The real estate settlement process, also known as closing, is a critical stage in a property purchase or sale transaction. It involves a series of essential steps to finalize the sale and transfer ownership from the seller to the buyer. Below are the key elements involved in real estate closings in the United States:

1. Identify Selling Terms and Costs (identify selling terms & costs): Before reaching closing, it is essential that both parties, the buyer and the seller, agree on the terms of the sale, which include the purchase price, financing conditions and other relevant aspects. The costs associated with the transaction must also be determined.
2. Determine non-prorated debits and credits: Debits are the financial obligations that each party must assume at closing. Credits are amounts owed to one of the parties. Some examples of debits and credits include prorated taxes, legal fees, and any escrow deposits.
3. Complete prorated debits and credits: Prorated debits and credits are costs that are divided between the buyer and seller based on their length of ownership of the property during the month in which the transaction takes place. This may include property taxes, homeowner association fees, and other prorated expenses.
4. Complete Closing Statement: The closing statement is a document that details all the debits and credits associated with the transaction. This document is essential to ensure that all parties understand how funds will be distributed at closing.
5. Distribute Funds (disburse funds): Once the closing statement and all necessary documents have been completed, the funds are distributed. This involves transferring money from the buyer to the seller and any other necessary payments, such as the outstanding mortgage balance.

Key Points On Closings

In real estate closings, there are certain key aspects to keep in mind:

• Seller Must Prove Marketability of Title: Before the property can be transferred to the buyer, the seller must demonstrate that he or she has clear, unencumbered title to the property. This is typically accomplished through title insurance, which protects the buyer in the event of disputes over the property.
• All Encumbrances Must be Removed Before Title Transfer: Any liens or encumbrances on the property, such as mortgages, tax liens or rights of way, must be removed before the transfer of title to the buyer can be completed.
• Escrow officer Disburses buyer's funds, loan monies once conditions are met: The escrow officer plays a critical role in the closing. This professional ensures that all conditions agreed upon in the transaction are met before releasing the buyer's funds and any mortgage loans involved.
• Conditions that include surveys, inspections, title insurance, reserves, PMI: Before the closing is completed, it is common for property inspections to be performed and title insurance to be obtained. Reserves and private mortgage insurance (PMI) may also be required if certain criteria are met.

Real Estate Settlement Procedures Act (RESPA)

Purpose

The Real Estate Settlement Procedures Act (RESPA) is a federal law that regulates the closing process in real estate transactions. Its primary purpose is to clarify and disclose the costs involved in a real estate transaction, while prohibiting kickbacks and undisclosed fees.

Applicability

RESPA specifically applies to residential property transactions and federally-related mortgage loans, including those backed by the Veterans Administration (VA) and the Federal Housing Administration (FHA). This law is regulated by the Consumer Financial Protection Bureau (CFPB).

Information booklet

RESPA requires a lender to provide the borrower with the CFPB's “Your Home Loan Toolkit” brochure when applying for a mortgage loan. This brochure provides valuable information to borrowers about the closing process and its associated costs.

Loan estimate

RESPA requires the lender to provide the borrower with a “Loan Estimate” within three days of the loan application. This document details the estimated costs associated with the transaction.

Closing disclosure

Additionally, RESPA requires the lender to use the CFPB's “Closing Disclosure,” also known as Form H-25. This disclosure must be provided to the borrower at least three days prior to the consummation of the transaction.

Referral fees and kickbacks

RESPA prohibits the payment of referral fees and kickbacks in the closing process. Additionally, it states that business relationships between companies involved in the transaction must be fully disclosed, ensuring transparency in all real estate transactions.

Truth in Lending Act Integrated Disclosure (TRID) Rule

Key Points

The Truth-in-Lending Integrated Disclosures Rule (TRID) is a regulation that combines the financial disclosure requirements of RESPA and the Truth-in-Lending Act. -Lending Act, TILA). This rule replaces the Good Faith Estimate and HUD-1 forms and uses the new Loan Estimate and Closing Disclosure forms.

Forms and Procedures

Under TRID, a lender must provide the CFPB's required “Your Home Loan Toolkit” pamphlet when applying for a mortgage loan. Additionally, you must provide the “Loan Estimate” within three days of the loan application and the “Closing Disclosure” at least three days before the consummation of the transaction. The terms on both forms should generally match.

Good faith

The TRID states that the estimated costs in the “Loan Estimate” are based on the best information available at that time. The costs in the “Closing Disclosure” must be equal to the estimated costs within certain tolerances.

Types of charges

The TRID establishes different categories of charges that may or may not be subject to increases relative to the initial estimate. These include charges with no escalation limitation, charges with a 10% tolerance, and charges with no escalation tolerance.

Applicable transactions

The TRID applies to most fixed-term consumer mortgage loans, including construction loans, loans secured by vacant land, and trust loans. However, it does not cover home equity loans, reverse mortgages, mobile home loans, or loans made by small lenders that do not exceed 5 loans per year.

