TITLE CLOSING AND SETTLEMENT PROCEDURES

10 TITLE CLOSING AND SETTLEMENT PROCEDURES RATIONALE FOR CHAPTER This chapter discusses the most important part of the real estate transaction: the closing. Not only will title transfer, but that well-earned commission will finally materialize. By the time of closing, the licensee s role is practically over, as attorneys for the buyer, seller, and lender usually prepare documents and arrange the details. It is helpful, however, for the licensee to understand the documents, expenses, and other elements of a closing. In this way, licensees can alert sellers and purchasers as to what to expect at closing and what their responsibilities are. FOCUS OF PRESENTATION 1. As you will see in the textbook, the topics are not discussed in great detail. A basic knowledge of what happens immediately before and during the closing should be your focus. 2. First discuss what a closing is. Ask students if they have participated in a closing and what their experience has been. Review why recordation is important. Students should already understand this concept from reading Chapter 4 Deeds. 3. Briefly review and explain the documents required for a closing and which parties need to supply them. 4. Explain what a title search is. Review the implications of an unclear or bad title. 5. Discuss the licensee s role before closing that will primarily consist of arranging for a final walk through of the property. Include how the commission is paid; this will be of interest to all. See Figure 10.1 Broker Commission Agreement. 6. Spend some time reviewing RESPA and why it is important. Emphasize that it applies to federally financed residential property, not commercial. Use the You Should Know learning highlight to discuss the differences between RESPA and TILA. 7. Explain the meaning of debits and credits, what a closing statement is, and what prorations are and why they are necessary. Table 10.2 includes a list of title buyer and seller debits and credits. Computing prorations is explained in the chapter. 8. Explain prorations utilizing Figure 10.3, exercises for determining prorated items. 71

9. Explain other costs specific to closing such as the realty transfer fee, mortgage recording fee, attorney s and lender fees. 10. Finally, discuss the difference between a condominium and cooperative closing. See the You Should Know learning highlight. If cooperative transfers constitute a large share of activity in your market area, you may wish to spend some extra time on this topic and supply some sample documentation for this type of purchase. LEARNING ACTIVITIES CONTAINED IN CHAPTER 10 Putting It To Work: Two exercises that exemplify proration computations Key Terms: fill-in sentences (8) Multiple Choice (20) CHAPTER 10 OUTLINE I. WHAT IS A TITLE CLOSING? A. interested persons review and execute documents, pay and receive money, receive title to real estate B. functions of those who will attend the closing 1. buyer pays; receives title 2. seller paid; grants title 3. agent collects commission 4. attorney represent parties a. lenders-attorneys do not represent purchaser C. closings that take place without attorneys representing parties do not constitute the unauthorized practice of law 1. notice must be attached to all contracts of sale D. recording acts 1. title insurers, abstractors, and attorneys rely on recorded documents II. PRELIMINARIES TO CLOSING A. deed and other closing documents 1. deed used to convey title B. survey-assure that no encroachments exist 1. blueprint showing measurements, boundaries, area of property C. additional documents-depends on particular closing 1. bill of sale of personal property 2. certificate of occupancy 3. closing or settlement statement (HUD Form No. 1) 4. sales contract 5. deed 6. mortgage 7. note 8. disclosure statement 9. estoppel certificate 10. homeowner s policy or hazard insurance policy 11. lease 12. lien waivers 13. mortgage guarantee insurance policy 14. option and exercise of option 15. installment land contract (contract for deed) 16. flood insurance policy 17. fire alarm or smoker detector affidavit 72

