CLOSING REAL ESTATE TRANSACTIONS

OVERVIEW

The closing of a real estate transaction is the final step in the process of title transfer that began when the contract for purchase and sale was written.  A broker often finds that a checklist helps organize the many details required for a smooth closing.  While the title closing agent handles many of the closing duties, including the preparation of closing statements, the broker must ensure that the statements conform to the agreement between the seller, the buyer and the buyer’s lender.

       The closing statement used in nearly every residential closing is the HUD-1 Settlement Statement.  It must be used for mortgage loans covered by the Real Estate Settlement Procedures Act.  This chapter describes the HUD-1 statement and helps you prepare one.  A traditional composite closing statement also is discussed.

Once you have completed this chapter, you should be able to:

• Describe the many tasks the broker must complete that lead to a successful closing;
• Explain the major objectives of a pre-closing inspection;
• List the three disclosures that a lender should make at the time of loan application;
• Describe the major sections of the HUD-1 Settlement Statement;
• Describe the process used in prorating taxes, interest and prepaid rents;
• Prepare a HUD-1 Settlement Statement; and
• Prepare a composite closing statement.

THE BROKER’S ROLE IN CLOSING

Buyers and sellers expect their salespersons to professionally monitor and coordinate all details of their closings.  Most lenders and title closing agents prepare documents very carefully, but a licensee must review the documents to ensure that they are correct.  A transaction that goes smoothly from contract to closing reflects well on the firm as well as the salesperson.  It is likely to result in additional business for the licensee.

PRELIMINARY STEPS TO A CLOSING

A real estate licensee’s key duties are skill, care and diligence in every aspect of a real estate transaction—including the closing.  The best way to organize the work flow for an efficient closing is to prepare a written plan.  Checklists can be a key component of this plan.  Figure 2.1 provides a handy reference form that lists information about the buyer, seller, cooperating broker and lender, as well as other service providers.

       Another form that helps organize the closing is the closing progress chart shown in Figure 2.2.  Blanks are provided for each side of the transaction (listing and selling) to establish each agent’s responsibilities.  A discussion of these responsibilities follows.

Sale pending sign on listing.  Licensees may not place a Sold sign on property without the seller’s consent.  The listing agent normally handles this task.

Notice of “Under contract” to MLS.  A duty of the listing agent, this notice alerts all parties that a contract is pending.

Earnest Money deposited in bank.  MREC rules require that earnest money accepted by the broker or any licensee for which the broker is responsible and upon acceptance of a mutually

FIGURE 2.1              PROPERTY SALE INFORMATION SHEET

Property Address:                                                                                                                    

Seller:                                                                           Buyer:                                                 

Contract Date:                                                              Closing Date (Est.):                              

Lender:                                                                        Loan Officer:                          

Title Company:                                                            Closing Agent:                       

Appraiser:                                                      

Date Scheduled to Close:                               

Service Providers:

            Pest Inspection:                                                Ph:                              

            Home Inspection:                                              Ph:                              

            Roof Inspection:                                                Ph:                              

            Contractor:                                                       Ph:                              

            Surveyor:                                                          Ph:                              

Buyer’s Insurance Company:                                                                                                 

            Agent:                                                                Phone:                                   

Property status:          Occupied by seller      Occupied by tenant    Vacant

Key to property for inspection:           At listing office            In lockbox at property

                                                            Call seller for appointment

FIGURE 2.2                  CLOSING PROGRESS CHART

Property Address:                                                                                                                  

Seller:                                                  Buyer:                                                

FIGURE 2.2              CLOSING PROGRESS CHART (Continued)

Note:  if comments on any line of the chart are necessary, place an “X” in the appropriate place, then enter the comments here:

agreeable contract, is required to deposit the money into a trust account prior to the close of business of the next banking day.

Additional earnest money received, if required.  If the contract requires the buyer to give additional funds as a good-faith deposit, the licensee must ensure that the funds are received and deposited as required.

Loan application made by buyer.  The buyer’s failure to comply with the contract terms is a default, and the seller must be notified.  Both the listing and selling licensees should monitor compliance.

Contingencies cleared in writing.  The licensee must ensure that action is taken to clear the contingencies as soon as possible.  Some normal contingencies include a home inspection, a soil test, a roof inspection and financing.

Appraisal.  The licensee must be certain that the appraiser has access to the property.

Loan approval.  Most contracts require a loan commitment within a specified number of days from the contract date.  The licensee must provide any information or documents the lender requests.

