MacIntosh Real Estate School
CLOSINGS COURSE
QUESTIONS and ANSWERS
About the text and Closing Problems
FUNDAMENTAL CLOSINGS CONCEPTS
I am really having trouble with these closings concepts, and feel like I’m never going to learn it!
If it makes you feel better, everyone has troubles with this. In "real life", every closing (worksheet/settlement statement) is different,
and has different charges. Which is why we have, say, credit report charges on one example – but not the other; and one loan the lender “nets out” their own fees,
and others they pay the entire loan amount and get a check back for their fees. That is why is essential that students learn and understand how worksheets and debits/credits work,
rather than trying to memorize an endless (and non-existent) list of figures.
Is it safe to say that in most loans, the broker cuts all checks, except with new institutional loans, which is cut by lender to secure loan more?
You’re asking about “real life”? Then, neither. In “real life” the broker does not actually do all this… the title company (closer) takes all the figures from the various sources (title company charges, loan company figures, the county for tax certs, broker fees) and puts them together on the worksheet and creates the settlement statements. They bring in (escrow) the money, then cut all the checks.
So your natural follow-up question would be: Why do you even have to learn any of this? Simple: You already learned that the broker is legally and ethically “responsible” for the closing – they’re in charge – even though they have “delegated” some of the legwork to other “people” like the title company. So, you are responsible and need to make sure that all the figures are correct, represent the interests of your clients by making sure they are paying for (or getting paid) for the right things, etc. And just as importantly, you want to look like you know what you are doing when someone asks you in a closing, “What is a Tax Certificate, and why am I paying for it?”, or “Why is my loan amount $300k, but the settlement statement only says that $288,412 is being credited to me?”
Why isn’t my interest/proration calculation the same as yours?
Make sure you are following the “calculator” method prescribed by the Real Estate Commission: After each “step” in the calculation you must round off the figure to 3 decimal places to the right of the decimal (“thousandths”). Clear out on the calculator after each calculation, and re-enter that 3-decimal number to start the next step in the calculation. When you arrive at the final figure, you must naturally round to two decimal places (i.e., $187.05 – not $187.054).
Can you explain the “knuckle rule” better? Or… How do I remember how many days each month has?
We're not big fans of the "knuckle rule", because we always learned the months of the year by the poem, "30 days hath September, April, June and November." and then it goes on to say that all the other months have 31 days, except for February which usually has 28 days, except in a leap year it has 29.
Otherwise, the knuckle rule simply says that you can count the months (with 30/31 days) on your "fingers": Make a fist with both hands, turn them face down and put them together. The knuckle of your left pinky finger will be on the far left. Note that the knuckles alternate with the spaces between: up, down, up, down, up, down, up. but then there is no "down" because it goes directly to the "up" knuckle of the index finger of your right hand. So then it is up, down, up, down, up. again.
So. the "up" knuckles are the months with 31 days, the "down" space between the knuckles are the months with fewer days (28 or 30): January - up (=31), February - down (=28), March - up (=31), April - down (=30), May - up (=31), June - down (=30), July - up (=31), August - up (again = 31), September - down (=30), October - up (=31), November - down (=30), finally December - up (=31 days). Of course, ignore the remaining knuckles.
Definition of DEBITS and CREDITS
Fundamentally, if you remember that if someone is paying something, then it is a DEBIT (i.e., if seller is paying for an item, then that number goes in the DEBIT SELLER column for that item). If someone is getting paid something, then that is a CREDIT (i.e., if buyer is getting paid for something, then that number goes in the CREDIT BUYER column for that item.)
If you have a debit in a certain amount, you must always have a credit in the SAME amount. Think of it this way: If I write you a check (Debit) for $2.08, then you aren't GETTING a check (credit) for $60.92. So, you can have TWO debits for an item, if the seller and buyer are splitting the payment for something (but you must then have a corresponding credit in the SUM TOTAL of those two debits).
Is there a list of Debits and Credits that I can memorize?
There is no list of items that say, the seller always pays for or the buyer always pays for. This is because almost nothing is set in stone (except, of course, the purchase price is always a debit to buyer and a credit to seller) and anyone could pay for these things: broker, buyer, seller, or an outside party. Then, as soon as you went to memorize a list, the real estate commission will throw something unusual into the mix on the state license exam (which is why we do the same thing throughout all our examples and problems.)
The simplest analysis is to always ask yourself “Who is PAYING for this item?” That person gets the DEBIT.
Then ask “Who is GETTING PAID for this item?” That person gets the CREDIT.
If the item is being PAID OUT (a check being cut to an outside part or the Broker – for commission) then it is also a CREDIT – but it is in the Broker Credit column (more understandable if you think of it as the DISBURSEMENT OUT column.)
If the item is money COMING IN to closing (such as the deposit that was being held in the broker’s trust account and now s/he is bringing it into closing), then it goes into the Broker Debit Column (more understandable if you think of it as the DISBURSEMENT IN column.)
That concept doesn’t make as much sense when you get to the bottom-line SUBTOTALS and TOTALS columns. The SUBTOTAL lines are, of course, all the items in that column added together. Just like I say above, the Seller Debit column is the amount that the seller is PAYING and the Seller Credit column is the amount the seller is GETTING PAID. So, obviously the difference of those two is what seller is GETTING PAID at closing (assuming – as normal – the Seller Debit total is less than the Seller Credit column. However, in the closing example - “When Loan is Assumed” - on approximately page 21 is unusual in this respect.) That figure will go in the Seller Debit line below the Subtotal (“Total Due to/from Seller”) because we need to add that to the Subtotal to make the two seller column totals (debit/credit) “balance out” - equal the same amount.
Same thing for the buyer, but buyer will usually be bringing money INTO closing, so that “balancing” amount is normally under the Buyer Credit column in the “Balance due to/from Buyer” line. Note that the amount buyer must PAY (the subtotal of the Buyer Debit column) is almost always greater than the money that is GETTING PAID to buyer (Buyer Credit column) so the “balancing” amount is under the Buyer Credit column so that the amount of money coming in is the same as the amount going out.
How do I know how to figure out who pays a bill, i.e. – debits vs. credits and in advance vs. in arrears?
If a bill is DUE and PAYABLE IN ADVANCE at the beginning of the month, and the closing happens somewhere in the middle of the month, then it must be PAID AT CLOSING. It will be prorated, with part PAID by SELLER and part PAID by BUYER, payable to whoever it is owed to. In your example, then, it would be 4 days DEBIT SELLER / 26 days DEBIT BUYER / total CREDIT "BROKER" (Disbursement OUT).
On the other hand, if a bill is DUE and PAYABLE IN ARREARS, then that means LAST MONTH (or quarter, etc.) is DUE for a period prior to closing, when seller owned the property. In that case, seller pays the entire amount (DEBIT SELLER the total amount / CREDIT "BROKER"-Disb OUT).
On the other hand, if a bill is DUE and PAYABLE IN ADVANCE for a time period AFTER CLOSING, then buyer will pay the entire amount (DEBIT BUYER the total amount / CREDIT "BROKER"-Disb OUT).
FINALLY, if a bill is NOT YET DUE, then it will LATER be paid for by BUYER (outside and after closing). If seller owned the property for part of the time period of the bill, then seller will need to PAY BUYER now, at closing, for that time. This is what PRORATING is all about. Sometimes we don't even know what that amount is going to be, so we have to ESTIMATE - usually based on the PRIOR time period. This is what we do with PROPERTY TAXES.
Why is it that sometimes the seller’s taxes don’t appear in the seller debit column… Wouldn’t the lender want to make sure they are always paid, so that they do not become a superior lien on the property?
If the taxes are DUE... AND the seller's ("old") lender has not yet paid them, then the closing company would pay those taxes due (and that figure would appear in the Seller Debit column AND the Broker Credit/Disbursement OUT column.) Yes - the lender will usually want to pay the taxes as soon as they are due, because otherwise it might constitute a (superior) lien on the property. But, as I said, they may have already been paid, or not yet due - so in that case they would not appear on that particular closing.
That’s another reason why it doesn’t do much good to try to have a “cheat sheet” for what items appear in what columns – or, it’s more trouble than it’s worth, because of all the different possibilities. You have to read the instructions – to find out whether something is due or has been paid.
Paying Taxes / Prorating Taxes / Tax Reserve
When do you have an entry for paying last year’s taxes?
If the problem (or in real life - the county) says that taxes "have not been paid" or "taxes are due" - then they must be paid at closing. Since the seller owned the property for the entire year, then it will be entirely paid by seller (debit seller/credit OUT).
This is true whether it is a New Loan or an Assumption, because if the taxes for last year are left unpaid, then it would constitute a lien on the property (superior even to buyer's new/assumed loan).
This is also true - even if there is a tax reserve (also regardless of whether it is a New Loan or an Assumption). You see - taxes (in Colorado) for last year are DUE on January 1 of this year... but they are not LATE until April of this year (or February and June, if they choose to pay in half-installments). So - the lender will hold off on paying them until the last minute. So, for example, even though the taxes for 2009 were due on January 1, 2010 - they aren't LATE until April, 2010... So the lender will hold off until April, with that money still in Reserves (collecting interest for the lender, buy the way). So - if the closing happens in March, they will still be due and must be paid at the Closing.
There is one instance on the Closings final exam where there is a slight difference in procedure from what I detail above. It is an unusual situation, so you have to read the fact-situation very carefully, because it subtly tells you what is happening and what to do.
This year's taxes will ALWAYS be prorated between seller and buyer - because seller owned the property for every day before closing and buyer is responsible for every day after closing.
However, as I mentioned, taxes for this year will not be paid until next year - by buyer. So the proration will simply be the number of days before closing debited to seller. Buyer will then pay the entire amount next year (but they already got paid by the seller way back at closing). Keep in mind, however, that since the buyer has been putting money into the lender's reserve, it will be lender who (in Feb/Apr/Jun next year) actually cuts the check to the county for this year's taxes.