Form H-25

The H-25 form is an essential document in the closing process. This form is 5 pages long and varies depending on the type of loan. It details the debits and credits associated with the transaction, helping the parties understand how funds will be distributed at closing.

Debits and Credits (Debits & Credits)

Debits and credits are key components on the H-25 form. These terms are used to describe the quantities each party must produce or receive at closing. These elements are detailed below:

• Buyer's credits: Buyer credits are the amounts that will be credited to the buyer at closing. This may include the escrow money, the mortgage loan amount, and the buyer's share of prorations.
• Buyer's debits: Buyer's debits are the amounts the buyer must pay at closing. This may include the agreed upon purchase price and other expenses as stipulated in the sales agreement.
• Seller's credits: Seller credits are the amounts that will be credited to the seller at closing. This may include the agreed upon purchase price and the seller's share of prorations.
• Seller's debits: Seller debits are the amounts that the seller must pay at closing. This may include agreed-upon expenses, the buyer's share of prorations to receive, and the outstanding balance of the mortgage and other liens that will be paid.

30-Day 12-Month Proration

Proration is a common practice in real estate closings to distribute prorated costs between the buyer and seller based on their length of ownership of the property during the month in which the transaction closes. There are two common proration methods:

Formula:

• Monthly Amount = (Annual Amount ÷ 12)
• Daily Amount = (Monthly Amount ÷ 30)
• Proration = (Monthly Amount x number of months) + (Daily Amount x number of days)

Example:

Let's say an annual tax bill is $1,800 and closing occurs on April 10. What is the seller's share of the taxes?

• ($1,800 ÷ 12) = $150, monthly amount
• ($150 ÷ 30) = $5.00, daily amount
• ($150 x 3 months) = $450 (January to March); ($5 x 10 days) = $50 (April 1 to April 10); ($450 + 50) = $500, part of the seller

365-Day Method (365-Day Method)

This proration method is based on a 365-day year to calculate prorated daily costs. It is often used when the closing date does not exactly coincide with the end of the month. The formula is the following:

• Daily Amount = Annual Amount ÷ 365 days; either
• Daily Amount = Monthly Amount ÷ number of days in the month
• Proration = (Daily Amount x number of days)

Example:

Let's say an annual tax bill is $1,800 and closing occurs on April 10. What is the seller's share of the taxes?

• ($1,800 ÷ 365) = $4.93, daily amount
• From January 1 to April 10, there are 100 days.
• ($4.93 x 100 days) = $493, seller's share

Real Estate Settlement Procedures Act (RESPA)

Purpose

The Real Estate Settlement Procedures Act (RESPA) is federal legislation designed to regulate and standardize certain aspects of the closing process in real estate transactions. This law has several key purposes:

1. Clarify and Disclose Costs: RESPA seeks to ensure that consumers fully understand the costs associated with the process of closing a real estate transaction. This is achieved through detailed cost disclosure.
2. Eliminate Unfair Practices: The law aims to eliminate unfair practices in the real estate industry, such as kickbacks and hidden fees that could increase the total transaction cost for consumers.
3. Protect Consumer Interests: RESPA seeks to protect consumers' interests by requiring disclosure of important information, allowing them to make informed decisions during the closing process.

Applicability

The Real Estate Settlement Procedures Act primarily applies to residential property transactions involving federally backed mortgage loans, such as those backed by the Federal Housing Administration (FHA) or the Veterans Administration (VA). It is regulated by the Consumer Financial Protection Bureau (CFPB).

Information Brochure

One of the key requirements of RESPA is that a lender must provide borrowers with the CFPB's “Your Home Loan Toolkit” brochure when applying for a mortgage loan. This brochure contains important information about the closing process and associated costs, helping consumers better understand what they can expect.

Loan Estimate

Another important provision of RESPA is the lender's obligation to provide a “Loan Estimate” to borrowers within three days of applying for the loan. This estimate details the estimated costs associated with the transaction, giving borrowers a clear idea of the expenses involved.

Closing Disclosure

The RESPA Act also states that the lender must use the CFPB's “Closing Disclosure,” known as Form H-25, to detail the final closing costs to the borrower. This document must be provided to the borrower at least three days prior to the consummation of the transaction, allowing for a detailed review of final costs prior to closing.

Referral Fees and Kickbacks

An important part of RESPA is the prohibition of referral fees and kickbacks in the closing process. The law requires that all business relationships between involved parties be fully disclosed, ensuring transparency in all real estate transactions.