Title insurance ordered by lender or salesperson.  Usually the party paying for the title insurance chooses the title closing agent from the lender’s approved list.  Many title companies prefer to begin title work even before loan approval is obtained.

Wood-destroying organisms inspection ordered.  A copy of the inspection report should be delivered to the seller, buyer, lender and title closing agent.  If treatment or repairs are required, agents working with the buyer and seller should communicate and agree on the details.  If a structural inspection is needed, a licensed contractor should be engaged to examine the property and estimate repair costs.

Required repairs ordered.  The appraisal could show the need for a new roof, or the buyer may have made the contract contingent on the seller replacing a swimming pool vinyl liner.  As soon as loan approval is obtained, the seller or buyer should order the work.  The appropriate party should inspect the work to be sure that it has been done properly.

Survey ordered.  The lender or the title closing agent orders the survey after loan approval.  In case of survey problems such as encroachments, the licensee must act quickly to help clear the problem.  If a new loan is required, the survey must contain the borrower’s name, the lender’s name and the title insurance underwriter’s name.

Buyer hazard insurance.  The buyer should contact an insurance agent early in the transaction to be sure the closing is not delayed.  Once a hurricane givens any indication that it is headed toward the state, Mississippi insurance companies stop writing policies until the danger has passed.

Hazard insurance policy to closing agent.  The salesperson must monitor the transaction to be certain that the insurance policy is delivered to the title closing agent.

Buyer/seller contacted for closing appointment.  Soon after loan approval, the salespersons should coordinate a closing time with the buyer, seller, lender and title closing agent.

Pre-closing inspection.  The buyer should make a pre-closing walkthrough inspection.  The salesperson should not conduct the inspection because of the liability involved.  The inspection ensures that:

• The property is ready for occupancy;
• The property was not damaged by the seller’s move out;
• Personal property the seller is required to leave remains on the property;
• All required repairs and maintenance have been completed; and
• The property has been maintained in the condition as it existed at the time of contract.

Closing papers reviewed with the buyer or seller one day before closing.  The licensee must monitor all phases of the closing and carefully review the closing statements.  When possible, the licensee should deliver copies of all documents to the buyer or seller, or his or her attorney.  The salesperson should review the closing statements to ensure that all items are correct, and be able to explain each item to the buyer or seller at the appointment.  The salesperson working with the buyer should compare the closing statement to the lender’s good-faith estimate.  The salesperson working with the seller should compare the figures to those the seller received on the net proceeds form.  The next section covers closing statements in detail.  The buyer’s attorney will want to review the following applicable documents:

• Mortgage loan documents
• Deed
• Land-use restrictive covenants
• Title insurance binder, commitment and exceptions
• Satisfaction of existing liens
• Condominium and home association documents
• Existing leases

Buyer given figure for certified check for closing.  The licensee should provide the buyer with this amount as soon as possible to allow the buyer time to get to his or her bank to secure a certified check for the necessary funds.

Earnest money check prepared for closing.  The salesperson should get the earnest money check from the broker and clip it to the buyer’s or seller’s file folder, which the salesperson will take to the closing.

At the closing.  The licensee should be completely attentive to every part of the closing.  Professionalism is the key to putting a buyer or seller at ease when she is dealing with what may be her largest single asset.

Signed closing papers received by salesperson.  The salesperson should be sure the office file is fully documented.  This includes any walkthrough clearance papers the buyer signs for the seller, closing statements all parties sign and copies of the survey and wood-destroying organism reports.  If disbursement is made at closing, the salesperson also received the commission check at this time.

Post-closing duties.  The salesperson should return the closing file to the office for processing, send a letter of thanks to the customer and arrange to visit the customer to make sure everything is satisfactory.

IRS reporting requirements.  The Foreign Investment in Real Property Tax Act requires a buyer of property owned by a foreign investor to withhold tax equal to 10 percent of the amount realized on the sale.  The tax may be withheld by the title closing agent as a service and must be deposited with the IRS within 30 days.  Among other exemptions, the sale of a personal residence is exempt if the amount realized does not exceed $300,000.

       Also, the closing agent reports residential sales and exchanges on Form 1099-S.  After May 6, 1997, however, a transaction is not reported if the seller gives written assurance that the full amount of the gain is tax free.