D. recording acts-protection for owner s title against subsequent claimants 1. recording provides protection in form of constructive notice 2. actual notice; person knows about and sees document 3. recording determines priority of interests in property E. title registration/torrens system 1. used in states other than New Jersey 2. titleholder applies to court to have property registered F. marketable title-seller must provide evidence 1. title examination determines quality of title 2. must be made by attorney, abstract, or title company 3. marketable title not perfect title; not necessarily free of liens 4. done through title search of all documents a. must be unbroken for title to be good G. abstract of title with attorney opinion-condensed history of title 1. contains legal description of property 2. summarizes related instruments in chronological order 3. update should be obtained prior to closing H. title insurance-insures policy owner against financial loss if title not good 1. issued by same companies that prepare abstracts of title; issued upon acceptable abstract or title opinion 2. premium is one-time payment when policy placed in effect I. Notice of Settlement 1. provide protection to purchasers and mortgagees 2. protection from liens and other adverse interests appearing against property during gap period between the date from which records can be searched and date of recording of deed or mortgage J. where closings are held-office of lender, attorneys offices, title company, county clerk s office K. property inspection-buyer inspects before closing 1. whole house inspection by professional inspection company L. pest inspection-seller responsible for treating and repairing damage M. perc, soil, and water-flow tests 1. perc test, inspection of percolation of septic system 2. if property commercial, seller responsible for soil test to detect environmental problems 3. water-flow tests conducted if water not municipal N. role of licensee before closing-goes with purchaser on walk-through O. payment of commission-closing 1. all or part of deposit money typically credited toward commission 2. broker who receives money puts it through escrow account and disburses monies due other agents P. homeowner s insurance-buyer usually provides homeowner s fire and hazard insurance 1. lender listed on policy as additional insured Q. standardized homeowner s insurance policies 1. homeowner s policies-ho-1, HO-2, HO-3, HO-4, HO-5, and HO-6 a. HO-4; tenant s policy b. HO-6; condominiums and cooperatives c. HO-1, HO-2, HO-3, and HO-5; single-family dwellings 73

III. IV. REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) A. applies to residential federally financed properties, not commercial properties, refinanced, owner financed loans B. purposes 1. advance disclosure of settlement costs 2. protect borrowers from unnecessarily expensive settlement charges 3. provide borrowers with timely information a. three working days of loan application-lender provides good faith estimate 4. eliminate referral fees or kickbacks-lenders permitted to charge only for services in amount of cost 5. buyer s guide to settlement costs booklet 6. unreasonable or unnecessary settlement charges avoided C. HUD Form No. 1.-lenders use standard settlement form to itemize all charges 1. not required for assumptions and nonresidential loans CLOSING STATEMENT A. historical document prepared in advance B. sets forth distribution of monies C. prepared by representatives of buyer and seller D. attorney, broker, lender, title company, or escrow agent V. CLOSING COSTS AND ADJUSTMENTS-PREPARATION OF CLOSING STATEMENTS A. first step in preparing closing statement-list all items in transaction B. items include two categories: debits or credits; items owed are debits 1. debits a. paid by buyer-buyer debits b. owed and paid by seller-seller debits 2. credits a. money received by buyer-buyer credits b. money received by seller-seller credits NOTE TO INSTRUCTOR: See Table 10.1 of textbook that lists typical debits and credits C. seller closing costs 1. realty transfer fee-tax on conveyance of title to real property a. paid by seller b. based on consideration seller receives c. graduated fee structure is now the same for existing and new construction d. $2.00 per $500 of value for properties purchased for up to $150,000 D. Seller s Residency Certification/Exemption form 1. non-residents of New Jersey must now file estimated gross income tax on transfer of real property as condition to recording deed 2. seller-residents exempt 3. must complete Seller s Residency Certification/Exemption form 4. broker s commission-percentage of selling price 5. attorney s fees 6. cost of recording documents to clear title 7. satisfy existing liens 74

VI. VII. E. purchaser closing costs 1. title insurance policy 2. title search-paid by buyer or seller 3. mortgage and deed recording fee 4. attorneys fees 5. lender fees a. escrow account for property taxes b. discount points c. credit check d. loan origination fees e. survey may be paid by seller or buyer F. New Jersey has no specific income tax on capital gain realized through real estate transaction ADJUSTMENTS-PRORATIONS AT CLOSING A. items adjusted and prorated 1. include real estate taxes, fuel, survey, water and sewer charges, security deposits, interest, homeowner s association dues, insurance B. ensure fair apportioning of expenses between buyer and seller C. prorated items either accrued or prepaid 1. accrued expenses-costs seller owes at day of closing but buyer will pay a. seller gives buyer credit for these items b. includes unpaid real estate taxes, rent collected by seller, interest on seller s mortgage assumed by buyer 2. prepaid expenses-costs seller pays in advance and not fully used up a. shown as credit to seller and debit to buyer b. prepaid taxes and insurance premiums, rent paid by seller under lease assigned to buyer, utilities billed and paid in advance, heating oil in tank RULES FOR COMPUTING PRORATIONS A. identify the appropriate period to be prorated 1. calendar year for property taxes 2. month, for mortgage interest 3. anniversary date, e.g., for insurance B. reduce annual rate to daily rate by dividing by 360 (the number of days per year for our purposes) C. determine number of days used in period 1. add in days of month of closing D. multiply number of days used times daily rate to figure dollar amount used for period E. determine whether to 1. debit this amount if in arrears 2. credit the unused portion if paid in advance NOTE TO INSTRUCTOR: Refer to specifics in Chapter 10 and also to Chapter 22 Real Estate Math for further explanation of proration calculations. 75

