Real Estate Finance Unit 12

Front 1

Settlement, or closing

Back 1

The final meeting of the parties involved in the real estate transaction at which the transaction documents are signed and the deed and money are transferred

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Escrow

Back 2

Short-lived trust arrangement

Front 3

Escrow instructions

Back 3

The written authorization to the escrow holder or title company to carry out the direction of the parties involved in the transaction

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Abstract of title

Back 4

A compilation of all the documents that affect the title to a property. A written summary of all useful documents discovered in a title search

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Marketable title

Back 5

A saleable title that is reasonably free from risk of litigation over possible defects

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Caveat emptor

Back 6

“Let the buyer beware”, the buyer had the final responsibility to verify title of a property prior to purchasing it

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Title insurance

Back 7

Insurance that protects the policyholder from losses due to a problem in the chain of title. Typically, both the owner and the lender take out separate policies

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Chain of title

Back 8

The public record of prior transfers and encumbrances that affect the title of a parcel of land

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Opinion of title

Back 9

A written statement by an attorney or title agent that states whether the property is encumbered or has clear and marketable title

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Title plants

Back 10

Over time, the abstracts and references to the recorded information were accumulated. Information regarding the property was organized in lot books and information affecting titles was organized in general indices. In time, these records became known as

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American Land Title Association (ALTA)

Back 11

The national trade association for title insurance companies and title insurance agents. The American Land Title Association (ALTA) forms are used almost universally throughout the nation

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1) standard and (2) extended

Back 12

The two types of title insurance coverage are

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Extended Coverage Policy

Back 13

All risks covered by a standard policy are covered by an extended coverage policy. An extended coverage policy also covers other unrecorded hazards such as outstanding mechanics’ liens, tax liens, encumbrances, encroachments, unrecorded physical easements, facts shown by a correct survey, and certain water claims

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Arrears

Back 14

Payment at the end of a period for which payment is due. It is the opposite of paying in advance

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According to value

Back 15

Real property is taxed at the local level through ad valorem property taxes, special assessments, and transfer taxes. Ad valorem means

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Taxing authority

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Any organization that is legally able to set (levy) and collect a tax

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Immune properties

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Typically include those owned by governments, such as schools, parks, military bases, and government buildings

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Exempt properties

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Include hospitals, homesteads, and property that belongs to religious organizations such as churches or synagogues

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Special assessments

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Taxes used for specific, local purposes such as underground utilities, sewers, or streets

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Special assessment liens

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Placed on the properties involved and are usually paid at the same time as property taxes

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Closing costs

Back 21

The expenses buyers and sellers normally incur in the transfer of ownership of real property that are over and above the cost of the property

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Closing statement

Back 22

An accounting of funds made to the sellers and buyers individually. It shows how all closing costs, including prepaid and prorated expenses, are allocated between the buyer and seller

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Prorated or allocated

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Closing costs are either

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Allocation

Back 24

Assigns a cost (generally one not yet spent) to either the seller or the buyer

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Proration

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Divides a cost (most often one that has already been paid) between the two parties. The division and distribution of expenses and/or income between the buyer and seller of property as of the date of closing

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365-day year method or a 30-day month method

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Prorations are typically calculated using the seller’s last full day of ownership and the buyer is charged for the closing day. Prorations are typically based on one of two methods:

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365-day method

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Annual cost is divided by 365 days. This gives a daily rate. The daily rate is then multiplied by the number of days. This equals the amount due

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30-day month method

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Divide the annual cost by 12 months then by 30 days. This gives a daily rate. The daily rate is then multiplied by the number of buyer or seller days, which then equals the amount due

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Property tax

Back 29

The money owed to the local or state government for services used by the homeowner

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Escrow account, sometimes referred to as an Impound account

Back 30

A trust account for funds set aside for future, recurring costs relating to a property, such as payment of property taxes and hazard insurance

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Transfer taxes

Back 31

Paid to state or local governments to transfer the ownership of property from one owner to another. May also be known as documentary stamp tax or conveyance tax

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Documentary stamp tax on deeds, the documentary stamp tax on notes, and the intangible tax on new mortgages

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A transfer of property can involve three transfer taxes, each with its own set of calculations. The three taxes are

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Stamp tax on deeds

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Required whenever real property is transferred from one owner to another. In order to establish accurate tax assessments, this tax allows governments to secure data about the fair market value of real properties in their jurisdictions. Many transactions are exempt from this tax. Some exempted transactions include transfers between a husband and wife or parent and child, gift deeds, and tax deeds

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Recording fees

Back 34

Monies paid to government agencies, typically the county, to legally record documents that concern the property. The buyer often pays the recording fees

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Hazard insurance

Back 35

Property insurance policy that protects both owner and lender against physical hazards to property such as fire and windstorm damage. Lenders require hazard insurance that covers the outstanding loan on the property

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Credit

Back 36

The reduction or elimination of an asset or expense

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Debit

Back 37

Shows the amount owed

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Closing statement

Back 38

An accounting of funds made to the sellers and buyers individually. The sellers and buyers are both credited and debited for their agreed-upon share of costs

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Estimated closing statement

Back 39

Serves as a preliminary copy of the HUD-1 Settlement Statement and outlines all credits and debits related to completing the sale. A lender must provide a borrower with a preliminary copy of the HUD-1 Settlement Statement if the borrower requests it one business day before the closing

Front 40

HUD-1 Settlement Statement (Uniform Settlement Statement)

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A standardized two-page form that serves as the official itemized summary of all settlement charges. This document breaks down the amounts due from the borrower and to the seller into line items. The closing statement outlines the flow of consideration through the transaction, as well as the adjustments and disbursements that reflect the agreement of the parties

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The HUD-1 Settlement Statement

Back 41

The HUD-1 Settlement Statement is a standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement of a loan transaction. The Real Estate Settlement Procedures Act (RESPA) gives the borrower the opportunity to request a HUD-1 Settlement Statement 1 day before the actual settlement or closing

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Initial Escrow Statement or Estimated Closing Statement

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Itemizes the estimated taxes, insurance premiums, and other charges to be paid from the escrow account during the first 12 months of the loan. It lists the escrow payment amount and any required cushion. Although the statement is usually given at settlement, the lender has 45 days from settlement to deliver it

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Annual Escrow Statement

Back 43

Loan servicers must deliver an ______ to borrowers once a year. Summarizes all escrow account deposits and payments during the servicer’s 12-month computation year. It also notifies borrowers of any shortages or surpluses in the account and advises them of the course of action taken to correct the overage or shortage

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Servicing Transfer Statement

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Required if the loan servicer sells or assigns the servicing rights to a borrower’s loan to another loan servicer. Generally, the loan servicer must notify the borrower 15 days before the effective date of the loan transfer. As long as the borrower makes a timely payment to the old servicer within 60 days of the loan transfer, the borrower cannot be penalized