PREPARATION OF THE CLOSING STATEMENT

THE CONTRACT FOR SALE

The closing statement is, in effect, the purchase and sale contract reduced to numbers.  Problems encountered at closings often are the direct result of poorly written contracts.  If a contract is not clear about which party must pay a certain closing cost, the closing agent must allocate the cost based on local custom.

PARTS OF THE RESPA SETTLEMENT STATEMENT (HUD-1)

The HUD-1 Settlement Statement provides an itemized listing of the funds payable at closing.  Closing agents must prepare the HUD-1 form for the parties to a federally related residential mortgage loan.  The form has become the standard and is used in nearly all residential closings, whether or not required.  Each item in the statement is assigned a separate number within a standardized numbering system.  Figure 2.3 provides a blank HUD-1 statement.

       The HUD-1 statement consists of two pages.  Page one shows the parties, the property description, the lender, the settlement agent and a summary of the borrower’s and seller’s transactions.  Page two (Section L) itemizes the settlement charges for each party, including the broker’s commission, loan closing costs, prepaid items, escrow account setup, title charges and recording charges.  The totals for each party on this page are transferred to the front summary page.  Normally, closing agents start at page two, explaining the charges to buyer and seller, then go to page one.  The totals at the bottom of page 1 indicate the seller’s net proceeds and the buyer’s net payment at closing.  A discussion of the lines on the statement follows:  The numbers correspond to the items listed in Section L of the HUD-1 Settlement Statement.

700. Sales/Broker’s Commission: This section discloses the total dollar amount of sales commission, usually paid by the seller. If more than one broker is involved, the split is shown on the next lines.

701-702. Division of commission. Cooperating brokers normally split commissions.  This is only a disclosure item; the lines need not show actual charges (see line 703).

703. Commission paid at settlement. This is the total commission to be paid, which is charged to the buyer, the seller or both.

800. Items payable in connection with loan. In this section, the fees that the lender charges to process, approve and make the mortgage loan are itemized.

801. Loan origination fee. The lender charges this fee for processing. It is often expressed as a percentage of the loan and varies among lenders and from locality to locality.  Generally, the borrower pays this charge.

802. Loan discount. The loan discount, a one-time charge used to adjust the yield on the loan to what market conditions demand, usually is expressed as point.  Each point equals 1

FIGURE 2.3              HUD-1 SETTLEMENT STATEMENT

1. Settlement Statement

U.S. Department of Housing

And Urban Development

OMB No. 2502-0265

FIGURE 2.3              HUD-1 SETTLEMENT STATEMENT (Continued)

percent of the mortgage amount.  For example, if a lender charges two points on a $100,000 loan, the borrower pays $2,000.  On a 30-year loan, this increases the lender’s yield by approximately ¼th of 1 percent.

803. Appraisal fee. This fee is paid to a state-certified appraiser, who prepares a value estimate of the property to be mortgaged. The borrower usually pays the appraisal fee, but it may be paid by either party, as agreed in the sales contract.

804. Credit report fee. This fee covers the cost of the credit report, which shows the lender the borrower’s attitude and willingness to pay debt on time.

805. Lender’s inspection fee. The charge covers inspections, often of newly constructed housing, made by lending institution personnel or an outside inspector.

806. Mortgage insurance application fee. This fee covers processing of the application for private mortgage insurance, which is required on certain loans.

807. Assumption fee. This fee is charged for processing when the buyer takes over the seller’s mortgage obligations.

       Note that the parties pay some items before title closing.  To disclose all costs on the closing statements, a memo entry appears in the appropriate places in the statement, showing the amount paid and the initials POC (paid outside closing).  POC items include the credit report and appraisal fee, which the borrower pays to the lender at the time of application, as well as the cost of the hazard insurance policy.

900. Items required by lender to paid in advance. This section is for prepaid items, such as interest, mortgage insurance premium and hazard insurance premium, at the time of settlement.

901. Interest. The lender usually requires that the borrower pay at settlement the interest on the mortgage from the date of closing to the beginning of the period covered by the first monthly payment. For example, if a closing takes place on August 12, and the first regular monthly payment is due October 1, the lender collects enough for interest from August 12 through August 31.  September’s interest is paid in the October 1 payment.

902. Mortgage insurance premium. Mortgage insurance protects the lender from loss if the borrower defaults. The premium may cover a specific number of months, a year in advance or the total amount.  Mortgage insurance should not be confused with mortgage life, credit life or disability insurance designed to pay off a mortgage if the borrower dies or becomes disabled.