SUPPLEMENTAL LEARNING ACTIVITIES True or False 1. At closing, lender attorneys usually represent the best interests of the purchaser. 2. Recordation of closing documents is a form of actual notice. 3. The Torrens system is a common form of title registration in New Jersey. 4. A form of title evidence is an abstract of title. 5. Once a prospective purchase signs a contract, he may not re enter the property until after the closing. 6. The broker commission is generally paid sometime before closing. 7. A lender is often listed on the homeowner s policy as an additional insured party. 8. A perc test measures the heat transfer through the walls of the structure. 9. Generally, if pest infestation is found on the property before closing, the purchaser must pay to treat the problem. 10. RESPA requirements apply to both residential and commercial loans. 11. The Notice of Settlement mainly protects the seller. 12. In New Jersey, only attorneys may handle the closing. 13. The Realty Transfer Fee is generally paid by the purchaser. 14. Before closing, a perc test is performed on all residential properties. 15. New Jersey residents must pay income tax on the property sale before a deed can be filed. 16. The Seller s Residency Certification/Exemption form must be given to the buyer or the buyer s attorney at closing. 17. The flip tax on a cooperative purchase is generally 15% of the purchase price. 18. The deed and mortgage are recorded with the county clerk. 19. Liens are not generally paid before title closing. 20. The New Jersey Department of Banking and Insurance regulates all title and closing fees. Multiple Choice 1. Which of the following do NOT appear as debits in the seller s closing statement? a. balance due to the seller b. broker s fee c. earnest money deposit d. unpaid property tax 2. If a seller has paid his entire real property tax of $1,200 for the year in advance, the appropriate entry in the closing statement for an October 30 closing would be: a. credit seller $200, debit buyer $200 b. credit seller $200, debit buyer $1,000 c. debit seller $200, credit buyer $200 d. debit seller $200, credit buyer $1,000 76

3. A purchase money mortgage will appear in the closing statement as a: a. credit to seller and debit to buyer b. credit to seller and credit to buyer c. debit to seller and credit to buyer d. debit to seller and debit to buyer 4. A buyer is NOT credited for which of the following? a. prepaid real property tax b. earnest money c. balance due from buyer d. unpaid property tax 5. The seller is NOT credited for which of the following? a. insurance policy assumed b. balance due to the seller c. prepaid real property tax d. mortgage interest paid in advance 6. Which is NOT a debit to the seller? a. mortgage interest in arrears b. broker s fee c. unpaid assessments d. private mortgage insurance 7. When the buyer goes to sell the house that he is now purchasing, his unpaid real property tax will then appear as: a. debit for the full year b. credit for the unused portion of the year c. credit for the full year d. debit for the used portion of the year 8. If a home is sold on the 17th of the month with a lease of $300 per month in effect for a tenant, we would expect to see: a. credit to the buyer for $300 b. debit to the seller for $300 c. credit to the buyer for $130 d. debit to the seller for $170 9. A reserve held by the lender to pay for taxes and insurance when due is called the: a. closing statement b. proration c. earnest deposit d. escrow 10. Before closing, the lender may NOT do which of the following? a. verify the borrower s employment b. investigate the racial composition of the neighborhood c. order a property appraisal d. order a credit report on the borrower 77

11. A document prepared before closing that assures the buyer that no encroachments exist on the property is known as a(n): a. estoppel certificate b. lien waiver c. survey d. chain of title 12. A document that insures an owner, lender, or other interested party against financial loss if the title if not good is known as: a. title abstract b. title insurance c. chain of title d. private mortgage insurance ANSWER KEY TO SUPPLEMENTAL LEARNING ACTIVITIES True or False 1. F 1. c 2. F 2. a 3. F 3. c 4. T 4. a 5. F 5. b 6. F 6. d 7. T 7. d 8. F 8. c 9. F 9. d 10. F 10. b 11. F 11. c 12. F 12. b 13. F 14. F 15. F 16. T 17. F 18. T 19. F 20. T Multiple Choice 78