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A Simple Real Estate Transaction
Why is the buyer’s earnest money deposit a credit to buyer and debit to the broker? Why wouldn’t it be a Buyer Debit (since s/he must pay it) and a Broker Credit (to disburse, or pay out)?
An earnest money deposit is a credit because the buyer has already paid that amount. (Way back in the beginning of the deal – to their broker.) So, the money has been sitting in the broker’s trust account, waiting for closing.
So – at closing – the broker has the earnest money and must pay (debit broker) the deposit – into the closing company’s account. The buyer gets a credit for that amount because s/he has already paid that money and… needs to get credit for it! (Otherwise, if it were a debit to buyer at closing – translated – that would mean that buyer is paying that amount (again) at closing.)
Section 17, the text says: "If the seller's loan is assumed and has a tax reserve, then the prior tax amount would be credited to the buyer as the lender will pay these taxes." So does that mean the amount of taxes due for previous year would be in total a credit to buyer and debit to seller?
No. This is sort of an unfortunate and confusing way for the Real Estate Commission to put this. (This part of the text is from the R/E Commission.) It means that the lender is - behind the scenes - giving ("crediting") the reserves to buyer, since buyer is assuming the loan. It does not mean that there is an entry on the worksheet - for closing - that is a credit to the buyer. However - since the lender has given the buyer the reserves (which were originally paid in by the seller), the buyer at closing must "pay back" the seller (credit seller/debit buyer) for those amounts. This also applies to any Hazard Insurance Reserves or Mortgage Insurance reserves that the seller paid in previous to closing.
On item 19 - Tax Reserve states that a five month tax reserve will be required at closing since the first installment is not due until July 1st. How are these figures related?
The lender needs to collect enough escrow at the origination of the loan, so that by the time the borrower makes the remaining payments in the year – lender has 12 months worth of tax payments so they can pay the full tax bill (due at the first of the year). Since the first loan payment borrower will have to make (and therefore the first 1/12th contribution to the tax escrow that will be due next year) is on July 1st, they will have made 7 payments by January 1 (July/Aug/Sep/Oct/Nov/Dec/Jan). Therefore, at closing they have to “make up” for the “missing” payments prior to closing, which would amount to 5. So, at closing, the lender escrows in advance those 5 payments – so that by the beginning of next year when the taxes will be paid they will have a total of 12 (5 before + 7 after closing).
Regarding the 3/12 taxes provision: The example shows that lender is holding 5 months of reserves to pay the 7/1 tax bill. Wouldn't that be undone, in a sense, if the lender has to return much of that by 5/30, before the 7/1 tax bill is due?
Yes. This – collection, then partial refund - would seem to not make sense, but it is simply a case of a state law conflicting with a lender practice. The “refund” law was to prevent lenders from over-collecting, or more appropriately, from holding on to too much of the borrower’s money. So – there are really two different things going on here (although the text of the R/E Commission’s sample problem, here, blurs the distinction): First, the lender must collect enough to have the full amount of (expected) taxes by the time the bill comes due for this year (at the beginning of next year); Second, lenders are required by law to refund excess escrow payments by May 30. This actually only seems senseless because of the time of year that this particular closing takes place (right at the time the “refund” would be due.)
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No Questions Yet! Must be perfectly clear.
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On the Real Estate Settlement - Assumption of Loan, why is the 2% Colorado withholding a different figure on Assumption of Loan, than on the worksheet for Real Estate Settlement - New Loan? The sales price is the same; however, the figures shown on the same on line 20 are different.
It says right there in the explanation for the “Simple Sale”, for line 20. (The pagination changes with every yearly revision of our materials, but it should be on about page 11.)
“20. Special Taxes - $4,075.00. A Colorado closing entity must withhold the lesser of 2% of the sales price OR the entire net sales proceeds amount in any transaction in which the Seller is or is going to be a non-resident person or corporate entity after closings.”
So – the closing company must withhold 2% of the sales price OR whatever the seller is getting out of the sale (= the subtotal line of DUE TO/FROM SELLER.) In the first two examples (Sale & Assumption) the seller was getting at least $4,075 – so the closing company took that out of seller’s proceeds for the 2% tax. However, in the New Loan, the Seller was due to receive (after all costs, etc.) only $976.14. So the closing company took that entire amount of seller’s proceeds to pay towards the income taxes. Note that in that New Loan, the “Due to Seller” subtotal line is empty – because we have already taken out the entire proceeds due to seller, in order to pay the tax.
The reason it is a different amount, therefore, on the Assumption is because there wasn’t enough proceeds to seller to cover the entire 2% tax.
How do you figure the tax calculation for Special Taxes (2% withholding)?
Note that the Colorado withholding (described on approximately page 22) should be 2% of the sales price or seller’s net proceeds – whichever is less. The reason it is ”whichever is less” is because the seller may not have enough proceeds to satisfy that 2% requirement. That is the case here. Two percent would have been ($203,750 x .02 =) $4,075. However, after all the debits and credits (before the withholding tax is figured) the seller was only left with $976.14 proceeds. Since to charge seller $4,075 for the withholding would mean that seller would have to come to closing with over $3,000, the state will just take the balance of $976.14 (leaving the seller with nothing!)
The state will come back later and charge the seller the remainder on the seller’s income taxes.
What is the deal with the Mortgage Insurance Premium refund mentioned in the facts of this Problem?
Do people get refunded for the insurance they paid?
Do I need to know the details of this, such as the refund table mentioned on page 24 of the Closings book?
Would they be able to assume an FHA loan?
If they have better financing, wouldn't that mean the new buyers wouldn't pay that MIP?
FHA loans (and Mortgage Insurance – MIP) is discussed in Chapter 5 (Finance):
Federal Housing Administration Insured Loan (FHA): The Federal Housing Administration (FHA) is a branch of the Department of Housing and Urban Development (HUD). FHA mortgages are distinguishable in that the lender is insured against loss in the event of foreclosure of the mortgage. The Federal Housing Administration is not a lender. Approved private lenders are the mortgagees and only those loans which meet certain requirements of the FHA are insured by the agency. Because of the insurance feature, the approved lending institutions are able to lend a higher percentage of the appraised value of the property than they would under ordinary circumstances. Here are some specific features of FHA-insured loans:
… Borrowers may be required to pay both a loan origination fee and discount points charged by the lender.
FHA loans are assumable if the buyer qualifies to assume the loan.
The original borrower remains liable on loans assumed by subsequent buyers.
… Borrower or someone else pays mortgage insurance premium (MIP) in cash or it may be financed. There is generally a large premium paid at closing, and smaller payments paid as part of each subsequent monthly payment. The amount of each of these payments is based on a percentage of the loan amount. If the borrower refinances within a certain period of time (generally two to five years, depending on the FHA loan program) FHA will refund a percentage of the initial MIP premium. Similarly, if the loan balance reduced by payments (to approximately 75% - 80%) of loan-to-value ratio, the borrower may petition FHA for a refund of the remaining balance of the initial MIP premium.
You will need to know the above information for the Uniform part of the license exam.
For the Colorado part of the license exam, you simply will not get a figure for refunding the FHA mortgage insurance premium, if for no other reason than what it says right there in that Closing section (after pg. 24): “26. FHA Mortgage Insurance Reserve. This item is involved when an FHA loan made prior to September 1, 1983 is being assumed. The reserve amount currently held by the lender is a debit to the buyer and a credit to the seller.”
(There are not going to be any of these loans around, since that was over 30 years ago.)
Also – in answer to your question about “better funding”. If they had better funding, then they wouldn’t want to assume this loan; remember buyers are assuming a loan because they want to – presumably because it has better rates than what is being offered out there now, or that they could get by applying for a new loan. (This is unlikely in today’s market – or for the last 6 or 7 years. However, as financing and rates and the R/E market is cyclical – assumptions may come back into play in the future. For example, if you have a 4% FHA loan now and sell your house 10 years from now and the normal rates are 8% - your buyer may then want to assume your 4% loan because it has much lower interest rate.)
Finally, all the nonsense about broker looking up figures and calculating the refund will never happen – either on the license exam or especially in real life: If there is a figure for refunding the fee, the lender (for the loan being assumed) will simply provide that for the person/company who is working up the figures for the closing. (Typically the title company closer – not the broker.)
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Does the seller have to write a check for $3,098.86 to broker? Also does buyer have to write a check to broker for $10,770.02? It looks like the broker gives the $10,770.02 to the seller.
This is an unusual closing, because seller doesn’t get any money at closing. You are correct – the seller actually has to bring $3,098.86 to closing – payable to the broker. (Actually, in “real life” the broker doesn’t actually do the closing – it is the title/closing company, so the check (in “good funds”) would be made payable to the title/closing company. The title of those last two columns “Broker debit/credit” is how it used to work – until about 30 years ago. It is kept that way in the Closings course because the contract forms are drafted by a bunch of old fogeys!)
In addition, the buyer has to bring in a check to closing for $10,770.02.
Then – that figure $10,770.02 is NOT paid to seller. (That wouldn’t make any sense – because the seller is bringing $3,098.86 to closing.) Both those figures are amounts that are brought into closing and then the cumulative total is disbursed to the various sources that need payment, such as the broker, the lender for the interest and the transfer fees, the county (for the Special 2% tax and the various recording fees).
Approximately page 33: Why is #3 (Title. Borrower covenants that Borrower owns and has the right to grant and convey… except), "none"?
Why wouldn't it reference the first mortgage?
Not necessarily. This is talking about liens, restrictions, etc., that would prevent or restrict the seller from conveying free title. It would not be, however, incorrect to put the first deed of trust in this blank space.
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Introduction
First, go back to the basic, explanatory material (for "simple" closings, New Loans and Assumptions) in the beginning of the Closings course. Study those carefully, because it walks you through why certain items go in one column (and, perhaps, not another column you might expect.) It is pretty dense, but it was written by the Real Estate Commission especially to address the question you are really asking. Also, presumably it follows the same system that they are using on the state license exam closing problems - so they are basically giving you the answers.
Please remember this for the Closings questions on the state license exam, because it is always true, and you will definitely see new things on the exam that we didn't specifically cover in our materials (such as variations on the prorations, say, for Advance Rents or Security Deposits for a tenant, which seller is holding, etc.)