903. Hazard insurance premium. This prepayment is for insurance protection against loss due to fire, windstorm and natural hazards. The lender may require that the borrower purchase the policy before the closing and bring to the closing a binder or proof of payment.  If the lender does not require prepayment, the title closing agent collects the first year’s premium at closing.  Closing statement examples in this text show both methods of payment.

904. Flood insurance premium. If the property is located within a flood hazard area identified by Federal Emergency Management Agency (FEMA), the borrower may be required to carry flood insurance. The first year’s premium must be paid in advance.

1000. Reserves deposited with lender. The lender normally requires a reserve if the loan-to-value ratio is greater than 80 percent. The reserve is an escrow account the lender holds to ensure future payment for such recurring expenses as real estate taxes, mortgage insurance and hazard insurance.  The lender collects an initial amount for each of these items to start the reserve account, then adds a portion of each monthly payment to the account.

1001. Hazard insurance. The lender determine the amount of money that must be placed in the reserve to pay the next insurance premium when due. Normally, two months’ premiums are collected.

1002. Mortgage insurance. The lender may require that part of the total annual premium be placed in the reserve account at settlement. Normally, two months’ premiums are collected.

1003-1004. City/county property taxes.  The lender may require a regular monthly payment to the reserve account for property taxes.  The lender pays the taxes in November, so the amounts added monthly should equal a full year’s taxes by October.

1005. Annual assessments. This reserve item covers assessments that may be imposed by subdivisions or municipalities for special improvements (such as sidewalks, sewers or paving) or fees (such as homeowners’ association fees).

1009. Aggregate analysis adjustment. This adjustment is made to ensure that the lender has set up enough, but not too much, in reserves.

1100. Title charges. Title charges may cover a variety of services performed by the closing agent.

1101. Settlement or closing fee. This fee is paid to the closing agent, normally by the person who has agreed to pay for title insurance.

1102-1104. Abstract or title search, title examination, title insurance binder.  These charges cover the costs of search and examination of the public records to determine whether the seller can convey clear title to the property.

1105. Document preparation. This document fee covers preparation of final legal papers, such as a mortgage, note or deed.

1106. Notary fees. If the notary charges for affixing his or her name and seal to various documents authenticating the parties’ execution of the documents, the charge is shown here.

1107. Attorney’s fees. The buyer and seller are advised to retain attorneys to check all real estate documents and to represent them at all stages of the transaction, including closing. If this service is not required or is paid for outside of closing, the person conducting settlement need not record the fee on the settlement form.

1108. Title insurance. The total cost of the owner’s and lender’s title insurance is shown here. The borrower may pay all, a part or none of this cost, depending on the sales contract terms or local custom.

1109. Lender’s title insurance. A one-time premium may be charged at closing for a lender’s title policy, which protects the lender against loss due to problems or defects in connection with the title. The insurance usually is written for the amount of the mortgage loan and covers losses due to defects or problems not identified by title search and examination.

1110. Owner’s title insurance. This charge protects the buyer against losses due to title defects.

1200. Government recording and transfer charges. The borrower usually pays the recording fees for the new deed and mortgage (line 1201).

1300. Additional settlement charges

1301. Survey. Usually, the borrower (but sometimes the seller) pays the surveyor’s fee.

1302. Pest and other inspections. This fee covers inspections for wood-destroying organisms. Fees for other inspections, such as an inspection for structural soundness, are entered on line 1303.

1400. Total settlement charges. All the fees in the borrower’s column entitled “Paid from Borrower’s Funds at Settlement” are totaled here and transferred to line 103 of Section J, “Summary of Borrower’s Transaction,” on page one of the HUD-1 Settlement Statement. All the settlement fees the seller pays are transferred to line 502 of Section K, “Summary of Seller’s Transaction,” on page one of the HUD-1 Settlement Statement.

       On page one, Section J summarizes the borrower’s transaction.  Lines 100 through 120 show items that increase the amount the borrower owes; lines 200 through 220 show items credited to the buyer that reduce the amount due; and lines 300 through 302 show the total due at closing.

100. Gross amount due from borrower.

101. Contract sales price. This ultimate closing cost is taken directly from the sales contract.

102. Personal property. The price of items of personal property being sold to the buyer is entered on this line.

103. Settlement charges to borrower. This total closing cost is carried forward from page two.

107. County taxes. This line is used only when the seller has paid the annual taxes before closing.

108. Assessments. This line is used if the seller has prepaid a county or homeowners’ association assessment.

120. Gross amount due from borrower. The above items are subtotaled here.

200. Amounts paid by or in behalf of borrower.

201. Deposit or earnest money. The buyer gets a credit for the earnest money deposit given at the time the contract was signed.

