Chapter 20 Concepts

Question 1

What is Closing in real estate?

Answer 1

is the consummation of the real estate transaction.

Question 2

What does settlement involve for buyers and sellers?

Answer 2

the time when the buyers and sellers review and sign the necessary closing paperwork, but the transfer of the title does not take place until later—sometimes just hours later, but it could be days later since closing involves recordation in North Carolina.

Question 3

closing involves a number of events (3):

Answer 3

(1) the promises made in the sales contract are fulfilled

(2) the mortgage loan funds (if any) are distributed to the buyer for use

(3) other settlement costs or funds are disbursed. It is the time when the title to the real estate is transferred via the deed in exchange for payment of the purchase price.

Question 4

Due Diligence Period (DDP) (in closing)

Answer 4

the Buyer’s opportunity to investigate the Property and the transaction contemplated by this Contract to decide whether Buyer, in Buyer’s sole discretion, will proceed with or terminate the transaction.

There are no restrictions on what or how the buyer investigates the property under contract. The buyer is urged to hire appropriate experts to examine the property’s condition and whether it will serve the buyer’s need.

Question 5

Buyer’s loan (in closing)

Answer 5

In other words, once the buyers have committed to purchasing the property by not terminating during the Due Diligence Period (DDP), they cannot legally terminate the contract for failure to obtain a loan commitment.

Buyers are strongly advised to structure their DDP to allow time to assure that their lender will approve the requested financing. If the buyers are not comfortable that the loan will be approved, they should exercise the right to terminate the contract before the expiration of the due diligence period.

If the financing request is denied after the DDP has expired, the buyer will be in breach of the contract if the buyer cannot close. This is an excellent reason why buyers should begin the loan process before or at the beginning of the property search.

Question 6

The settlement agent

Answer 6

has the responsibility for ensuring that all legal documents are properly prepared and delivered.

Question 7

Sellers may be responsible for providing the following documents (either directly or through their attorney):

Answer 7

-The deed (usually prepared by the settlement agent)

-Bill of sale of personal property (If any of the seller’s personal property is being transferred to the buyer, ownership can be shown by a bill of sale.)

-Leases and related documents (if the property being transferred is currently leased)

-Statement from the seller’s lender regarding loan balance payoff figures

-An affidavit(s) and indemnification agreement(s) executed by seller and any person or entity who has performed or furnished labor, services, materials or rental equipment to the property within 120 days prior to the date of settlement and who may be entitled to claim a lien against the Property as described (see the following discussion)

Question 8

Title Procedures

Answer 8

After a thorough title search, the closing attorney usually submits a preliminary opinion on title to the title insurance company. Based on this opinion, the title insurance company will issue a title commitment. This is a commitment to issue a title insurance policy if the final title search confirms that the seller’s title is marketable.

On the date of the settlement meeting (the date of delivery of the deed), the buyer has a title commitment that was probably issued several days or weeks before the closing. For this reason, the final opinion on title and the title insurance policy are issued after closing

Question 9

Preclosing procedure would involve the buyer’s completion of due diligence. (T/F)

Answer 9

True

Question 10

A broker should encourage buyers to determine the availability of casualty insurance on the day of closing. (T/F)

Answer 10

False

Brokers should encourage buyers to determine the availability of insurance during due diligence. Consumers need to be aware of the challenges of obtaining affordable insurance well before closing.

Question 11

Settlement meeting

Answer 11

In North Carolina, closings are conducted by gathering the parties and exchanging copies of the documents. This kind of closing is called the settlement meeting. Current practice in North Carolina is that a lawyer frequently represents the buyer.

Question 12

A closing involves the resolution of two issues:

Answer 12

First, the promises made in the sales contract are fulfilled.

Second, the buyer’s loan is finalized, and the mortgage lender or settlement attorney/agent disburses the loan funds.

Additionally, the settlement/closing documents are reviewed and signed, and any funds due from the purchaser are collected.

Question 13

Escrow Type Settlement

Answer 13

1. Impartial third party, the escrow agent, conducts the closing without parties in attendance; seldom used in North Carolina
2. Once deed is delivered to escrow agent, it is considered delivered to the buyer per the relation back doctrine

Question 14

North Carolina Settlement Agent

Answer 14

1. In North Carolina, it has historically been the buyer’s attorney that conducts the settlement meeting
2. Since 2003, non-lawyer assistant can conduct closing if does not practice law

Question 15

Finalizing the Closing (4)

Answer 15

1. Recordation of instruments in the correct order is imperative
2. Buyer’s new loan is recorded after the seller’s satisfaction of mortgage is recorded
3. When all documents are recorded, closing has occurred
4. Funds are disbursed after the deed is recorded

Question 16

Settlement agents can disburse funds to the appropriate party before recordation of the deed and the deed of trust. (t/f)

Answer 16

False

Settlement agents can disburse funds to the appropriate party only after recordation of the deed and the deed of trust.

Question 17

An attorney must be present at all North Carolina settlements. (t/f)

Answer 17

False

An attorney does not have to be present at a settlement meeting. A non-lawyer assisting under the supervision of an active member of the Bar may conduct the settlement meeting.