Remember that the first question you have to ask yourself is: "at closing, who is paying for this? buyer - seller - broker - lender, etc.?” Then that person gets the DEBIT. The second question is "Who is that person paying?" or "Who is it that that person owes?" The person GETTING PAID is the CREDIT. If it is seller owing buyer, then debit seller/credit buyer. If it is buyer owing seller, then debit buyer/credit seller. If it is either one of them owing someone else (who is not the other party), then it is debit buyer (or seller), credit broker (or credit/disbursement out).
Example: say
1) SELLER PAID FOR propane - a year's worth - in advance, long before closing.
2) Now, BUYER (since he's buying the house now) is GETTING THE BENEFIT of SOME OF that propane after closing.
3) BUYER is now going to have to PAY BACK SELLER for SOME OF that "year's worth" of propane (i.e., proration). In terms of the closing worksheet, that means DEBIT BUYER (a prorated calculation) and CREDIT SELLER!
Why are there so many entries for TAXES and INSURANCE – I can’t keep them straight!
1) There are different kinds of insurance that everyone pays with every loan/closing... but they are listed separately, they go on different lines (entries) on the closing worksheet, and they are treated differently - so it isn't hard to keep them "apart".
On any worksheet, there will be entries for paying Prior Year's property taxes (if the problem says they are due). There will also be an entry for seller paying buyer (debit seller/credit buyer) for that part of the current year (proration) taxes.
Similarly, if this is an Assumption, then seller would have already paid the Hazard ("homeowner" or "property") insurance, so buyer will have to pay "back" the seller for the remainder of the year from the date of closing forward (debit buyer/credit seller).
AND, similarly, if this is an Assumption, then seller would have already paid the Mortgage insurance, so buyer will have to pay "back" the seller for the remainder of the year from the date of closing forward (debit buyer/credit seller).
2) In addition, seller has been paying into the escrow account (with the lender, on the loan that buyer is assuming) for Hazard Insurance, for the premium to be paid for a year at some point in the future. Since seller has been paying that - but won't get the benefit of it - buyer must pay back the seller those amounts in escrow. (Hazard Insurance Reserve: debit buyer/credit seller)
(If it is a New Loan, the lender will also require that the borrower pay forward for the hazard insurance reserves, so that by a year from now there will be enough to pay in advance the next year's full premium.)
Just like the Hazard Insurance Reserve, seller has been paying (with each monthly payment) into the Property Tax Reserve so that there will be enough in the escrow account to pay the taxes when they come due next year. Again, since seller has been paying that - but won't get the benefit of it - buyer must pay back the seller those amounts in escrow. (Property tax Reserve: debit buyer/credit seller)
AND, just like the Hazard Insurance Reserve, seller has been paying (with each monthly payment) into the MORTGAGE INSURANCE reserve. Again, since seller has been paying that - but won't get the benefit of it - buyer must pay back the seller those amounts in escrow. (Mortgage Insurance Reserve: debit buyer/credit seller)
SO...
Property Tax:
a) Pay last year's taxes IF UNPAID/DUE: debit seller / credit broker (OUT)
b) Tax proration for the part of the year seller has owned the property: debit seller / credit buyer (a prorated amount, based on last year)
c) Property Tax Escrow: buyer pays BACK seller - debit buyer/credit seller whatever is in escrow account (based on Assumption Statement figure)
Hazard Insurance:
a) Hazard Insurance Assumed - buyer pays BACK seller a prorated amount of the full year's premium seller already paid way back when - debit buyer/credit seller
b) Hazard Insurance Reserve - buyer pays BACK seller those amounts seller already paid into reserve (intended to pay the NEXT premium due) - debit buyer/credit seller
Mortgage Insurance:
a) Mortgage Insurance Assumed - buyer pays BACK seller a prorated amount of the full year's premium seller already paid way back when - debit buyer/credit seller
b) Mortgage Insurance Reserve - buyer pays BACK seller those amounts seller already paid into reserve (intended to pay the NEXT premium due) - debit buyer/credit seller
The confusion caused by calling the last two columns “Broker Debit/Broker Credit”. OR Why does the broker get debited or credited for items (such as loan fees) when the broker has nothing to do with this?
Those last two columns cause some confusion because they are often headed by “Broker Debit” or “Broker Credit”. The fact that it says Broker Debit/Credit (sometimes) is definitely a misnomer, and is the source of confusion for people who are trying to associate it with common sense. Just remember that this is not common sense, but basic accounting... and all basic accounting is concerned with is that things get put in the correct columns and add up right. Naming it "Broker Debit/Credit" is a throwback to before about 20 years ago when brokers actually did the closings. Now, the title company does ALL closings, and the broker never cuts a single check. So, what you should do is think of the last two columns of the worksheet as DISBURSEMENT IN/OUT, instead - and it will make a lot more sense. (The previous practice problems in the Closings course use this form instead.)
So - if money is coming IN, it goes in the DISBURSEMENT IN column (formerly known as Broker Debit). If money is being paid OUT (no matter to whom - except for the other party, who would then just get an offsetting credit) then it goes in the DISBURSEMENT OUT column (formerly known as Broker Credit.) If you think of it this way, then it won't be confusing, since you are currently trying to picture the Broker issuing checks. You see, the final two columns are not really describing an actual action (like the Broker issuing a check), but are really "offsetting" columns, to give a corresponding credit/debit when there was a debit/credit in either the seller or buyer columns.
So... Since the Discount Point is a BUYER CHARGE, then it is a BUYER DEBIT, right? Now, since there has to be an offsetting credit in the exact same amount as the debit, you ask yourself "Does this amount get PAID to seller?" (In which case, it would be SELLER CREDIT in the same amount.) If NOT, then the only place to offset the Buyer Debit is to put it in the remaining credit column, DISBURSEMENT OUT. Picture it this way: Pretend the buyer is handing a check (for each of his/her) charges to the appropriate party... If it is a check to the seller (say, for a proration, or a prepaid assumption item) then Buyer would be handing a check (BUYER DEBIT) TO the seller (CREDIT SELLER). If it is a loan fee, then Buyer would be handing a check (BUYER DEBIT) TO the lender (Disbursement OUT, the "old" Broker Credit, yuk.) Run through this little question/answer scenario with EVERY item, for every buyer and seller charge, and you will end up putting everything in the correct columns.
The only time this works differently is when SOMEONE ELSE is paying either the buyer or seller for something. For instance, in a new loan the LENDER is PAYING THE BUYER the loan amount. So, in this case the loan amount is a DISBURSEMENT IN - as if the lender is handing a check - TO the BUYER... So, DISBURSEMENT IN ("old" broker Debit), BUYER CREDIT.
If you always do this analysis, you will also be able to avoid the typical confusion with real-life perceptions about Assumptions. With assumptions, there is no new loan amount (hopefully), so it is basically either the buyer paying the seller for things (DEBIT BUYER/CREDIT SELLER) that seller has already paid for (when seller had the loan originally), and occasionally the seller paying the buyer for things (DEBIT SELLER/CREDIT BUYER) that the buyer will be paying later on (such as taxes for current year).
Totals/Subtotals Lines – Generally
By the time you get down to the Totals/Subtotals Lines, the numbers in the "Due to/From" Seller/Buyer parts represent the amount that will be given TO seller (usually) at closing - because (usually) seller will be "getting" money at closing (the "difference" between what s/he GETS PAID - credit seller, LESS what s/he has to PAY - debit seller. The reverse is true of course, for buyer, because buyer will (usually) have to bring money TO closing (therefore that amount will be what buyer pays - debit buyer - LESS what buyer GETS PAID - credit buyer.
The subtotal of the Broker Debit column PLUS what the buyer owes (in other words, the number right below it) equals the subtotal of the Broker Credit (Disbursement) column PLUS what the SELLER GETS. Remember, on every line if there is a DEBIT, there must be a corresponding CREDIT in the same amount in some other column. So for instance, if Buyer is paying for something (= buyer debit), then either seller or "broker" is GETTING PAID (= credit) that exact same amount!
So... just like the "Total Due from Buyer" amount in the Buyer Credit column has its corresponding Debit in the bottom of Broker Credit (Disbursement IN) column, the "Total Due TO SELLER" amount is also carried all the way over from below the Seller Debit column TO the Broker DEBIT (Disbursement OUT) column. (Finally, as a check to make sure the correct numbers are in the columns, the Subtotal of the Broker Debit column is added to the Balance Due from Buyer, to equal the Total of the Broker Debit (Questions #22 and #24 on the first part of the Closing exam, for example... AND the Subtotal of the Broker CREDIT column is added to the Balance DUE TO SELLER, to equal the Total of the Broker CREDIT column.
Subtotals and Totals Lines to be continued a few lines down, under Closing/Contract Problem #1...
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Subtotals and Totals Lines (Continued from Immediately above):
The bottom line (literally) is that the “Subtotal” line represents the sum of each column. For example, the sum of the Debit Seller line represents all the money Seller must pay out, the sum of the Credit Seller line is the sum of all the money coming in (being paid to) seller, the Debit Buyer line represents all the money Buyer must pay out, the sum of the Credit Buyer line is the sum of all the money coming in (being paid to) Buyer.
The Broker Debit/Credit columns are a little different: Those columns actually represent the money coming IN and going OUT – which is why it makes more sense to call them (instead) the DISBURSEMENT IN and DISBURSEMENT OUT columns. So, the Subtotal line for the DISBURSEMENT IN and OUT columns represent just that: All the money coming IN (for example, the Buyer’s Deposit and Loan Proceeds) and being paid OUT (i.e., title and closing fees, appraisal fee, loan fees, etc.)
The next lines represent the difference between the money being paid to seller (Credit Seller, naturally) and the money seller must pay (Debit Seller). Similarly, the “Due from Buyer” is the difference between what buyer must pay (Debit Buyer) and gets paid (Credit Buyer, such as the buyer’s loan amount).