202. Principal amount of new loan. The buyer is credited with the loan amount, which the lender gives to the closing agent.

203. Existing loan(s) taken subject to. If the buyer assumes or buys subject to a mortgage, the current principal balance is entered on this line.

211. County taxes. The amount the borrower owes is reduced by the seller’s share of annual ad valorem taxes.

212. Assessments. This line is used for amounts due to the buyer for assessments the seller has not paid.

220. Total paid by/for borrower. The subtotal of lines 200 through 218 is entered here.

300. Cash at settlement to/from borrower. This section summarizes the transaction.

301. Gross amount due from borrower (line 120).

302. Less amounts paid by/for borrower (line 220).

303. Cash  from  to borrower. This is the grand total of the borrower’s transaction.

       Section K summarizes the seller’s transaction.  Line 400 through 420 are the seller’s credits, which increase the amount due to the seller; lines 500 through 520 reduce the amount due to the seller; and lines 600 through 602 show the check due to the seller at closing.

400. Gross amount due to seller.

401. Contract sales price. This sum is taken directly from the sales contract.

402. Personal property. The price of items of personal property being sold to the buyer is entered on this line.

407. County taxes. This line is used only when the seller has paid the annual taxes before closing.

408. Assessments. This line is used if the seller has prepaid a county or homeowners’ association assessment.

420. Gross amount due to seller. The above items are subtotaled here.

500. Reductions in amount due to seller.

501. Excess deposit. If the buyer pays the earnest money deposit directly to the seller, not to the broker or title closing agent, it is shown on this line.

502. Settlement charges to seller (line 1400). This is the seller’s total closing cost carried forward from page two.

503. Existing loan(s) taken subject to. If the buyer assumes or buys subject to a mortgage, the current principal balance is entered on this line.

504-505. Payoff of mortgage loans.  The closing agent must pay off this balance due on the seller’s mortgage.

511. County taxes. The amount the borrower owes is reduced by the seller’s share of annual ad valorem taxes.

512. Assessments. This line is used for amounts due to the buyer for assessments the seller has not paid.

520. Total reductions in amount due seller. The subtotal of lines 500 through 519 is entered here.

600. Cash at settlement to/from seller. This section summarizes the transaction.

601. Gross amount due to seller (line 420).

602. Less reduction amount due seller (line 520).

603. Cash  to  from seller. This is the grand total of the seller’s transaction.

PRORATING PROCEDURES

ITEMS TYPICALLY PRORATED BETWEEN BUYER AND SELLER

In every closing, income and expenses associated with the ownership of the property must be prorated between buyer and seller.  In most cases, the 365-day method is used to prorate annual expenses.  The annual cost is divided by 365 days to get a daily rate, which is multiplied by the number of days involved to get the amount due.  When calculating prorations using the 30-day month method, the annual cost is divided by 12 months, then by 30 days to get the daily rate.  This rate is multiplied by the number of days involved to get the amount due.

       Proration calculations should be based on the last day of seller ownership.  The day of closing is charged to the buyer.  It is possible that by negotiation or custom in an area, the day of closing is charged to the seller.

       The most common items prorated on a closing statement are property taxes, interest on assumed mortgages, and rents and security deposits the seller collects in advance.  A discussion of each follows.

Prorating property taxes.  Property taxes, paid in arrears, are the buyer’s responsibility at year end.  For this reason, the seller must compensate the buyer for the seller’s share of the taxes.  The only exception occurs when a closing takes place at the end of the year and the seller already has paid the taxes.

       If we assume that the closing date is June 12 and that property taxes are $3,224, the proration is calculated as follows:

       Beginning               Closing Date                   End

       January 1                  June 12               December 31

       Number of days from January 1 through June 11:

January     31                Daily rate $3,224 ÷ 365 days = $8.83288 per day   

February    28                Daily rate $8.83288 X 162 days = $1,430.93          

March        31

April          30

May           31

June          11

Total        162

Proration exercise.  Calculate the following property tax prorations:

Closing Date         Taxes                   Amount                Charge To

June 10                $2,567                  $                         Buyer  Seller

November 13          $4,260 (Paid 11/3)  $                         Buyer  Seller

February 8            $1,892.56             $                         Buyer  Seller

Prorating interest on a mortgage the buyer assumes.  Mortgage assumptions, although less common than they were in the past, are encountered from time to time.  Interest on a mortgage is paid in arrears, so if a mortgage is assumed, the seller must compensate the buyer for the seller’s share of the interest.  For example, when a mortgage payment is made on July 1, it pays the interest for the month of June.

