1. Chapter 15

2. Georgia Real Estate An Introduction to the Profession Eighth Edition Chapter 15 Closing the Transaction

3. Key Terms closing closing agent prorating Real Estate Settlement Procedures Act (RESPA) settlement statement walk-through © 2015 OnCourse Learning

4. Buyer’s Walk-Through It is good practice for a buyer to make a final walk-through just prior to closing. The walk-through gives the buyer the opportunity to make certain that agreements regarding the condition of the premises have been kept. © 2015 OnCourse Learning

5. Closing Closing refers to the completion of a real estate transaction. This is when the buyer pays for the property and the seller delivers the deed. © 2015 OnCourse Learning

6. Closing Common terms used are closing, settlement or escrow. In Georgia, we use the term closing. © 2015 OnCourse Learning

7. Closing or Settlement Meeting In most cases, the seller and buyer both attend the closing. The seller delivers the deed and the buyer pays the seller for the property. The real estate agents who represented the buyer and seller may also be present. © 2015 OnCourse Learning

8. Closing or Settlement Meeting If there is a new loan, an attorney representing the lender will conduct the closing. If the buyer and/or seller cannot attend the closing in person, a representative with a power of attorney can sign for them. © 2015 OnCourse Learning

9. Seller’s Responsibilities at Closing The seller is responsible for bringing certain documents to the closing. These can be: deed most recent tax bill insurance policy termite inspection report documents showing the removal of liens bill of sale for personal property © 2015 OnCourse Learning

10. Seller’s Responsibilities at Closing The keys to the property, garage door openers and any other similar items would also be brought to closing. © 2015 OnCourse Learning

11. Buyer’s Responsibilities at Closing The buyer must bring adequate settlement funds. The lender provides a check for the amount of the loan along with the note and mortgage for the borrower to sign. © 2015 OnCourse Learning

12. Real Estate Agent’s Duties The real estate agent is present on behalf of the broker, receive the commission check and make sure all goes smoothly. It is the duty of the agent who listed the property to make certain that they are prepared for the meeting. © 2015 OnCourse Learning

13. Real Estate Agent’s Duties It is the duty of the agent who found the buyer to make certain that the buyer is prepared. The buyer and seller are to be kept informed as the status of the closing. © 2015 OnCourse Learning

14. The Transaction A settlement statement is given to the buyer and seller to summarize the financial aspects of their transaction. It provides a clear picture of where the buyer’s and seller’s money is going at the closing. © 2015 OnCourse Learning

15. The Transaction The buyer will give the attorney a certified check for the balance owed, and the attorney will provide a check to the seller. The deed, new security deed and release of the old security deed are recorded and the transaction is complete. © 2015 OnCourse Learning

16. Dry Closing When there is an unavoidable circumstance that delays a closing, the parties may closing into escrow, also referred to as a dry closing. © 2015 OnCourse Learning

17. Dry Closing All parties sign their documents. No money is disbursed and the deed is not delivered until the missing paperwork arrives. When it does, the closing attorney completes the transaction and delivers the money and documents by mail or messenger. © 2015 OnCourse Learning

18. Delays and Failure to Close When a real estate contract is written, a closing date is also negotiated and placed in the contract. Delays along the way are sometimes encountered. © 2015 OnCourse Learning

19. Delays and Failure to Close If the delay will be long, the wisest choice may be to relieve all parties from further obligations. It is essential that the buyer and seller sign termination and release papers to rescind the purchase contract and cancel the transaction. The buyer’s deposit is also returned. © 2015 OnCourse Learning

20. Reporting Requirements The Internal Revenue Code requires that the seller's proceeds from all sales be reported to the Internal Revenue Service. © 2015 OnCourse Learning

21. Reporting Requirements The Taxpayer Relief Act of 1997 provides that real estate reporting person's generally do not need to file form 1099–S for sales or exchanges or principal residence with the sales price at or below $250,000 for a single individual or $500,000 for a married couple. © 2015 OnCourse Learning

22. Prorating at the Closing When an item was pre-paid by the seller and then not completely used, that portion that was unused must be computed and refunded to the seller. © 2015 OnCourse Learning

23. Prorating at the Closing In calculating the prorations, several assumptions should be made unless otherwise indicated: The date of closing is the responsibility of the seller. On a new loan, interest paid to the lender is the responsibility of the borrower. © 2015 OnCourse Learning

24. Prorating at the Closing Annual bills should be prorated on a 365-day year with the exception of interest. On interest, use a 360-day banker's year. When computing the loan amounts, the loan should be in $100 increments and you should round the amount down in $100 increments as necessary. © 2015 OnCourse Learning

25. Prorating at the Closing Loan payments are made on the first day of the month. When computing prorations or percentages, have a calculator displaying at least four digits past the decimal to get accurate answers. © 2015 OnCourse Learning

26. Prorating at the Closing Everything before the closing is the responsibility of the seller; everything after the closing is the responsibility of the buyer. © 2015 OnCourse Learning Beginning Close End