Those two figures are then carried over to the final columns because the point of the worksheet in general – and the sub/total lines specifically – is to make sure that the money coming in equals the money going out. That is why the figure in the “Due TO Seller” (a Debit) is carried over to the Disbursement OUT (a credit column), and the “Due FROM Buyer” (a Credit) is carried over to the Disbursement IN (a debit column).
Finally, the carried over “Due TO Seller” (credit) figure plus the subtotal of the Disbursement OUT (credit) – must equal – the carried over “Due FROM Buyer” (debit) figure plus the subtotal of the Disbursement IN (debit) column.
That’s what the final “TOTALS” column means: The totals of the Seller Debit equal the totals of the Seller Credit, The totals of the Buyer Debit equal the totals of the Buyer Credit. Finally, the totals of the money coming IN (debit broker/disb. IN) is the same as the money going OUT (credit Broker/Disb. OUT).
So what is the significance of the "Balance TO Seller" and "Balance FROM Buyer" lines in Closing Problem #1?
The $26,579.26 figure is the money that buyer is bringing to closing, because it is the difference between what they are “getting” ($80,040.92) and the sum of what they must pay ($106,620.18). Similarly, the $23, 973.66 figure is what Seller “nets” from closing: The difference between the subtotal of what they are “getting” ($106,224.58) and what they must pay ($82,250.92). The bottom line “Totals” in the last two columns (Disb IN and Disb OUT) are the “checking” columns of this “accounting” worksheet, to verify that the money coming IN to the closing (company) is the same going out. Yes, we “balance”, because money coming IN ($5,000 + $26,579.26) is the same as what we are paying OUT ($7,605.60 + $23,973.66) = $31,579.26.
Why debit seller/credit buyer on trust deed assumption?
As for the “Trust Deed – Assumption”, that just means the balance of the loan that buyer is assuming from seller. But for purposes of understanding who pays for what (debit/credit, seller/buyer), think of it another way: It is originally seller’s loan and seller is giving (“paying”) it to buyer. Remember that the person PAYING (anything) gets the DEBIT, and the person GETTING PAID gets the CREDIT. Therefore, DEBIT SELLER -> CREDIT BUYER the loan being assumed.
Who makes the loan payment in an Assumption?
As for the loan payment, this is a common source of confusion for students – but once you understand about loan payments, it clears many things up. You see, the Loan Payment Due is for last month’s payment/interest, because interest is always paid in arrears! So seller is paying for the full amount of last month, when he/she owned the property for the entire time. There will therefore be no proration (buyer paying seller back) for the Loan Payment Due – it is completely Seller’s responsibility.
Now, the next payment will be due, as usual, on the first of the next month – when buyer owns the property! So in an Assumption, buyer will be responsible for making the next payment (after our closing). But meanwhile, seller was in the property for some of that month – before closing. That is why at closing, seller will pay buyer for prorated interest up to the day of closing (in essence, paying buyer “back” for the money that buyer will be paying for the next loan payment.)
How do you calculate the Interest Payment from Seller? ($183.53)
You get the daily interest (and eventually the total amount owed by Seller for the interest up to the date of closing) by making the following calculations:
New Loan:
Current Balance of New Loan x Interest Rate
... That figure represents the total yearly interest on the loan.
That amount / 365 days (or 366 if it’s a leap year)
... That figure represents the total daily interest on the loan.
That amount x the number of days in this month prior to closing (meaning “do not include the day of closing in this number).
... That figure represents the total seller owes to lender for the current month’s interest. (debit seller, credit OUT/broker)
Assumption:
Current Balance of New Loan x Interest Rate
... That figure represents the total yearly interest on the loan.
That amount / 12 months
That amount / number of days in this month (28, 30, or 31 – depending on the month)
... That figure represents the total daily interest on the loan.
That amount x the number of days in this month prior to closing (meaning “do not include the day of closing in this number).
... That figure represents the total seller owes to buyer for the current month’s interest. It is not paid to lender, here – because buyer is assuming the loan, and will pay the full payment (including the interest that seller just paid buyer for part of the month) at the beginning of next month.
So, in Problem #1 – which is an Assumption – the calculation is:
$54,184.25 x 9% = 4,876.582 (yearly interest)
Divide by 12 to get 406.381 (monthly interest)
Divide by 31 days (July) to get 13.109.
Multiply by 14 days (July 1-14) to get 183.527
Seller pays buyer (debit seller/credit buyer) $183.53
How do you calculate the Hazard Insurance?
No tricks here, just a basic proration based on a 365-day year (since hazard insurance is paid yearly). You may have gotten fooled by mis-counting the days, so it is important to attribute the correct number of days for buyer to "pay back" (Debit Buyer/Credit Seller), and remember that the hazard insurance doesn't run from Jan. 1 through Dec. 31 (like, say, property taxes) but from the original date it started (in this problem, Feb. 1). Here is how we did it: Hazard Insurance Premium assumed/prorated: $196 / 365 = 0.537/day, .537 x 164 (days seller lived at house) = $88.068. $196 – 88.068 = 107.932 (for the time buyer owes seller for time after the closing) = $107.93.
There are a couple of reasons you might be confused, and they are common reasons - especially with assumptions. You might not have recognized that since the insurance is being (partly) assumed, we have to "split" the cost between seller and buyer. It is not something that "starts over" because buyer is getting the loan (which would mean that buyer would pay the full amount) - since seller paid for it earlier and buyer is getting it for the rest of the year, buyer must pay "back" seller for the number of days (starting with closing day) that buyer will have the benefit of it (201). Also, hazard insurance is doesn't necessarily start on January 1 (like, for instance, property taxes) - instead it starts on the day that someone buys the house. However, since this is an assumption - the hazard insurance started on the day seller originally bought the house and keeps running on the same cycle even when buyer assumes the loan.
You also might be confused on this or other calculations because your number is a few cents (or dollars) different than the answers given. The fact that your figure is "off" is undoubtedly because you let your calculator's decimal places go all the way "out" to 6 or 8 places - and if you do that, you will be at least a few cents higher. (It could also be caused by not allowing for enough decimal places.) The bottom line is that the fact that you are 50 cents or a couple of dollars off, will not affect your score on the closing problem on the state license exam. One, because the difference between the "wrong" answers and the "correct" answer will rarely be that close. But the important thing to know is that they are not looking to see if you used 3 decimal points, cleared out your calculator, etc. They are trying to see if you are putting the figures in the correct columns (i.e., Debit vs. Credit, Buyer vs. Seller, etc.) and using the correct number of days, making the debits and credits in a proration equal rather than add up, etc.
Why does buyer pay seller (debit buyer/credit seller) for the Hazard Insurance reserves?
With Hazard Insurance Reserves (just like Tax Reserves in later problems), Seller was the one who paid for them originally (into his or her escrow account – back when seller was making the monthly loan payments + tax & insurance escrow). Therefore, at closing buyer must PAY BACK the SELLER (= DEBIT BUYER, CREDIT SELLER). In this case, the Instructions to the problem say that there was $110 in reserve, so buyer must debit seller that amount at closing, since buyer is not getting (assuming) that balance that seller previously paid.
Why isn’t the Hazard Insurance Reserve prorated?
Reserves are NEVER prorated. Period. These are monies that the seller has already paid into the escrow account (prior to closing) in anticipation of being paid later on for the following year's premium, and buyer is "getting" that money (assuming), and therefore buyer has to "pay back" the seller the entire amount.
On the other hand, the Hazard Insurance that was paid last year will be prorated - and that's what that $107.93 is all about.
How did you calculate (prorate) the Current Year’s Taxes?
Last year's taxes were $1,260, and they were already paid by seller (see Line 506). This year's taxes are based on the amount of last year's ($1,260). But since we are only part-way through the year, part of the tax is the seller's amount (for the number of days in the year before closing) and part of it is buyer's responsibility (for the number of days from closing until the end of the year.) Now property taxes in Colorado are paid in arrears, meaning that this year's taxes will be due and payable on January 1, next year. Here, there were 195 days prior to closing, so the seller is paying back the buyer for 195 days (based on last year's amount, since this year's amount is not yet assessed until Jan. 1 next year.) $1,260 / 365 = $3.452 (per day). $3.452 x 195 days = $673.14 that seller owes buyer at closing. (Debit Seller/Credit Buyer). See page approximately page 4 and approximately page 8, which explain this thoroughly.
How did you calculate the Water/Sewer charge?
Water/Sewer was already paid by Seller in the amount of $36.00, for the period May 1 through July 31 (92 days). Since the closing is happening on July 15, Buyer must "pay back" Seller for the 15th through the 31st of July (17 days). $36 / 92 = $0.391 (per day). $0.392 x 17 days = $6.65 (Debit Buyer/Credit Seller).
Why do we pay two months into escrow for Hazard Insurance at Closing?
Hazard insurance is always paid in advance before closing (therefore, by seller), and at an "odd" time of year (never January 1). Then, you pay for a year of Hazard in advance, AND with each monthly payment you put 1/12 of the yearly amount into escrow so that there is enough to pay it next year. The reason we have to put 2 or 3 months into escrow at closing is because buyer won’t be making a full 12 months of payments by the time the next Hazard Insurance payment is due. Buyer is making this month’s loan (interest) payment at closing… then that covers her or him through next month… then he or she will not be making a payment until the first of the month – up to 2 months away. So, we have to put a little into escrow at closing so there will be a full 12-months reserve.
A $20,000 note at 10% over 10 years would not be $200 per month. Where did you get the figure “$200 monthly payment”?
Note that we really aren’t asking you (here) to figure out the loan payment (like we did in the Ch. 13 – Math questions.) We are simply giving you the balance, because that is just something we don’t need to get into in the Closings course (and will certainly never be asked in a “Closings” question on the state license exam.
The promissory note $200 payment is a random number - you don't have to figure out what the payments will be. This is not unusual for a seller carry-back, because usually they have a small monthly payment for 5 -10 years, then buyer has to pay off the "balloon" balance at the end. Again, you don't need to know that - so don't worry about it.
Is there an inconsistency on Note and D.O.T. (i.e., July 15/August 15)?
