chapter 15. georgia real estate an introduction to the profession eighth edition chapter 15 closing...

Chapter 15

Georgia Real Estate An Introduction to the Profession

Eighth Edition

Chapter 15

Closing the Transaction

Key Terms• closing• closing agent• prorating

• Real Estate Settlement Procedures Act (RESPA)

• settlement statement

• walk-through

© 2015 OnCourse Learning

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.


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.


Closing

Common terms used are closing, settlement or escrow.

In Georgia, we use the term closing.


Closing or Settlement MeetingIn 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.


Closing or Settlement MeetingIf 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.


Seller’s Responsibilities at ClosingThe 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


Seller’s Responsibilities at Closing

The keys to the property , garage door openers and any other similar items would also be brought to closing.


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.


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.


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.


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.


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.


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.


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.


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.


Delays and Failure to CloseIf 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

Reporting Requirements

The Internal Revenue Code requires that the seller's proceeds from all sales be reported to the Internal Revenue Service.


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.


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.



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.


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.



• 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.



Everything before the closing is the responsibility of the seller; everything after the closing is the responsibility of the buyer.


Beginning

Close

End

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.


Property Taxes

Let’s look at an example of a closing scheduled for March 15th 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?


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

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.


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 isCredited? Days Amount

Buyer

Seller

Buyer

Buyer

Seller

Seller

62

79

160

97

133

59

$441.30

$187.22

$612.82

$12,95.81

$992.22

$202.50

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.


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.


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


June 15

January 27

June 14

Hazard Insurance


Begin Date

Closing Date

Annual Bill

Days Amount

Oct 4 Jan 17 $317

Mar 22 Aug 4 $815

Jan10 April 16 $713

July 24 Feb 7 $476

Aug 7 July 28 $957

May 16 Sep 16 $593

259

229

268

166

9

241

$224.94

$511.33

$523.52

$216.48

$23.60

$391.54

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.


Accrued Interest

A June 1st payment would pay the loan interest from May 1st through May 31st, but would not pay for June 1st.


Accrued Interest

Let’s look at an example: If the closing took place on March 23rd 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?


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.


March 1

March 23

April 1

Accrued Interest

$79,265 x 7% ÷ 360 x 23 days = $354.49

*Remember, interest uses a 360-day banker’s year


Accrued Interest


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.


New Loans and Down PaymentsDown 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.


Down Payments


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.


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 7th.

What is the interest adjustment?


Interest Adjustment

Sales price x LTV = Loan AmountLoan amount x Interest rate = Annual

InterestAnnual Interest ÷ 360 = Daily interest

rate

Daily interest rate x number of days = Interest adjustment


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


Interest Adjustment


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.


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


Rent Proration

Another example: Margaret purchases a tenant-occupied property from Frank. The closing is expected to be September 4th and the rent of $1,250 is to be prorated.

What are the number of days and amount of proration?


Rent Proration

30 – 4 = 26 days’ proration

$1,250 ÷ 30 x 26 = $1,083.33


Rent Proration


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.


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%.


Mortgage Insurance

Loan amount x Required percentages =

Amount due up front and annual PMI premium


Mortgage Insurance


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.


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.


Tax EscrowsAll 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.


Tax Escrows

You will be told how many months to escrow.

Annual tax bill ÷ 12 x Number of months required = Tax

escrow


Tax Escrows


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


Insurance Escrow


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.


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.


Transfer Tax

Sales price – Loan assumed ÷ 100 = Transfer tax


Transfer Tax


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.


Intangibles Tax

New loan ÷ 500 (rounding up to the next whole

number) x $1.50 = Intangibles tax


Intangibles Tax


Settlement Statement

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


Real Estate Settlement Procedures ActIn response to consumer complaints regarding real estate closing costs and procedures, Congress passed the Real Estate Settlement Procedures Act (RESPA).


Real Estate Settlement Procedures ActThe 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.


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.


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.


Restrictions

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


BenefitsAnyone 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

BenefitsThe 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.


HUD Settlement StatementThe HUD Settlement Statement (HUD-1) is required of all federally related real estate lenders.

It is generally used even when it is not required.


chapter 15. georgia real estate an introduction to the profession eighth edition chapter 15 closing...

Documents

closing closing

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closing agent

dry closing

term closing

transaction slide

buyer andor seller

real estate transaction