Question 18

The Federal Real Estate Settlement Procedures Act (RESPA)

Answer 18

was enacted in 1974 to protect consumers from abusive lending practices. RESPA also aids consumers during the residential mortgage loan settlement process. It ensures that consumers are provided with important, accurate, and timely information about the actual costs of settling or closing the transaction.

It also eliminates kickbacks and other referral fees that tend to inflate the costs of settlement unnecessarily. RESPA prohibits lenders from requiring excessive escrow account deposits.

Question 19

The federal Truth-in-Lending Act (TILA)

Answer 19

TILA laws and regulations apply to anyone who advertises or makes loans for a personal, family, or household purpose that involve either a finance charge or are payable in more than four installments. TILA applies not only to banks, savings, and loans but also to finance companies, mortgage companies, and anyone who extends consumer credit more than five times a year.

Whether the loan is for a primary or secondary residence, vacation home or vacant land, regardless of the loan amount, if the loan proceeds are for a personal, family, or house purpose, the lender must comply with TILA.

Question 20

According to TRID, loan application is defined as the time by which the lender receives the following information from the borrower:

Answer 20

-Legal name

-Statement of gross income

-Social Security Number (to obtain a credit report)

-Property address

-Estimate of property value

-Amount of mortgage loan required

Question 21

The LE indicates which settlement costs may or may not change prior to settlement and if they do, by how much. Lenders are bound by tolerance limits on fee estimates that were imposed in 2009/2010; although these limits are now called permissible variations. The fees are divided into three categories:

Answer 21

No tolerance: fees that may not increase before closing; lender charges for taking, underwriting, and processing the loan application, including points, origination fees, and yield spread premiums

10% tolerance: fees that cannot increase by more than 10% in any given category; settlement services for which the lender selects the provider or for which the borrower selects the provider from the lender’s list, title services and title insurance if the lender selects the provider, and recording fees

Unlimited tolerance: fees for services that are out of the lender’s control; services for which the borrower chooses the provider (such as escrow and title insurance), escrows for taxes, mortgage interest, and the cost of homeowners insurance

Question 22

Controlled Business Arrangements

Answer 22

A real estate firm, title insurance company, mortgage broker, home inspection company, and even a moving company may agree to offer a package of services to consumers. RESPA permits such a controlled business arrangement (CBA) as long as the consumer is clearly informed of the relationship among the service providers and that other providers are available.

Question 23

Required use of a particular service provider is

Answer 23

prohibitied by RESPA.

Fees may not be exchanged among the affiliated companies simply for referring business to one another. This may be a particularly important issue for brokers who offer computerized loan origination services to their clients and customers.

While a borrower’s ability to comparison shop for a loan may be enhanced by a CLO system, the range of choices must not be limited. Consumers must be informed of the availability of other lenders.

Question 24

If a settlement agent discovers typographical errors on closing documents, the settlement must be delayed by three days. (T/F)

Answer 24

False

If errors are typographical, then TRID does not require that the settlement be delayed. However, if the errors involve substantive errors regarding the buyer’s loan, the settlement may have to be delayed in order for the corrections to be made and for the buyer to receive a three-day review period.

Question 25

The Real Estate Settlement Procedures Act is implemented by rules referred to as Regulation Z. (t/f)

Answer 25

False

The Real Estate Settlement Procedures Act is implemented by rules referred to as Regulation X.

Question 26

What is a debit?

Answer 26

is a charge—an amount that a party owes and must pay at settlement.

Question 27

What is a Credit?

Answer 27

is an amount entered in a person’s favor—an amount that has already been paid, an amount being reimbursed, or an amount the buyer promises to pay in the form of a loan.

Question 28

Broker’s compensation (who pays?)

Answer 28

The responsibility for paying the broker’s compensation is determined by signed agency agreement. If the broker is the agent for the seller, the seller is usually responsible for paying the compensation. If the listing firm entered the property into a multiple listing service (MLS), the compensation of the selling agent (whether a buyer’s agent or a seller’s subagent) is generally disclosed in the MLS entry. Most of the time, the listing firm will split the compensation earned from the seller with a cooperating firm that brings the buyer to the transaction.

If the listing firm or seller refuses to pay the buyer’s agent, most buyer agency agreements state that the buyer is then responsible for the agent’s compensation at a preset rate or figure.

Question 29

Recording Expenses (who pays?)

Answer 29

The seller usually pays for recording charges (filing fees) necessary to clear all defects and furnish the purchaser with a marketable title. Items customarily charged to the seller include the recording of release deeds or satisfaction of mortgages, quitclaim deeds, affidavits, and satisfaction of mechanics’ liens. The buyer pays for recording charges that arise from the actual transfer of title. Such items usually include recording the deed that conveys title to the purchaser and a mortgage or deed of trust executed by the buyer.

Question 30

Excise tax (who pays?)

Answer 30

North Carolina requires an excise tax (formerly known as revenue stamps) on the gross revenue generated by the sale of real estate. This tax, sometimes called a deed transfer tax, is levied at a rate of $1 per $500 of value, or portion thereof. The excise tax will always round up to the next whole dollar amount if the calculation includes cents. This expense is borne by the seller.