Ten years worth of payments starting on August 15 would end on July 15. In other words, the 120th payment would be July 15 ten years later. So, this is what the Deed of Trust says on approximately page 33. Technically, the Promissory note should say the same thing (start with August 15 and end with July 15 ten years later.) It's not really a typo, because promissory notes have some latitude with this passage.
But don't worry about these kinds of details, because you will not be filling in notes or deeds of trust on the state license exam (and probably never will)... According to the required curriculum, you just need to be exposed to these forms and what they say. (And it is not a bad thing to know how to read them - when you are sitting in a closing!)
Where did the address of 1223 Vermont St., Denver, CO 80210 come from? I also don't see where it states that there will be a 10% late charge within 5 days after payment is due.
Since this is the Closings course – the main point here is to demonstrate where certain figures come from – and where they go on a settlement sheet. This isn’t a contract problem, so we aren’t asking you to find details like the address or penalty rate and then fill in the blanks of a contract. Since it really is irrelevant to the Closings course we are just filling it in for you.
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Why isn’t the Broker Debit (Disbursement IN) and Buyer Credit amounts for the New Loan the same? OR What is “Netting Out”?
Netting Out: The explanation for difference between the total loan amount ($119,700) and the amount funded by the lender ($118,061.78) is actually at the bottom of the instructions page for this with the other figures to put in the worksheet: “NOTE: the loan company will ‘net out’ all their fees (i.e., Origination fee, Tax and Insurance escrows, etc.,) from the amount they send to the title company. Therefore, the “IN”-column (buyer Credit) will be less by the total of those fees.”
You only "net out" is when there is a New Loan and the Lender is withholding (instead of funding, then getting back) their own funds. The BROKER DEBIT (a.k.a. DISBURSEMENT IN) column is for MONEY COMING IN. The BROKER CREDIT is for MONEY GOING OUT (i.e., "checks being cut"). For instance, if the Buyer is PAYING FOR a certificate of taxes due (BUYER DEBIT) then there must be a check being cut to the County Assessor for that Cert. (= DISBURSEMENT OUT/BROKER CREDIT).
Why do you "Net Out"? When you think about it, it makes sense - because why should the loan company fund the entire balance, and then get a check back (from the broker or closing company) for their fees?... Why not keep their fees, so there is no middleman?
Let's say the loan company is giving a loan of $100,000 - that would be a Broker Debit ("IN") of $100,000 and a Credit to Buyer (borrower). Then let's say they are charging a 1% ($1,000) Origination fee, 1 pt. Discount fee ("points"), $200 Document prep fee, and $300 appraisal fee. They could either GIVE the full $100,000 and wait for a check back for the $2,500 in fees, OR they could NET OUT their fees and simply cut a loan check for the balance - $97,500.
In the second case, when we are "netting out", then the lender is PAYING (DEBIT BROKER/DISBURSEMENT IN) $100,000, but the buyer is only GETTING at closing $97,500 (CREDIT BUYER). Meanwhile, it balances out at the bottom, because the buyer is PAYING that $2,500 in fees (DEBIT BUYER) but they are NOT being PAID OUT, because the loan company already WITHHELD THE MONEY (NO Disbursement IN for that $2,500).
The Countrywide payoff letter states $82,841.17, which the answer key says is correct.
However, it appears that the Countrywide payoff figure includes interest through 6/1, whereas the transaction is to close on 5/15.
Shouldn’t the payoff be more like:
82,270.85 principal
50.00 Statement fee
15.00 Fax fee
249.20 interest from May 1 through May 15.
(15 days at 16.6131 per day)
Total Payoff - $82,585.05
This is a "real life" lesson - that you don't question how the lender came up with their figures. I know that you want to know the "whys and wherefores" of this, for purposes of understanding what figures go in the worksheet, and how they were determined. However, when it comes to the Payoff Statement (for New Loans) or the Assumption Statement (for Assumptions), there often is no reasoning how the lender came up with their numbers.
Your basic question is why the closing company (at the instruction of the lender being paid off) is collecting 31 days (all of May) when they are actually being paid off on the 15th. Well... the "real life" answer is that even though it closes on the 15th, doesn't mean that the lender receives and properly credits the payoff on the 15th! In "real life" the closer must collect "extra days" of interest - sufficient to cover the travel time (FedEx) of the payoff to the lender and for the lender to take their sweet time crediting the payoff. Actually, this would normally only be about 5 - 7 days of "extra" interest, but this lender seems to want over two weeks of cushion.
Yes - this is a waste of (seller's) money, and yes - someone is paying interest to two different lenders on the same property for two different loans during that stretch. But, if the lender-being-paid-off receives the payoff and it is even one penny short, they will refuse it and send a form letter to the closing company, that doesn't get there for a week, and then the closing company has to scramble to send a new payoff - and meanwhile, another two weeks of interest has piled up! So, they simply collect that extra interest at closing.
However... all that "extra" interest doesn't simply go into the lender's pockets: As soon as the check gets there and the lender credits the money, the clock stops "ticking". The lender will refund the excess interest that has been sent (whether it is 3 days or 13, etc.) as well as the escrow balance that has been collected from the seller and has not yet been paid out for taxes and/or hazard insurance.
By the way, as further evidence that we can't determine the arcane reasoning of the lender, note that the interest from 5/01 through 6/01 would not be $505.32 if you use their stated per diem of $16.6131! ($16.6131 x 31 = $515.0061, or $515.01.) Working backwards, the only way to even get close is to take their stated balance ($82,270.85) and multiply it times the interest rate (.07375) and divide by 12 (months) = $505.62.
Why was the certificate of taxes due a buyer debit? The broker ordered it, so why not broker debit?
The broker (or the Lender in a New Loan problem) rarely pays for anything. So, even if it says “the broker ordered” something for either the seller or buyer, that party is going to pay for it – not the broker.
Now, specifically as to the Tax Certificate: Note that on approximately page 8 (Part II, Closings Examples – A Simple Real Estate Transaction), the problem says that the buyer will normally pay for the Certificate of Taxes Due. “This certificate from the county treasurer's office is the buyer's insurance that the county may not later lay claim for any taxes other than as stated on the certificate. (Any loss resulting from an error in a tax certificate shall be paid by the county that such treasurer represents.) Debit Buyer and Credit Broker. In this example, in the absence of contract provision to the contrary, the person who benefits pays for the document.”
This is also demonstrated on the Closing worksheets for this problem (16) and every other closing problem where there is a Tax Certificate charge: The buyer always pays for the tax cert.
What are Endorsements Alta 8.1 and End. 2 & 3?
Knowing these will probably come in handy at a "real life" closing of a New Loan, if your buyer/borrowers ask (but it definitely won't be on any of our tests or the state license exam). Both of these are endorsements required by all lenders on all new loans (including refinances) in Colorado - because of some of the peculiarities in Colorado lien laws that make it a minute possibility that a lien might take priority over their loan:
Alta 8.1 endorses over (covers) the possibility of an EPA (environmental) lien on the property. An example might be if the EPA discovers toxic waste on or near your property and "condemns" it. Of course, this would make the property valueless, and the lender would have no more security for their loan when the borrower (naturally) fails to continue payments. The 8.1 is the title insurance covering that remote possibility.
Endorsements 2 & 3 are basically "mechanics lien" protection. Note that in Chapter 10, we mention that how to determine the priority of mechanics liens in Colorado is unusual: it is based on when work commenced (which ultimately was not paid for, and led to the filing of the lien) - NOT when the lien was recorded. Conceivably, if a contractor starts building a house on January 10, completes work and closing (of the sale and new loan) is on March 10, then any mechanics lien the builder puts on the house "relates back" to Jan. 10 prior to (and therefore has foreclosure "priority" to) the lender's new-loan priority. The builder then could execute the mech's lien "out from under" the lender - robbing the lender of their security interest. These endorsements are therefore the title insurance company's guarantee to pay off any loss to the lender in this event. (It occasionally happens!)
The Sales Contract indicates that this is a LEAP YEAR. If there is an extra day in the year and the closing takes place on May 15, why does
the answer key indicate a proration based on 134 days, instead of 135 days?
The first point in the Closings Course is to follow the Closing Problem Instructions. (On the license exam, it is to follow the facts of that question and nothing else.)
The second point is to always be aware of the possibilities, variations and “tricks” in the problem (or license exam question).
We just want you to be aware that “366 days” may be a possible variation that
could affect your figures. In this case, it didn’t – and in a lot of closings – it won’t. (In real life, you need to follow the “Instructions” –
often coming from the lender. But here in our closing problem, it was simply not an issue because the Instructions for the particular problem didn’t
explicitly state it.)
The other reason is because we’re trying to de-emphasize the contracts in these examples – and make you focus on the instructions for each problem, instead.
Put another way, you already got all the practice and exposure to the contracts – where that was the point of the exercises – in Chapter 21… Here in the Closings
course, the point of including the forms is simply to show you some of the forms that are involved in a “typical/real-life” closing – and not to keep drilling you
on how to fill them out.
So in this worksheet problem, it tells you that (despite the note in the Contract) that "leap year" is not an issue.
The number of days prior to closing (May 15) is 31 (Jan) + 28 (Feb) + 31 (Mar) + 30 (Apr) + 14 (first part of May) = 134 days. ($2.853 x 134 = $382.38.)
The answer key to this particular problem indicates that that the calculation is based on $1,041.50.
This figure is incorrect on some editions. The answer key worksheet should say "1,041.56".
Didn't the Instructions at the beginning of the Closings course tell us to calculate based on "3 decimal places"? Why are you calculating this interest proration based on four decimal places?
This is another “quirk” in this problem (based on something that was on the license exam in the past),
reflecting some questions on the license exam that didn’t follow the R/E Commission’s own rules of “3 decimal places”.
Point? That if you are calculating something and get a figure that doesn’t “fit” (in the case of a test, isn’t one of the given answers)
then you might have to try something non-standard. So it is a lesson in being mentally “flexible”, because the Rules sometimes change (especially in closings).
What fees are allowable under VA or FHA?
