RESPA and The Real Estate Closing

The Real Estate Settlement Procedures Act was created to inform the real estate buyer about closing costs and to prevent abusive practices that could result in the inflated closing costs for the buyer.

This act which is on the federal level was administered by the Housing Urban and Development or HUD and applies to any closing which applies to most mortgages and does not discriminate between single family homes, multi-family properties such as townhome and condominiums. RESPA requires that the mortgage lender disclose all of the closing costs to the buyer and strictly prohibits the mortgage lender from demanding excessive deposits for escrow accounts which are used to pay taxes and insurance premiums on the property. In addition, the Real Estate Settlement Procedures Act prohibits referral fees to the lender if they refer the buyer to services in which the services are not performed. There are specific requirements to the Real Estate Settlement Procedures Act which include that within three days of the loan application, they buyer must by law receive a HUD settlement cost information packet which explains the closing procedure and the closing costs; provides a good faith estimate of the closing costs so that there are no surprises at the closing table; grants the borrower the right to review an example of a completed HUD form one day prior to closing. The HUD form itemizes all fees that will be paid out at closing by either the buyer or the seller at the closing table. Any charges that must be paid prior to closing must be disclosed on the HUD statement as paid outside of the closing.

Now, to define what a real estate closing is and what a buyer and seller can expect. The real estate closing is the transfer of the real estate title from seller to buyer according to the fully executed sales contract. The buyer obtains possession of the property, receives title to the property, and the seller receives their proceeds from the sale. There are many additional costs in regards to the closing on the local, state, and federal level. As a buyer of real estate, it is imperative that the buyer review all documents making sure everything is precise and stated correctly and according to real estate law. This includes the review of evidence of title, the seller's deed, valid proof that any encumbrances have been removed from the title if any, review of the property's survey, and the outcome and result of the home inspection. Most all real estate professionals urge their buyers to conduct a final inspection or walk through of the property they are purchasing prior to closing, with the real estate agent present. Reviewing the survey of the property is essential as well, and the survey should be up to date, not an old survey of the property as things can change over the years such as fence additions or extended driveways not in the original survey. Typically, the mortgage lender or title company will require a new survey on the property to make sure that there are no encroachments from adjoining properties. Both parties involved in the sale will want to accurately inspect all the closing documents and HUD statement as well. The seller wants assurance that they buyer has the funds to close the deal. If the seller has a mortgage then the seller is required to pay off the mortgage loan on the day of closing. The payoff statement will usually include not only the remaining principal and interest, but also any prepayment penalties in which the seller could incur. In addition, the closing statement will issue credits for any amounts escrowed such as insurance and taxes as a prorated amount. Although rare, there may be situations where the buyer is assuming the seller's mortgage in that case, then the buyer will receive a mortgage reduction certificate from the mortgagee, or the seller, which will list the exact amount of the balance as of the closing date, the interest rate, and the date of the last payment the seller made on the property.

It's imperative that the real estate buyer receives a clear title to the property, and if the buyer is purchasing with a mortgage, then the mortgage lender will require that a title search be done on the property to insure that the title is free and clear of any encumbrances. The seller of the property generally pays for this title search. If there are any issues that arise from the title search and there are clouds in the title, then the buyer sure make certain that these issues are resolved at least two weeks prior to the closing date.

The real estate closing is the actual settlement and transfer of real estate from the seller to the buyer. Real estate closings can occur in a couple of ways; in person, or through an escrow agent who is a third party, has no interest in either party, receives all documents after fully execute by both buyer and seller, and finalizes the settlement and transfer of funds and transfer of possession of the property. Real estate closings must be reported to the Internal Revenue Service using Form 1099-S, listing the seller's social security number, the sales price, and any reimbursements to the seller of prepaid property taxes.

At the closing table there are expenses outlined in the HUD statement in which the buyer and seller are expected to pay for. The HUD will include the typical closing costs, which would have been outlined in the good faith estimate but other expenses that a buyer and seller should expect to be on the good faith estimate as well as the HUD statement are disclosed as well. Buyers can usually expect to pay for loan costs such as the origination fee, any discount points, appraisal fees, credit report fees, home inspection fee, mortgage application fee, mortgage insurance premiums, property insurance premiums, survey and title fees, recording fees, and state tax or documentary tax stamps. Closing costs in which the seller is responsible for includes the commission due to the real estate brokerage company which represented the seller, the title search, any prepayment penalties owed to the mortgage lender, and prorated amounts.

Most all real estate closings encounter proration's which are calculated through the day of the closing, which pretty much says that the seller owns the property on the day of closing. In the event prorations are calculated up to the day of closing, then the buyer of the property owns the property on the day of closing. Proration is shown on the HUD statement as credits and debits for both the buyer and the seller. A credit for the seller increases the amount that the seller will receive at closing and shows that a credit to the buyer at closing decreases the amount the buyer pays at the closing table. Additionally, a debit for the seller decreases the amount that the seller receives at closing and a debit for the buyer increases the amount that the buyer must pay at the closing table. The major credit for the seller is the sales price of the property, which is also the major debit for the buyer. What is a credit to the seller is a debit to the buyer, and vice versa. Most expenses that are prorated like property tax, mortgages, interest and insurance use a three hundred sixty day year, which is then divided into twelve, thirty day months.

Knowledge of one's closing rights as a real estate purchaser or seller of real estate is imperative so that issues whether major or minor do not delay the closing of one of the most important purchases and sales of one's life.

Source: http://ezinearticles.com/6268767

asdf dannii minogue les paul madhuri dixit achilles