cengage Learning Closing the Transaction Buyer & Seller Worksheets Settlement Statement HUD-1 Required by RESPA

© 2008 by South-Western, Cengage Learning RESPA Regulates and standardizes settlement practice Restrictions Prohibits kickbacks Impounds restricted to an additional 1/6

© 2008 by South-Western, Cengage Learning RESPA Benefits HUD Information Book Good Faith Estimate HUD Settlement Statement Inspect HUD-1 day prior to closing

© 2008 by South-Western, Cengage Learning Key Terms Key Terms Closing Closing agent Prorating RESPA Settlement statement Walk-through