Closing Problem #2 Instructions say "Determine type of loan for closing fee and VA or FHA allowable charges..." The fact is that these charges (and their "cap" amounts) change every year and are different in every state. (For instance, "tax stamp fee" is allowable - but we don't have that in Colorado!)
The fact of the matter is that you do NOT need to know the exact list for either the state license exam or in "real life", but you should be aware of them in “real life”: Certain fees may or may not be allowed if you are doing a VA or FHA loan. For example, in Colorado it is customary for the buyer to pay the Documentary Fee - but since FHA doesn't allow it, then either the broker or the seller must pay it. Also, most loan fees are paid by the buyer (after all - it is the buyer/borrower's loan!) but the Tax Service Fee, Document Preparation Fee, Flood Cert and Underwriting Fee are "non-allowable" with FHA - so if the lender charges these fees, again - either the seller or broker must pay them.
FHA
Allowable
• Appraisal Fee (if customary)
• Credit Report Fee
• Compliance Inspection Fee (max $75)
• Title Insurance Endorsements
• Escrow/Closing Fee (1/2 of the total transaction fee and not more than the seller)
• Home Inspection Fee
• Notary Fee
• Origination Fee (max 1% of loan)
• Recording Fee
• Title Insurance
Non-allowable
• Processing Fee
• Document Preparation Fee (unless the documents were prepared by a company other than the lender)
• Documentary Fee
• Flood Certification Fee
• Inspection Fee (only FHA appraisal compliance inspection are permitted)
• Tax Service Fee
• Underwriting Fee
VA
Allowable
• Appraisal Fee
• Credit Report Fee
• Title Insurance Endorsement
• Home Inspection Fee
• Notary Fee
• Origination Fee (max 1% of loan)
• Discount Points
• Recording Fee
• Title Insurance / Title Search fees
• Funding Fee
• Survey
• Flood Zone Determination
• Prepaid Items such as property taxes and hazard insurance
Non-allowable
• Loan Application Fee
• Processing Fee
• Lender's Administrative Fee
• Document Preparation Fee (unless the documents were prepared by a company other than the lender)
• Documentary Transfer Stamp Tax
• Attorney's Services (other than title work)
• Interest Rate Lock-in Fee
• Postage/Delivery Fee
• Loan Tie-in Fee
• Photo Fee
• Notary Fee
• Tax Service Fee
• Underwriting Fee
• Escrow Fee
• Buyers Broker Fee
Step 4. How would I figure out in this case the type of payoff?
As it says, if it is an FHA loan being paid off, then you don’t pay a prorated daily amount of interest up to closing. You actually pay a full month of interest, no matter what day the closing takes place on. Therefore, you would be instructed that it is an FHA loan on the Payoff statement. Note on the statement on approximately page 48, it says ‘CONV – 15YR’, which means that it is a Conventional loan, not FHA.
#5. What is the significance of the figure 113,400? (“Deed of Trust in the amount of…”)
Nothing you care about. That was the proposed amount of the new loan when the order for the title insurance commitment was placed… This is for purposes of the title company only – and says what they will commit to insure.
How does the Truth in Lending Statement apply to problem #2?
As discussed in the Introduction to the Closings course, this problem includes examples of actual closing documents that you will see at any given (loan) closing. This is an example of the Federal Truth in Lending Disclosure - so that you will know what one looks like when you see it in "real life". It doesn't apply to the calculations or worksheet/settlement statement at all. (Although on the Uniform portion of the state license exam, you certainly could be asked about the requirements of RESPA (ch. 5) and the TIL is one of those things... so now you know what it looks like.
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What is the rule of thumb for what items do and do not show up in the broker's debit and credit columns?
There is no rule of thumb or list of items that say, the seller always pays for or the buyer always pays for. This is because almost nothing is set in stone (except, of course, the purchase price is always a debit to buyer and a credit to seller) and anyone could pay for these things: broker, buyer, seller, or an outside party. Then, as soon as you went to memorize a list, the real estate commission will throw something unusual into the mix on the state license exam (which is why we do the same thing throughout all our examples and problems.)
The simplest analysis is to always ask yourself “Who is PAYING for this item?” That person gets the DEBIT.
Then ask “Who is GETTING PAID for this item?” That person gets the CREDIT.
If the item is being PAID OUT (a check being cut to an outside part or the Broker – for commission) then it is also a CREDIT – but it is in the Broker Credit column (more understandable if you think of it as the DISBURSEMENT OUT column.)
If the item is money COMING IN to closing (such as the deposit that was being held in the broker’s trust account and now s/he is bringing it into closing), then it goes into the Broker Debit Column (more understandable if you think of it as the DISBURSEMENT IN column.)
Interest on Loan Assumed: How did you get that number? I got $122.53.
Since the problem says “$15.3166” per day, and your figure is $15.32 lower than the correct answer of $137.85, you clearly have mis-counted the number of days. It should be only nine days (June 1 through June 9), because – as it says at the top of the problem – “Buyer owns the property the date of closing” (June 10). Therefore, interest on that assumed loan on the day of closing (June 10) is the buyer’s responsibility.
Line 8. Why is the attorney opinion on the abstract the seller's responsibility?
Just like with Owner’s title insurance, it is a case of seller providing assurance to the buyer that title is “clear” – so seller always pays for this (although in “real life”, you just never see an abstract any more.) Note that this is different from the Title Exam (Line 10), which is the Buyer's responsibility/charge on the worksheet.
Line 15 how did you get $9? I had $5
You’re mixing up the Documentary Fee with the “Recording Fee”.
Yes, the recording fee is $5, but that is already taken care of on line 10.
Information about the documentary fee is found in the Deeds & Title chapter:
“Colorado documentary fee on real property conveyances… 39-13-102 C.R.S.,
obligates the clerk and recorder of each county to collect this fee of one cent for each one hundred dollars of consideration
(or $10 per $100,000 of purchase price) whenever a deed is recorded.”
So, the sales price here of $89,950 / 100 x .01 = $8.995 (which has to be $9, rounded off.)
Line 18. How do you get 160 days for the Current Year’s Taxes proration?
160 days = 31 (Jan) + 28 (Feb) + 31 (Mar) + 30 (Apr) + 31 (May) + 9 (Jun up to but not including closing - because buyer owns on Jun 10 per instructions and Colorado practice.)
Line 29. Why isn't there an interest payment on the new loan of $2500?
You will see this again in the final exam problems. With a seller-carry-back, collecting and paying interest for the current month would be very unusual. Carry-backs are usually pretty loosey-goosey, so the problem would have to specifically instruct you to do this. (Unlike with a big-time institutional lender on a New Loan problem… There, you will always make buyer pay the certain number of days of interest.)
For the Hazard Insurance Premium Assumed (credit to seller) I come up with I come up with 92 days and 1.78 per day ($163.76). Why is it $162.50?
The difference is that you were prorating by (92) days. But the problem indicates to you (by saying “9 months ago exactly, the policy was paid for 1 year by seller) that the proration should be based on months. The full premium was $650: 650 / 12 = $54.167 (per month). 12 months less 9 months = 3 months. 3 months x $54.167 = $162.50.
Hazard Insurance Reserve:
Is just a flat amount… no calculating is necessary. This is the amount that the seller has already put into reserve, and it was intended to eventually add up to 12 months worth, so that when the Hazard Insurance was next due (next year at some point) the lender would have a full year’s worth. (Remember that hazard insurance is paid all in one chunk, every year – and it pays for the next year in advance.) The Assumption Statement says that there is $595.83 sitting in the reserve account. That money will stay in the account, because buyer is Assuming the balance of the reserves. However, since it was seller who paid these funds and the buyer is getting (assuming) them, at closing there must be a figure where the buyer reimburses the seller. That’s why the Reserve figures are always debit buyer/credit seller for the exact amount that is given on the Assumption Statement. Remember that for every Assumption problem, especially on the final exam problems, because that RULE NEVER CHANGES.
On Line 32 (Water/Sewer), how was the 52 days figured for the proration?
The instructions say that the item was paid in advance (therefore by seller) for the quarter as of May 1st. The quarter therefore would be 31 days (May) + 30 days (June) + 31 days (July) = 92 days. Seller "used up" all of May + 9 days prior to closing (= 40 days), so now Buyer has to "pay back" Seller at closings for the rest of the days Seller already paid for but doesn't get to use because s/he is selling the property: 92 days - 40 days = 52 days.
With any closing, if seller pays for something in advance and closing occurs in the middle of that pre-paid period, then buyer is going to "pay back" seller (debit buyer/credit seller) for the remaining days.
It says it was paid in advance quarterly on May 1st. If it was a quarterly payment shouldn’t it have been paid April 1st for april through June?
Just because a figure says that it is “quarterly” doesn’t mean that the quarter starts on “January 1” (or April 1, or October 1, etc.). It just means that it is for a 3 month period, and that period can start on any day of the year. Here, the “quarters” for the Water/Sewer in this example happen to start on May 1. (We could have started it on “May 18”, but we made it “easy” on students.)
I think the Water/Sewer payment should be starting on Feb 1st, which would make the seller responsible
for 20 days and the buyer responsible for 69 days. Right?
You have to pay close attention to the exact dates stated in the Instructions -
especially for Water/Sewer and Hazard Insurance, because they don't fall on nice, even dates like the property taxes,
and they can be PAID or DUE. (And if they are either DUE - then they are likely to be DUE part by Buyer and part by Seller.
And if they are PAID, then Buyer will probably owe Seller for a prorated portion.)
This was definitely not calculated "perfectly in 1/2". The total bill was $45.00,
and exactly half would therefore have been $22.50. The correct figure, however, is $25.43.
Here's why: The Instructions said that they were PAID in Advance (by Seller) for the entire quarter -
by Seller in advance, on May 1. (You must be using Feb + Mar + Apr to get 89 days, but that would be
"paying in Arrears", which means "after the dates have happened." But that is exactly the opposite
of what the Instructions say. "Paid In Advance" means that it was paid before the dates "happened" -
as here it means May, June and July.)
