Section 9: Loan Closing Unit 3

Question 1

Prepaid Examples

Answer 1

Lender or seller prepaid costs owed by the borrower at the closing include:

Homeowners insurance
Mortgage insurance
Per diem interest
Property taxes

Question 2

Depending on the seller-buyer agreement, the following expenses may be shared by the buyer and seller:

Answer 2

HOA fees
Fuel i.e., propane, natural gas
Utilities

Question 3

Math of Prorating

Answer 3

Prorations may be based on a statutory (360-day) or a calendar (365-day) year.

Question 4

What is being prorated?

Answer 4

What is being prorated?
Is the item an accrued or a prepaid item?
Is it based on the statutory year (360 days) or the calendar year (365 days)?
Once you have answered these questions, follow these steps to calculate the prorated amount:

Question 5

Step One:

Answer 5

Step One: Divide the yearly cost by 12 to find out the monthly cost. If you need to know the daily cost, divide the yearly cost by 365 (if using a calendar year) or 360 (if using a statutory year).

Question 6

Step Two:

Answer 6

Find out the number of months or days in the proration period. When using a statutory year, this would be based on 30 days in each month. If using a calendar year, this would be based on the actual calendar days.

Question 7

Step Three:

Answer 7

Multiply the number of months and/or days in the time period by the monthly and/or daily cost. This will give you the amount that will be shown on the closing statement.

The buyer’s number of days owed will appear as a debit and the same amount is credited to the seller on the settlement statement.

Question 8

HUD-1 Fees

Answer 8

The HUD-1 settlement statement is all about who owes what. In a matter of full disclosure, it is important to not just give the parties a dollar amount but an itemized breakdown of the credits and debits. These are called closing costs.

Question 9

HUD-1 Purpose

Answer 9

Under the Real Estate Settlement Procedures Act (RESPA), the borrower must be provided with the completed HUD-1 settlement statement and the final form required under Truth in Lending Act (TILA) rules shortly before closing. A HUD-1 is used in second mortgages and is a close cousin to the closing statement used in traditional first mortgages. It provides a breakdown of all the fees involved with the loan, from the initial application to the final mortgage loan document preparation.

The HUD-1 form will include the parties’ debits and credits. A debit is a charge (an amount a party has to pay). A credit is an amount that appears as an amount in the party’s favor—an amount a party has already paid, an amount that must be reimbursed, or an amount that is promised (e.g., the borrower’s promised payment to the seller displays as a credit for the seller).

Question 10

GFE

Answer 10

Each itemized debit and credit will note where it can be found on the Good Faith Estimate (GFE) statement.

Question 11

Applicable Loans

Answer 11

The HUD-1 statement isn’t as common as the closing statement, but there are certain types of loans that require borrowers to use the HUD-1. When processing a cash out refinance loan, a home equity line of credit (HELOC) loan, or reverse mortgage loan, the HUD-1 will commonly be the best fit.

Question 12

When is Refi the Answer?

Answer 12

Refinancing an existing home mortgage seems like a good idea in some cases. It can help homeowners to:

Get a better interest rate
Cash out some equity
Shorten the mortgage term (from 30 years to 15, for example) Switch to a different type of loan (ARM to fixed rate, for example)

Question 13

Refi Considerations

Answer 13

A consumer should keep in mind when considering a refinance that a refinance is a new loan, so the following items come into play:

New application fee
New title insurance
New appraisal
New loan origination fee
New closing costs
New term (refinancing starts over from day one on mortgage payments.)
Always run the numbers for a consumer before suggesting they pull the trigger on a refinance.

Question 14

HUD-1 Framework

Answer 14

As an MLO, there are a few things to keep in mind when processing a loan that requires a HUD-1 statement. Just like a closing statement, the HUD-1 statement must be given to the borrower at least one day before closing. The HUD-1 works with the Truth in Lending Act-required disclosure. A courteous and professional MLO will explain to the borrower that the information found in the HUD-1 should match what’s found in the good faith estimate. If any changes need to be made from the time the good faith estimate was issued, it should be noted for the borrower with a logical and honest explanation.

Question 15

HUD-1 Fee Categories – Part One

Question 16

Itemized Costs

Answer 16

The closing statement must indicate the title fees are related to closing in the following format along with the name of the service provider business:

Title – Insurance broker
Title – Lender’s title insurance
Title – Insurance binder
Title – Settlement agent fee
Title – Title search The word “title” must appear at the beginning of the description of the service. Only the items which have fees must be completed on the closing statement.

Question 17

Escrow Accounts

Answer 17

An escrow account (aka trust fund account or trust account) is a temporary pass-through bank account held by an escrow agent or officer (usually a broker, title company representative, or attorney) who’s responsible for maintaining funds that belong to others.

Question 18

Escrow Funds

Answer 18

he borrower is expected to pay funds into the escrow account. The funds that typically are part of escrow include the following:

Taxes
Property insurance premiums
Assessments
Other loan-related funds

The closing statement notes the amounts of each itemized item required to be held in escrow and due at closing. Some of these funds are payments for the first year of property expenses that are paid in advance.