Chapter 11 Preparing To Close

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Chapter 11Preparing To Close

• Escrow Math

2
Chapter 11

• At the conclusion of this chapter, you will be
  able to
• 1)   Understand prorations.
• 2)   Give a definition for each escrow debit and
  credit for the buyer and the seller.
• 3)   Outline the steps to calculate the amount to
  charge for an escrow item on a per day basis.
• 4)   Differentiate between buyer and seller
  expenses and between a debit and credit item.
• 5)   Explain the federal regulation HUD-1
  settlement statement and RESPA.

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CHAPTER OUTLINE

• Is Everything In? Checklist to Close Who Pays
  What?
• Computer-Generated Estimated Closing Statements
• Will Sellers Proceeds be Sufficient to Pay
  Existing Liens?
• Prorations of Property Taxes, Loan Interest and
  Homeowner Association dues and fees
• Insurance Policy and The Rental Statement
• Documentary Transfer Tax and Mello-Roos
• Lenders Fees
•       Signing the Loan Documents
•       Balance Needed By Buyer
•       Messenger Service
•      Preparing to Record

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Initial check to Close Escrow

• Is everything into escrow?
• Balance of buyers funds
• Documents from seller
• Lender, Title, Appraiser, Inspector, Reports
• Checklist to close
• Grant deed
• Trust deed(s)
• Reconveyance deed
• HUD-1 or closing settlement statement

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Escrow Checklist
Disbursement authorization Buyers
insurance Termite clearance Loan commitment Loan
documents Beneficiary demand Lender
requirements Insurance requirements Commission
authorization Personal property

• Initial deposit
• Increased deposit
• Funds to close
• Signed escrow instructions
• Preliminary title
• Check legal description
• Verify vesting
• Pest control clearance
• Prorations
• Calculate closing costs

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Escrow Checklist

• Grant deed
• Trust deed
• Trust note
• Reconveyance deed
• Notary expiration date
• Contingency
• PCOR
• HUD-1 (HUD-1A)
• HOA documents
• IRS forms
• Disclosures

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Who pays for what?

• costs and fees are freely negotiable between the
  parties
• Buyer and seller determine who pays
• Title and escrow officer follow instructions
• Lenders loan requirements may dictate some costs

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Computer-Generated Estimated Closing Statements

• Multiple Listing Service (MLS) cost sheet
• Estimated Sellers Proceeds
• Buyers Closing Costs
• Real estate software program cost sheets
• Top Producer
• Agent 2000
• Federal Housing and Urban Development
  (HUD-1)ESTIMATED cost sheet
• HUD-1 form for a buyer-seller transaction
• HUD-1A for a refinance transaction
• Escrow may prepare an estimated closing statement

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Real Estate Settlement Procedures Act (RESPA)

• Affective as of 1976
• Lender must provide the borrower with
• an annual percentage rate (APR)
• prior to being committed to the loan.
• Mailed directly to the borrower

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Prorations

• The division of costs/fees between the parties.

Pity Me PITI- MI means Principal, Interest,
Taxes and Insurance, plus the Mortgage Insurance
A-PITI It is A PITI (A Pity) to have to make
the payment. The means A Association
dues P Principal of the current unpaid
balance I Interest on the loan T Taxes
on the property I Insurance on the property
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Prorations (Close of escrow April 17)

• Association Dues
• Seller paid Apr 1 to May 1
• Buyer owes the seller Apr 17 to May 1
• Principal Loan
• Seller last paid Apr 1 for Mar 1 to Apr 1(in
  arrears)
• Seller owes Apr 1 to Apr 17
• Buyers lst payment will be June 1
• Buyer owes Apr 17 to May 1
• Buyers June 1 payment is for May 1 to June 1

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Prorations (Close of escrow April 17)

• Property Taxes
• Seller last paid Apr 10 for Jan 1 to June 30
• Buyer owes seller Apr 17 to June 30
• Insurance
• Sellers agent will cancel and make any refund
  due outside of this escrow
• Buyer will pay for new policy from Apr 17

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Property TaxesNDFA
When it comes to paying taxes, there is No Darn
Fooling Around

• First Installment
• NO November 1 -due and payable
• Darn December 10 -5pm-delinquent
• Second Installment
• Fooling February 1 - due and payable
• Around April 10 -5pm delinquent

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Real Property Taxes

• Impound account Number of months impounded
• 1 month Jan, Feb
• 2 months Mar
• 3 months Apr, Oct 19-31, Nov
• 4 months May, Dec
• 5 months June
• 6 months Jul
• 7 months Aug
• 8 months Sept
• 9 months Oct 18,
• SUPPLEMENTAL TAX

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Insurance

• Sellers Insurance
• Buyers Insurance
• Other Insurance Options

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Sellers Insurance

• If seller has an existing policy and is
  purchasing a new house, the difference between
  the old policy and new policy is billed in escrow
  or
• If seller doesnt need a new policy, the
  insurance company will refund any difference to
  seller outside of escrow.

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Prorated Sellers Hazard Insurance

• Example
• Sellers existing policy 1350
• Seller closes escrow with 4 months remaining on
  existing policy
• 1350 / 12 112.50
• 112.50 x 4 months 450 refunded to seller or
  credited to new policy

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Buyers Insurance

• A hazard insurance policy is purchased and the
  annual premium is billed in escrow
• The annual premium is approximately 35 of the
  sales price
• Should the buyer have impounds, escrow will
  collect 2 months hazard insurance reserves for
  lender

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Prorated Buyers Hazard Insurance

• Example
• 500,000 sales price x .0035 1750 per year
• 1750 / 12 months 145.83 per month
• 145.83 x 2 months 291.67 reserves
• 1750 291.67 2041.67 would be billed to
  buyer in escrow

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PMI Private Mortgage Insurance

• If the loan to value is over 80 PMI insurance is
  required.
• PMI is required by conventional lenders and
  calculated on the loan amount.
• PMI rate calculated at approximately 65 of the
  loan amount.