Truth in Lending Act Integrated Disclosure (TRID) Rule

Key points

The Truth-in-Lending Integrated Disclosures Rule (TRID) is an important regulation that affects the closing process of real estate transactions. Here are some key points related to TRID:

• Combine Disclosure Requirements: TRID combines the financial disclosure requirements of RESPA (Real Estate Settlement Procedures Act) and TILA (Truth in Lending Act). This helps simplify and standardize the disclosure of financial information in the closing process.
• Replaces Previous Forms: TRID replaces the “Good Faith Estimate” and “HUD-1” forms with two new forms: the “Loan Estimate” and the “Closing Disclosure.” These forms provide detailed information about closing costs and the terms of the loan.
• Obligation to Provide Information to the Consumer: The TRID requires lenders to provide consumers with key information, such as the CFPB's “Your Home Loan Toolkit,” when applying for a mortgage loan. This helps consumers better understand the process and costs involved.
• Cost Tolerances: The TRID establishes cost tolerances, meaning that the estimated costs in the “Loan Estimate” must be within certain limits relative to the actual costs in the “Closing Disclosure.” This helps consumers avoid unpleasant surprises in closing costs.

Forms and Procedures

Under TRID, a lender must provide the borrower with the CFPB's “Your Home Loan Toolkit” brochure when applying for a mortgage loan. Additionally, you must provide the “Loan Estimate” within three days of the loan application and the “Closing Disclosure” at least three days before the consummation of the transaction. Importantly, the terms on both forms should generally match, giving borrowers a consistent view of the costs and terms of the loan.

Good faith

The TRID establishes the obligation that the estimated costs in the “Loan Estimate” be based on the best information available at that time. Additionally, the costs in the “Closing Disclosure” must equal the estimated costs within certain tolerances. This ensures that borrowers receive accurate and reliable information about closing costs and the loan.

Types of Charges

The TRID classifies charges into different categories with respect to cost tolerances. These categories include charges with no escalation limitation, charges with a 10% tolerance, and charges with no escalation tolerance. This classification helps borrowers understand which costs could vary and which should be kept within certain limits.

Applicable Transactions

The TRID applies to most fixed-term consumer mortgage loans, including construction loans, vacant land loans, and trust loans. However, it does not cover home equity loans, reverse mortgages, mobile home loans, or loans made by small lenders that do not exceed 5 loans per year.

Form H-25

The H-25 form is a critical document in the real estate closing process. This form consists of 5 pages and its content varies depending on the type of loan and transaction. Form H-25 details the debits and credits associated with the transaction, helping all parties understand how funds will be distributed at closing.

Debits and Credits

The terms “Debits” and “Credits” are of vital importance on the H-25 form. These terms describe the financial amounts each party must produce or receive at closing. These elements are detailed below:

• Buyer's credits: These are the amounts that will be credited to the buyer at closing. They can include the escrow money, the mortgage loan amount, and the buyer's share of prorations.
• Buyer's debits: Buyer's debits are the amounts the buyer must pay at closing. This may include the agreed upon purchase price and other expenses as stipulated in the sales agreement.
• Seller's credits: Seller credits are the amounts that will be credited to the seller at closing. This may include the agreed-upon purchase price and the seller's share of prorations.
• Seller's debits: Seller debits are the amounts that the seller must pay at closing. This may include agreed-upon expenses, the buyer's share of prorations to receive, and the outstanding balance of the mortgage and other liens that will be paid.

30 Day and 12 Month Proration

Proration is a common practice in real estate closings to distribute prorated costs between the buyer and seller based on their length of ownership of the property during the month in which the transaction closes. Two different proration methods are used:

Formula:

• Monthly Amount = (Annual Amount ÷ 12)
• Daily Amount = (Monthly Amount ÷ 30)
• Proration = (Monthly Amount x number of months) + (Daily Amount x number of days)

Example:

Let's say an annual tax bill is $1,800 and closing occurs on April 10. What is the seller's share of the taxes?

• ($1,800 ÷ 12) = $150, monthly amount
• ($150 ÷ 30) = $5.00, daily amount
• ($150 x 3 months) = $450 (January to March); ($5 x 10 days) = $50 (April 1 to April 10); ($450 + 50) = $500, part of the seller

365 Day Method

The 365-day method is used in cases where the closing date does not exactly coincide with the end of a month. In this method, prorated costs are calculated using a 365-day year. The formula is the following:

• Daily Amount = Annual Amount ÷ 365 days; either
• Daily Amount = Monthly Amount ÷ number of days in the month
• Proration = (Daily Amount x number of days)

Example:

Let's say an annual tax bill is $1,800 and closing occurs on April 10. What is the seller's share of the taxes?

• ($1,800 ÷ 365) = $4.93, daily amount
• From January 1 to April 10, there are 100 days.
• ($4.93 x 100 days) = $493, seller's share

This article provides a detailed look at real estate closings in the United States, including the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act Integrated Disclosure Rule (TRID). Additionally, key concepts, such as debits, credits, and proration, that are critical to understanding the closing process in the U.S. real estate industry, are explained. By following these regulations and understanding these concepts, parties involved in a real estate transaction can ensure that the closing process is transparent and fair for all parties.