       If we assume that the closing date is June 12, the mortgage is being assumed and the interest for June is $883.50, the proration is calculated as follows:

       Beginning               Closing Date                   End

         June 1                    June 12                     June 30

Daily rate $883.50 ÷ 30 days = $29.45 per day

Daily Rate $29.45 X 11 days = $323.95

Proration exercise.  Calculate the interest prorations on the following assumed mortgages.  Assume that payments are due on the first of the month.

Closing           Interest          Proration        Charge To

September 20   $647.80          $                    Buyer Seller

December 15    $1,145.07        $                    Buyer Seller

March 8          $976.43          $                    Buyer Seller

       With seller financing, the buyer usually makes the first payment on the first of the month following closing.  Because that initial payment includes the interest due for the entire month, the buyer should receive a credit for the portion of that month the seller owned the property.

Prorating rent.  Prepaid rent is prorated for income property.  The seller collects the rent and should compensate the buyer for the rent for the period after the closing.  The buyer also should be credited for the security deposits collected by the seller.

       If we assume a closing date of June 12, with a duplex rented for $700 on each side and rents collected on June 1 by the seller, the proration is calculated as follows:

       Beginning               Closing Date                   End

         June 1                    June 12                    June 30

Rent of $700 X 2 units = $1,400

Daily rate $1,400 ÷ 30 days = $46.66667

Daily rate $46.66667 X 19 days = $886.67

Proration exercise.  Please calculate the following rent prorations:

                          Rent

Closing Date   Collected        Proration        Charge To

May 10              $4,750          $                    Buyer Seller

November 13      $   750          $                    Buyer Seller

February 8        $2,300          $                    Buyer Seller

       Security deposits or advance rents the seller collects are credited to the buyer in full at closing.

Prorating hazard insurance.  Because it is a rare situation that a buyer can assume an existing policy, this text does not cover insurance prorations.  The buyer should purchase a new policy, and the seller should cancel the existing policy and request a refund.

PREPARATION OF CLOSING STATEMENTS—EXAMPLES

Brokers and salesperson rarely prepare closing statements; this is a function of title closing agents.  However, a licensee should be able to review the statements to ensure that they conform to the purchase and sale contract.  Understanding how the statements are constructed is a necessary part of learning to review them carefully.  The following sections provide examples of HUD-1 closing statements for three types of transactions: a residential transaction with new financing; a residential transaction with an assumed mortgage; and an income property transaction with new conventional financing.  Another section helps the licensee prepare the traditional composite closing statement.

CLOSING STATEMENT 1: RESIDENTIAL TRANSACTION WITH NEW FINANCING

Wendy Putnam Smith has entered into a purchase contract for a home located at 6798 Stonegate Road, Gautier, MS 39553.  The seller is Cecil L. Harrolsen; the lender is Tri-State National Bank, and the settlement agent is Thomas & Schmidt Title Co.  Wendy will finance the purchase price of $140,000 with a new 80 percent conventional mortgage at 7.5 percent interest.  There is no requirement for mortgage insurance or for escrowing reserves.  The seller’s mortgage payoff is $112,549 at the date of closing.  Wendy and Cecil privately agreed that Wendy would purchase Cecil’s washer, dryer and refrigerator for $428, which they have asked to be shown on the closing statement.  The broker’s commission does not include the personal property.  The closing date of October 14 belongs to the buyer.  While this closing statement shows the insurance premium being collected at closing, licensees should be aware that many lenders want the policy prepaid before the closing.  Based on the following information, complete the blank HUD-1 statement at Figure 2.4.