27. Property Taxes The amount of proration depends on when the property taxes are due, what portion has already been paid, and what period of time they cover. You will be told the amount of the tax bill, what has or has not been paid, and that the taxes will be paid for a calendar year. © 2015 OnCourse Learning

28. Property Taxes Let’s look at an example of a closing scheduled for March 15 th with an unpaid annual tax bill of $2,070. What is the number of days of proration and what will be the amount of proration? © 2015 OnCourse Learning

29. Property Taxes (Annual tax bill ÷ 365) x Days Owed = Tax Proration The seller will owe from January 1 through March 15. 31 + 28 + 15 = 74 days © 2015 OnCourse Learning January 1 March 15 December 31

30. Property Taxes If the unpaid annual tax bill is $2,070, divide the tax bill by 365. ($2,070 ÷ 365) x 74 days = $419.67 The buyer will be credited $419.67 at closing. © 2015 OnCourse Learning

31. Property Taxes © 2015 OnCourse Learning $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 62 79 160 97 133 59 $441.30 $187.22 $612.82 $12,95.81 $992.22 $202.50

32. Hazard Insurance Hazard insurance policies for such things as fire, wind, storm, and flood damage are paid for in advance for an insurance year. The policy begins the day of closing and is prepaid for one year. © 2015 OnCourse Learning

33. Hazard Insurance Since the policy is always prepaid, the seller will always be refunded from the day after closing through the end of the paid policy. © 2015 OnCourse Learning

34. Hazard Insurance (Annual insurance bill ÷ 365) x Days Owed = Insurance Proration The seller will be refunded from January 28 through June 14th. 4 + 28 + 31 + 30 + 31 + 14 = 138 days © 2015 OnCourse Learning June 15 January 27 June 14

35. Hazard Insurance © 2015 OnCourse Learning 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$593 259 229 268 166 9 241 $224.94 $511.33 $523.52 $216.48 $23.60 $391.54

36. Accrued Interest The seller will be responsible for the interest on an existing loan from the last payment date through the closing date. The interest is paid in arrears. © 2015 OnCourse Learning

37. Accrued Interest A June 1st payment would pay the loan interest from May 1st through May 31st, but would not pay for June 1st. © 2015 OnCourse Learning

38. Accrued Interest Let’s look at an example: If the closing took place on March 23 rd and the seller had a loan balance of $79,265 at 7% interest as of the March 1 payment, what is the amount of accrued interest? © 2015 OnCourse Learning

39. Accrued Interest (Existing loan amount x Annual Interest Rate ÷ 360) x Days Owed = Accrued Interest The seller will be responsible for the interest from March 1 through March 23, which is 23 days. © 2015 OnCourse Learning March 1 March 23 April 1

40. Accrued Interest $79,265 x 7% ÷ 360 x 23 days = $354.49 *Remember, interest uses a 360-day banker’s year © 2015 OnCourse Learning

41. Accrued Interest © 2015 OnCourse Learning

42. New Loans and Down Payments New loans are typically represented as a percentage of the sales price, known as the loan-to-value ratio (LTV). The higher the LTV, the higher the potential risk to the lender in the event the borrower defaults. © 2015 OnCourse Learning

43. New Loans and Down Payments Down payments are the difference between the sales price and the loan amount. Always compute the loan amount first; round down in $100 increments if necessary and then subtract the loan amount from the sales price and you will get the down payment every time. © 2015 OnCourse Learning

44. Down Payments © 2015 OnCourse Learning

45. Interest Adjustment If the closing is on the first of the month, the first payment will be the first day of the following month. If the closing is any day of the month except the first, the borrower's first payment will not be due the following month, but the month after. © 2015 OnCourse Learning

46. Interest Adjustment Let’s look at an example: John purchases a property for $225,000 with a 90% conventional loan with an interest rate of 6%. The closing is scheduled for March 7 th. What is the interest adjustment? © 2015 OnCourse Learning

47. Interest Adjustment Sales price x LTV = Loan Amount Loan amount x Interest rate = Annual Interest Annual Interest ÷ 360 = Daily interest rate Daily interest rate x number of days = Interest adjustment © 2015 OnCourse Learning

48. Interest Adjustment The buyer will owe interest on the new loan from March 7 through March 31, which is 25 days. $225,000 x 90% = $202,500 loan ($202,500 x 6%) ÷ 360 x 25 days = $843.75 © 2015 OnCourse Learning

49. Interest Adjustment © 2015 OnCourse Learning

50. Rent Proration Rent is paid in advance and usually due on the first of the month. Prepaid rent will have to be prorated between the seller and buyer. The seller will credit the buyer from the day after closing to the end of the month. © 2015 OnCourse Learning

51. Rent Proration The formula for rent proration is: Monthly rent ÷ Days in the month x Days from the day after closing through the end of the month = Rent proration © 2015 OnCourse Learning

52. Rent Proration Another example: Margaret purchases a tenant-occupied property from Frank. The closing is expected to be September 4 th and the rent of $1,250 is to be prorated. What are the number of days and amount of proration? © 2015 OnCourse Learning