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PMI Calculations

• Example
• 500,000 x 65 3250
• 3250 / 12 months 270.83
• 270.83 x 2 months 541.66

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Government Mortgage Insurance

• FHA requires an up front mortgage insurance
  premium (UFMIP) calculated at 1.5 of the loan
  amount.
• Additionally, a monthly insurance premium is
  required at .50 percent of loan amount

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FHA Mortgage Insurance Calculations

• Example
• UFMIP
• 500,000 x 1.5 7500 (usually financed in the
  loan amount)
• MMI
• 500,000 x .50 2500
• 2500 / 12 months 208.33 per month

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Miscellaneous Insurance Policies

• Earthquake
• Flood
• Disability/Life Insurance
• Jewelry

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The Rental Statement

• Seller would provide escrow with copy of rental
  agreements
• Escrow would prepare the rental statement for the
  seller
• The rental statement will require the seller
  verify deposit and rent amounts
• Seller can deduct tenant caused maintenance costs
  and delinquent rent from security deposits

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Prorated Tenant Deposit

• Tenant has a deposit on file with the seller for
  2000.
• Tenant owes landlord 300 in delinquent rent and
  50 tenant maintenance charge back.
• Seller would prepare and submit to the tenant and
  escrow a security deposit disposition statement
  showing itemized deductions of 350 from
  deposit.
• Escrow would credit the buyer 1650 for tenant
  deposit

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Prorated Rent

• Example
• The tenants rent is 1500 per month
• Rent is due on the first of the month
• Escrow closes on the 20th of the month
• Escrow will calculate rent due to seller and
  buyer as follows

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Prorated Rent (Continued)

• Example
• 1500 / 30 days 50 per day
• 20 days x 50 1000
• Escrow credits seller 1000 and credits buyer
  500

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Documentary Transfer Tax

• The documentary transfer tax is assessed on
  transactions involving new money.
• Seller usually pays but is negotiable
• Counties and Cities charge the documentary
  transfer tax
• County tax rate is 1.10 per 1000
• City tax rate ranges from 1.10 to 15.00 per
  1000

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Documentary Transfer Tax Calculation

• Example
• County Transfer Tax
• 500,000 x 1.10 550

• City Tax
• 500,000 x 4.50 2250

• Cities with Transfer Tax

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Cities with Transfer Tax

• Alameda
• Albany
• Berkeley
• El Cerrtito
• Hayward
• Piedmont
• Oakland
• Richmond
• San Pablo
• San Leandro
• San Rafael

Culver City Los Angeles Mountain View Pomona
Redondo Beach Riverside Sacramento San
Francisco San Mateo Santa Monica Stockton
Cotati Cloverdale Davis Palo Alto Petaluma
Rohnert Park Santa Rosa San Jose Sebastopol
Vallejo West Sacramento
Winters Woodland
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Mello-RoosCommunity Facilities District Act

• Allows any county, city, special district or
  joint powers of authority to establish a
  Communities Facilities District which allows for
  the financing of public services and facilities
  such as streets, police and fire protection,
  schools, parks, libraries, etc.
• Property owners pay a special tax for the above
  referenced public services.
• An average cost .75 added to normal property
  taxes.

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Mello-Roos (Continued)

• Seller or sellers agent must disclose notice of
  special tax immediately.
• If buyers offer is accepted without disclosure
  of special tax, buyer has 3 days after delivery
  in person to cancel contract.
• Escrow should be certain before proceeding that
  notice of special tax has been disclosed to buyer.

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Lender Fees

• Loan origination fee
• Prepayment Penalties
• Loan Origination
• Document Prep
• Underwriting
• Wire Transfer
• Messenger Service

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Loan Documents

• Escrow gets loan documents from lender or prints
  electronically
• If there is a seller carry back, escrow prepares
  deed of trust and note and prorates interest
• Buyer signs loans documents with notary present
• Loan documents can be signed at buyers home, the
  lenders office or escrow.

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Balance Needed From Buyer

• All calculations are checked thoroughly and
  audited in-house
• Escrow notifies buyer of funds needed
• Funds received from buyer is usually in the form
  of a cashiers check or wire transfer

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Preparing To Record

• On the day of recordation, the buyer
• Receives the first day of rental income from
  property purchased
• Is charged interest on all loans
• Starts paying association dues
• The seller is charged for items up to the day
  before recording occurs except for interest on
  existing loan.

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Preparing To Record (continued)

• The sellers lender receives payoff funds the
  same day or the next day of recordation
• The lender instructs trustee to record deed of
  reconveyance after funds have cleared which takes
  approximatley 2 weeks.

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Think About It!

• The seller has paid the annual homeowner
  association dues of 1130 for the calendar year.
  Escrow closes on June 22.
• Does the buyer owe the seller, or does the seller
  owe the buyer? Which party has a debit or a
  credit? How much would be owed?

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Think About It! Answer

• Step One 1130 360 days per year 3.14 per
  day.
• The seller paid in advance from January 1 to
  December 31, but only owned the property until
  June 22. The seller will want a refund for the
  funds paid in advance.
• The buyer owes the seller for the remaining 9
  days in June (June 22, 23, 24, 25, 26, 27, 28, 29
  and 30) plus 30 days each for July, August,
  September, October, November and December (30
  days x 6 months 180 days).
• Add the 9 days for June plus the 180 days for the
  balance of the year 189 days
• 3.14 per day x 189 days 593.46 that the
  escrow officer would collect from the buyer as a
  debit and give to the seller as a credit.