HUD-1

FIGURE 2.4              CLOSING SETTLEMENT STATEMENT 1

1. Settlement Statement

U.S. Department of Housing

And Urban Development

OMB No. 2502-0265

FIGURE 2.4              CLOSING SETTLEMENT STATEMENT 1 (Continued)

*POC on the statement means “paid outside closing”

CLOSING STATEMENT 2: RESIDENTIAL TRANSACTION WITH AN ASSUMED MORTGAGE

Jack and Susan Wilder, husband and wife, are purchasing a home located at 5021 Azalea Street, Moss Point, MS 39566.  The seller is Ellen Smith.  The sale price is $178,000.  The closing date of April 15 belongs to the buyer.  The Wilders will assume Ellen’s mortgage, which has a balance of $124,519 on the day of

FIGURE 2.5              CLOSING STATEMENT 2

1. Settlement Statement

U.S. Department of Housing

And Urban Development

OMB No. 2502-0265

FIGURE 2.5              CLOSING STATEMENT 2 (Continued)

 closing.  There is no escrow account on the existing mortgage.  Interest for April on the first mortgage is $830.  Ellen has agreed to hold a 20-year purchase-money mortgage from the Wilders for $20,000 at 9 percent.  The first payment is due on May 1, with interest in arrears.  The settlement agent is Dean Title Co.  Based on the following information, complete the blank HUD-1 statement in Figure 2.5.

HUD-1

*POC means “paid outside closing”

CLOSING STATEMENT 3: INCOME PROPERTY TRANSACTION WITH A NEW MORTGAGE

39243. W. Dixon has entered into a purchase contract for a triplex located at 1868 Maple Street, Tupelo, MS 39243. The sellers are Simmons and Mary Tyler, husband and wife. The settlement agent is First United Title Insurance, Inc.  J. W. will finance the purchase price of $200,000 with a new 75 percent 25-year mortgage at 9 percent.  The first payment will be due on September 1, and prepaid interest will be collected for the balance of the month of closing.  Payoff of the Tylers’ existing mortgage is $117,947 as of the closing date.  There is no requirement for mortgage insurance or for escrowing reserves.  Each tenant has paid a security deposit equal to the monthly rent.  The rents are $750, $775 and $790, respectively, and all rent is current.  The closing date of July 16 belongs to the buyer.  Other facts necessary to prepare the closing statement follow.  Use the blank HUD-1 Settlement Statement at Figure 2.6.

HUD-1

FIGURE 2.6              CLOSING STATEMENT 3

1. Settlement Statement

U.S. Department of Housing

And Urban Development

OMB No. 2502-0265

FIGURE 2.6              CLOSING STATEMENT 3 (Continued)

*POC means “paid outside closing”

THE TRADITIONAL COMPOSITE CLOSING STATEMENT

The composite closing statement is laid out with the seller’s charges (debits) and credits on the left side and the buyer’s on the right side.  The center position provides the description of each charge.

       The composite statement is divided into four major sections:

1. The transaction section includes the price, earnest money deposit and mortgages.
2. The prorations and prepayments section divides items like interest on assumed mortgages and taxes between the parties. The prepayments sections also accounts for items like an interest and escrow setup on a new loan.
3. The expenses section includes such costs as commissions, title insurance fees, and surveys. These are debits to the party responsible for paying the expenses.
4. The broker’s statement is a control to ensure that the broker’s escrow account remains in balance. Receipts and disbursements must be equal, or the result is an overage or a shortage in the trust account.

Debits and credits.  A debit is a charge.  A debit to the seller reduces the seller’s proceeds; a debit to the buyer increases the amount due from the buyer.  A credit to the seller increases the amount due to the seller; a credit to the buyer decreases the amount due from the buyer.

CLOSING STATEMENT 4: RESIDENTIAL TRANSACTION WITH AN ASSUMED MORTGAGE USING THE TRADITIONAL COMPOSITE CLOSING STATEMENT

Based on the same facts shown for closing statement two, with Jack and Susan Wilder as buyers and Ellen Smith as seller, and the following information, complete the Composite Closing Statement in Figure 2.7.

       When you have completed the closing statement between the seller and the buyer, the next step is to ensure that the broker’s statement balances.  The broker’s statement shows all the broker’s receipts and disbursements for the closing.

       You should enter the broker’s receipts in the left column, which would include the earnest money deposit, any new mortgage proceeds (except seller financed mortgages) and the check from the buyer at closing.

       You should enter the broker’s disbursements in the right column, including the brokerage fee, the check paid to the seller at closing, the seller’s other expenses and the buyer’s expenses.

       The columns, when totaled, must balance to show that the broker is disbursing exactly the amount received.

FIGURE 2.7              COMPOSITE CLOSING STATEMENT, CLOSING STATEMENT 4

FIGURE 2.8              BROKER’S STATEMENT