That means that Seller's responsibility was May 1 through June 9. Buyer's responsibility is June 10 through July 31.
Since Seller already paid the full amount back on May 1, the buyer owes them for 21 days (June) + 31 days (July) =
52 days (June 10 - June 30 = 21 days NOT 20, because it includes the day of closing, June 10.
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What is P.I.T.I.?
Principal-Interest-Taxes-Insurance. It is the four components of every single (monthly) loan payment. In other words, your mortgage payment isn’t just principal and interest. They also escrow 1/12th of the premium to pay the (Hazard) Insurance and (Property) Taxes with each payment.
On problem #4, why do we “net out” the lender fees?
For the same reason we did it on Problem #2!: The lender fees that are being withheld would be all the loan charges that have a debit - but no corresponding credit (Broker Credit/Disbursement OUT), or put another way Items that Buyer is Paying For (Buyer Debit), but are not actually being PAID OUT (since lender is "netting out" those items. The one unique item is the $1,520 Discount Fee (points) that Seller has agreed to pay. That is why it is still a Debit (PAY), but by SELLER... However, it is still a loan fee that is being withheld from the loan, so it is still a Broker Credit that is being held back by the loan.
These items have the ellipses (dots) in the Broker Credit column on the answer sheet on approximately page 66:
Line M - Tax Reserve - $720.45
Line O - Tax Service Fee - $69.00
Line Q - Hazard Insurance Reserve - $40.00
Line R - Doc Prep Fee - $150.00
Line S - Origination Fee - $760.00
Line T - Loan Discount Fee - $1,520.00
Line U - Interest on New Loan - $171.81
Line X - Wire Fee - $32.00
Total $3,463.26 withheld fees from loan
Loan Amount (Buyer Credit) $76,000 - $3,463.26 = netted out loan fees
(Broker Debit/Disbursement IN) $72,536.74
I simply cannot figure out the reason why the number for the loan amount in the Buyer Credit column
is different from the number in the Disbursement IN column. How do you get the figure of $72,536.74? How do you know which
figures to not count in the loan total? What do the ellipses mean (....)? What is the significance of the subtotals at the bottom of these columns?
Just like in all the other problems – it tells you to “net out” – or “the lender will withhold this amount”.
You don’t have to guess what figures to withhold, because it tells you right there in this problem’s instructions: “Please NET OUT these fees marked with an * from the total loan amount, as it would be silly for the lender to fund the entire loan amount and then have the title company cut them back a check for the fees. All others will be PAID OUT.
*Tax Reserve: 9 months @ $80.05 per month
*Hazard Insurance:…” etc.
Conceptually, think of netting out (actually, all of these things) in terms of real life. Picture the (Buyer’s new) Lender giving the buyer (at closing) a check for $76,000. But the lender has their own fees they are charging the buyer for granting that loan, such as their Documents Prep fee, their Origination Fee, etc. There’s two ways they can handle it:
1) Lender cuts a check to the closing company for the full $76,000 (Disbursement IN) and then the closing company turns around and cuts a check back to the lender to the lender’s own fees (Disbursement OUT: Doc Prep fee, Origination Fee, etc.),
2) OR more commonly - Lender takes their own fees out BEFORE sending the check to the closing company. They take all the fees out first, and then the Buyer has less total amount to credit towards their purchase of the property. (It’s all the same final amount, anyway.)
That’s how you get the figure in Closing #4: $76,000 minus all the lender’s fees they held back:
The Buyer gets credit (Buyer Credit) for the full loan amount of $76,000 - but the lender only sends a check (Broker Debit/DISBURSEMENT IN) for $76,000 – all their fees (remainder of $72,536.74.)
As for subtotals – they either tell you:
1) Difference between what they have to pay (DEBITS - purchase price, other fees) MINUS what buyer receives (CREDITS - loan amount, credit for the earnest money, etc.) = Balance Due FROM BUYER;
2) Difference between what seller receives (CREDITS - purchase price, proration credits from buyer, etc.) MINUS fees that seller pays (DEBITS) = Balance Due TO SELLER;
3) The “bottom line” figures are to verify that the money coming IN equals the money going OUT.
For a more detailed explanation of the Subtotal and Totals columns, return to the very top of this page, about two sections down, under "Definition of DEBITS and CREDITS".
Taxes are $960.60. Not paid for previous year and (of course) this year. Closing date Aug. 20th.
I understand why the previous year is a seller debit/broker credit. But why is the current year
considered seller debit/buyer credit?
Current year’s taxes will ALWAYS be (in Colorado) a prorated debit seller/credit buyer – even on an assumption (check out all the other examples and exercises). This is because this year’s taxes get paid at the beginning of next year, when seller will be long-gone. That means that seller better pay buyer (debit seller/credit buyer) for a prorated share of this year – up until the day before closing – based on the amount of last year’s taxes. (This is because we don’t know what this year’s taxes will be until the County tells us at the beginning of next year.)
Line L- Taxes for current year- I keep getting $608.90, but the answer key says, "$960.60 / 366 = $2.63 x 232 days".
This is what you are doing: 960.60 / 366 = 2.62459016 x 232 = 608.904917
But that is not the correct way to do the calculation, because you are supposed to clear out your calculator after each "step" and then round off the decimal place.
That's how the true calculation gets to 960.60 / 366 = 2.63 x 232 = 610.16.
But keep in mind that the important thing is that the license exam (= R/E Commission) is not looking to see if you used 3 decimal points, cleared out your calculator, etc. They are trying to see if you are putting the figures in the correct columns (i.e., Debit vs. Credit, Buyer vs. Seller, etc.) and using the correct number of days, making the debits and credits in a proration equal rather than add up, etc.
This problem says "principal balance of the loan after the August 1 payment was made is $63,470.46".
This type of situation exists in many of the closing problem given. So does the seller make a monthly payment or not? It seems (from the examples) that this payment is NOT made, which makes me think that this month's payment should be prorated as a debit to the seller for the days of the month prior to closing.
In this case, the exact wording of the problem tells you that the payment was already made: “balance of the loan after the payment was made…” Therefore, you in this case, you do not need to make the payment for the prior month. (Of course, at a New Loan closing seller needs to pay off the entire loan balance. And seller needs to pay the interest for this current month– plus the extra days as instructed – through closing. This is because the Interest for Current Month covers the current month - of course – where the Loan Payment Due was for the entire last month.)
However, if when the instructions say something like, “after the payment is made” or “last month’s payment is due”, etc. – that is telling you that the payment is still due and that you must pay it at closing. Naturally, since seller owned the property last month (interest/loan payments cover the prior month – they are paid in arrears) they will pay the entire amount of the payment due. Loan payments are always the entire responsibility of the seller. Never, ever prorate the payment between seller and buyer. And never divide the payment up for this month and try to have the seller just pay a portion of the payment. That’s what the separate entry for the Interest for Current Month takes care of.
Why does the seller pay the lender for the $1,520 Discount Fees? Shouldn’t that amount be credited to the buyer, since the lender has already taken it out of the loan (“netted out”)?
We need to go back to the basic concept of debits and credits, so that you will understand what it means to be “charged” and “getting credit”
Debits are things that that party PAYS FOR, Credits are things that that party GETS PAID FOR.
So – when it says that the seller PAYS FOR the Discount Fee, all that means (when thinking in terms of the worksheet/settlement statement) is “DEBIT SELLER”. Note that the $1,520 fee appears in the Debit Seller column. That means the seller is PAYING FOR the Discount points.
Since a CREDIT is something that that party GETS PAID FOR, then if you Credited the Buyer, that would mean that the Seller is PAYING the buyer, right? But that is definitely not the case. The seller is PAYING the lender!
If we didn’t throw in this “netting out” confusion, then, the Discount would appear as a Debit Seller / Credit Broker (but, please, really think of “Credit Broker” as being DISBURSEMENT (paid) OUT.) The only difference here is that the lender took their money out (from the loan proceeds) first.
I know that it seems weird that even though it says that seller is paying for the Discount fees, it is coming out of the loan. It seems like that means that the buyer is still incurring the cost (since it is coming out of their loan.) But think of it this way, instead: The seller is PAYING the lender (Debit Seller/Credit “lender”). It is almost like the seller is handing the lender a check. So – by paying the lender, the seller is in essence paying (back) the buyer that amount, because that $1,520 is going to buyer’s loan. Essentially, this means the buyer didn’t pay anything for the Discount – it has a net effect of “zero”.
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On approximately page 83, the problem says to add 7 days interest on the loan payoff for the seller for a total of 27 days. Closing is on the 20th. Would it not be 26 days because buyer owns property the day of closing (19+7)?
Remember that proration is different than figuring out interest for a payoff. Proration is when we are trying to apportion the financial responsibility between seller and buyer, and in those cases "who pays for day of closing" is important.
But here, we are figuring out what seller's payoff is going to be. The idea is to pay the lender enough money (principle + fees + interest) so that the loan will be completely paid off. In fact, we are going to pay them more than we think it will be, because if the payoff is one cent "short" the lender will not accept it at all (and will turn it back and it will take days to return, then the closing company or broker will be paying for those extra days - because it was their fault for not collecting enough, etc., etc.)
We are collecting up to the 20th, because the seller is selling the property on the 20th and paying it off completely. Then we are collecting an addition 7 days "padding" for the payoff to reach the lender by Express Mail, for them to log it in, taking into account weekends, etc.
This has nothing to do with buyer or prorating - because it is strictly seller's loan payoff. (On the other hand, if this were an ASSUMPTION - we would be prorating, in a sense, because seller is "giving" his/her loan to buyer... so seller would only be responsible for the time up to closing - and perhaps "day of closing" depending on what that state does.)
PART IV – FINAL CLOSING EXAM
Closing Problem #5
Closing Problem 5 says: “contained in the previous problem...”
When the Instructions for the final exam say: “Use the following facts, together with the general information contained in the previous ‘Contract Problem’ (Sale from McDougal to Smith)” it is simply referring to the previous “practice” problems: Swan to Hopper and Sellers to Byers (where the worksheet answers are provided), and so on.