53. Rent Proration 30 – 4 = 26 days’ proration $1,250 ÷ 30 x 26 = $1,083.33 © 2015 OnCourse Learning

54. Rent Proration © 2015 OnCourse Learning

55. Mortgage Insurance Mortgage insurance is expected on conventional loans above 80% LTV ratio and FHA loans. Private mortgage insurance (PMI) is typically paid with an upfront amount at closing and then an annual premium. © 2015 OnCourse Learning

56. Mortgage Insurance With the FHA, the upfront amount is typically 1.75% of the loan amount and an annual premium of 0.85%*. *As of January 2015, the annual premium for FHA loans was lowered from 1.35% to 0.85%. © 2015 OnCourse Learning

57. Mortgage Insurance Loan amount x Required percentages = Amount due up front and annual PMI premium © 2015 OnCourse Learning

58. Mortgage Insurance © 2015 OnCourse Learning

59. Tax Escrows Many loans will require the borrower to escrow an amount with the lender to pay future payments of such things as property taxes, homeowners insurance, and mortgage insurance. © 2015 OnCourse Learning

60. Tax Escrows The borrower pays 1/12th of the annual amount to the lender each month, along with the payment. These loans are referred to as budget loans. © 2015 OnCourse Learning

61. Tax Escrows All FHA loans, all VA loans, and conventional loans above 80% will be budget loans. The Real Estate Settlement Procedures Act (RESPA) places requirements on lenders as to how much they can require a borrower to deposit into the escrow account as a prerequisite for being approved for a loan. © 2015 OnCourse Learning

62. Tax Escrows You will be told how many months to escrow. Annual tax bill ÷ 12 x Number of months required = Tax escrow © 2015 OnCourse Learning

63. Tax Escrows © 2015 OnCourse Learning

64. Insurance Insurance proration will require either a two- or three- month escrow requirement from the lender. Annual insurance bill ÷ 12 x Months of escrow required = Insurance escrow requirement © 2015 OnCourse Learning

65. Insurance Escrow © 2015 OnCourse Learning

66. Transfer Tax Transfer tax is a state tax paid when recording a deed transfer. There is always a transfer tax, and it can be paid by the seller or the buyer. © 2015 OnCourse Learning

67. Transfer Tax The transfer tax is paid on the adjusted sales price, which is the sales price minus the loan assumed. The tax is paid at the rate of $.10 per $100 increment or any portion thereof. Transfer tax will always end in a zero. © 2015 OnCourse Learning

68. Transfer Tax Sales price – Loan assumed ÷ 100 = Transfer tax © 2015 OnCourse Learning

69. Transfer Tax © 2015 OnCourse Learning

70. Intangibles Tax Whenever there is a new recorded loan, there will be an intangibles tax. Intangibles tax is paid at the rate of a $1.50 per $500 increment or any part thereof on the new loan. If there is no new loan, there is no intangibles tax. © 2015 OnCourse Learning

71. Intangibles Tax New loan ÷ 500 (rounding up to the next whole number) x $1.50 = Intangibles tax © 2015 OnCourse Learning

72. Intangibles Tax © 2015 OnCourse Learning

73. Settlement Statement The HUD-1 Settlement Statement is the form required by the Real Estate Settlement Procedures Act (RESPA) in most residential closings. © 2015 OnCourse Learning

74. Real Estate Settlement Procedures Act In response to consumer complaints regarding real estate closing costs and procedures, Congress passed the Real Estate Settlement Procedures Act (RESPA). © 2015 OnCourse Learning

75. Real Estate Settlement Procedures Act The purpose of our RESPA is to regulate and standardized real estate settlement practices when federally related first mortgage loans are made on one- to four-family residences, condominiums, and cooperatives. © 2015 OnCourse Learning

76. Restrictions RESPA prohibits kickbacks and fees for services not performed during the closing process. The act prohibits the seller from requiring that the buyer purchase title insurance from a particular title company. © 2015 OnCourse Learning

77. Restrictions The act also contains restrictions on the amount of advanced property tax and insurance payments a lender can collect and place in an impound or reserve account. © 2015 OnCourse Learning

78. Restrictions This requirement ensures that the lender has an adequate but not excessive amount of money impounded when taxes and insurance payments fall due. © 2015 OnCourse Learning

79. Benefits Anyone applying for a RESPA–regulated loan will receive several benefits: HUD information booklet explaining RESPA. Good-faith estimate of closing costs HUD Uniform Settlement Statement Buyer has the right to inspect the Settlement Statement one business day before the day of closing © 2015 OnCourse Learning

80. Benefits The primary reason lenders are required to promptly give loan applicants an estimate of closing costs is to allow the loan applicant an opportunity to compare prices for the various services the transaction will require. These estimates help the borrower estimate closing costs. © 2015 OnCourse Learning

81. HUD Settlement Statement The HUD Settlement Statement (HUD-1) is required of all federally related real estate lenders. It is generally used even when it is not required. © 2015 OnCourse Learning