On those two problems, the answers (the completed worksheets) were provided to you. On this problem (McDougal to Smith) the answers are not provided to you, because it is the final exam. You will need to work up the worksheet and answer the questions based on the fact situation provided.
On approximately page 87 it does not state the amount the buyers are planning to put down as earnest money, just that they are planning to pay $10,000 plus normal closing costs at the closing. Then on approximately page 94 it says that the sellers decide they are unwilling to accept the offer as it is written because of the sale price and not putting enough money down. Is the money down considered the earnest money in both of these situations?
The $10,000 figure mentioned on approximately page 87 means that that will be the total amount they will pay by closing - including the deposit - but, in this case, not including the closing costs. So - just as an unrelated example - if the parties agree on a $100,000 sale price, there is $1,500 in closing costs, there is a 70,000 loan buyers will assume from seller, and they are willing to pay $10,000 total by/at closing (including deposit)... THEN we can figure what the seller carry-back will be. (It will be whatever is left over after those figures.) In this example, that amount would be:
$100,000 +
$1,500 -
$70,000 -
$10,000 =
$21,500 seller carry-back note.
If the buyers had already deposited $6,000 earnest money, then that would leave only $4,000 cash they would have to bring to closing.
Nevertheless: Remember, you won't be plugging the figures from the contract forms or these negotiations into the Closing worksheet for the first problem on the final exam (#5). You will only use those ("final") figures given in the actual closing problem (on approximately page 126).
New Loan vs. “Old” Loan to be paid off.
New Loan amount should be $90,450. Seller’s OLD loan amount he is paying off should be $74,874.
Paying Title Insurance
Seller pays only for the "owner's" title insurance at closing (here, $624) and buyer pays for their own "lender's" or "mortgagee's" title insurance (here, $100). The total of the title insurance payment which is also "credit broker" or "disbursement out" is the total of all Debits.
The $100 Mortgagee’s title policy is a CHARGE to BUYER. Since all CHARGES (things someone PAYS FOR) are DEBITS, that figure must go in the buyer’s DEBIT column.
Note that the numeral "6" is in the Buyer CREDIT column, so it is asking you what the amount should be for a Buyer Credit.
The disbursement out (Broker Credit) for the title insurance is a rare example of when both seller and buyer have a debit, or charge, for the same or similar items – but the check out, this time to the title company, is for both amounts together. Another example is the split of the closing fee - also usually to the title company.
Who pays for last year's taxes?
Well, who lived in the house and owned it last year? Taxes are due on the first of January (but may not be PAID yet by closing), so who pays last year’s taxes. Similarly, this year's taxes will be due and paid by next year (because they won't be due and payable until Jan. 1 next year). Therefore, at closing NOW, seller has to pay Buyer for a prorated share of taxes up to (not through) the day of closing, since seller owned the house until then. Since we don't know yet what this year's taxes will be due (on Jan. 1 of next year), we have to “guess” - and base it (usually) on this year’s taxes.
Divide that amount by 365 (unless instructed otherwise - or unless you are on the Uniform portion of the state license exam, where it will be based on 360 days) and multiply it by the number of actual days up to closing (unless you are on the Uniform portion of the state license exam, where it will be based on 30 days in each month, no matter what months we are talking about) and that will be Seller's share of this year's taxes prorated and paid to buyer (Debit Seller/Credit Buyer).
Prorating Taxes according to the correct number of days before closing:
As an example of both "real-life" (how nothing regarding closing ever goes according to plan) and in making sure that you use the most recent information: check the top of the closing worksheet that you are filling-out, to see what date the closing actually takes place.
We are told to prorate the taxes for this year based upon last year's taxes of $890. I’m calculating that Seller pays (debit) part of that bill (based on the number of days from Jan. 1 to closing). Then I want to credit buyer the remainder of that $890.
1) Remember that if you have a Debit for something, that means that party is paying for that item (i.e., seller debit for the tax proration of – for example – $500, means that seller is paying $500 for his/her part of this year’s taxes – which will actually be paid at the beginning of next year.);
2) Then, for every debit (paying out) there has to be a corresponding credit. In other words, if seller pays $500, then one of the other columns must have the corresponding credit of $500. They don’t “add up” (i.e., not $152 debit and $348 credit) because that means they wouldn’t balance. Put another way, think of it as a debit is someone handing out a check in that amount, and a credit is someone getting (paid) that check… Here, seller is handing a check for $500… He is handing that amount to the buyer… therefore the buyer is getting paid $500. (How could seller hand a check – debit seller - for $500 to the buyer – credit buyer – but buyer gets paid a different amount?
3) Check all the other problems/examples… nowhere in no line/column/example is the amount of the debit(s) different than the credits. The debit always is the same as the credit – no exception. The only “exception” is where both seller and buyer are paying for some item (both seller and buyer have debits)… then the corresponding credit is in the DISBURSEMENT OUT column (aka “Broker CREDIT”) is still the TOTAL of those DEBITS. This happens on title insurance and closing fees (and usually nowhere else).
The only other thing that looks like the debits don’t seem to add up to the same figure as the credit is when the lender “nets out” their fees from the amount of the loan proceeds (see closing problems #2 and #4). However – the debits still equal the credit, because the amount that the lender is not funding to closing (DISBURSEMENT IN) has already held back the same amount as the debits for those fees. In other words, the Debit Broker is less that total amount than the Credit Buyer. This will make more sense if you go back and review those problems.
Loan fees:
Mortgage Insurance premium, Discount fees, Origination fees, etc. Those are all BUYER CHARGES, because it’s the buyer’s loan! Therefore, LOAN CHARGES always go in the BUYER DEBIT (and also the BROKER CREDIT) column.
Interest on new loan is a BUYER CHARGE (since they are paying for their new loan) and for the rest of the month. Please note the top of the worksheet what day the closing occurs.
Note also that in spite of all the work we had you do for the contract problem (McDougal & Smith) and the Promissory Note and Deed of Trust, etc., here in the Closing problem – none of those “preliminary” facts apply. Just like with a “real life” closing, only the most current figures apply.
Mortgage Insurance:
Seller doesn't (normally) pay the buyer's mortgage insurance. Unless stated in the problem (or prohibited by Regulation, such as FHA), the buyer will always pay all of their own loan charges.
note the warning (on approximately page 81): "Remember, just because there is a question number in a particular space, is not necessarily an indicator that a figure actually belongs in that space. (The answer may be zero, or a figure.)" In other words, the fact that you need to answer a question about what is in, say, Seller Debit column for Discount Points is not an indication that seller necessarily pays Discount Points (in this case, or in general.)
Discount Points:
Bottom line is that unless instructed otherwise, Buyer (Borrower) pays for his or her own Loan Fees (in a New Loan), including Discount Fees, Mortgage Insurance premium, etc. Therefore, unless the problem indicates that the seller or broker is going to pay for a loan fee (on behalf of the buyer - which actually happens in "real life" but rarely - if ever - on the state exam closing questions) then it will always be a Buyer Debit.
Then... it will be a Disbursement OUT (Broker Credit) - because that fee is being "paid" to the lender - unless the problem says to "Net Out" the fees... In that case, the amount will be subtracted from the total loan amount, and lowers the Broker Debit/Disbursement IN entry for Loan Amount/Trust Deed New Loan - by that amount, since the lender has already withheld that amount for itself before funding the loan. (As in Problems #2 and #4.)
Origination Fee: Remember that a loan origination fee (or discount points) are only based on percentage of the loan amount. It is not based on the sales price.
Interest on New Loan: Note what day the closing takes place… and the buyer must pay the Interest on his/her new loan starting on that day.
Closing fees: As described in the first example closing worksheets, who pays Sales Closing fee?
Subtotal/Totals Columns Questions (#22-25) Question 24 is essentially the other side of the coin as Question #22: The sum of the Subtotal of the Broker Debit (IN) column plus the difference between the Subtotal of the Buyer Debits (all of the items that buyer must PAY FOR) less the Buyer Credits (all of the items buyer is GETTING PAID FOR).
So, add up the Buyer Debits, add up the Buyer Credits, then subtract the Credits from the Debits. That is your “Total Due FROM BUYER” (and when you think about it, that makes sense.)
Carry that figure one “step” over to the Broker Debit column. That figure plus the subtotal of the Broker Debit (IN) column (Question #22) represents all the money coming IN.
That figure should be the same as the “Total Due TO SELLER” figure (which carried over all the way from the Seller Debit column (Question #23 – The Difference between the Seller CREDITS – money seller GETS PAID – and the Seller Debit – money seller PAYS) plus the money being paid OUT (“Disbursement OUT/Credit Broker”)
This is the way you determine whether you have the right amounts in the right columns: The bottom-line figure in Broker Debit (PAY IN) is the same as the bottom-line figure in Broker Credit (PAY OUT, Question #25.)
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Closing Problem #6
Reserves:
Many students have a hard time with Assumptions, and this is because some of the items seem backwards ("Why is the buyer paying the seller...?") But think of it this way, if the seller already paid for something (such as the reserves for insurance or taxes), then the buyer is getting the benefit of that at closing and beyond. So that means that buyer must pay back (debit buyer/credit seller) for those reserves.
So, the flow (for these kinds of items – like reserves – that are treated “backwards” compared to New Loan figures) is this:
BEFORE CLOSING: Seller paid for the reserves. Now there is a "pool" of money sitting with the lender.
AT CLOSING: Buyer is "inheriting" the reserve money, so must pay the seller back for that money that seller paid before closing. Therefore DEBIT BUYER / CREDIT SELLER for each individual reserve amount (Property taxes, Hazard Insurance, Mortgage Ins. - if applicable).
The assumption statement on approximately page 86, reads as follows:
ESCROW INFORMATION AFTER APRIL PAYMENT:
Tax reserve: $3600.00
Hazard Reserve: $576.00
Total Reserve: $1077.97
Where is that total coming from?
This is a figure from an actual Assumption statement that we obtained. The math doesn't seem to work out - but it just isn't something that you even have to think about, because nowhere are you asked, nor do you have to make a worksheet entry for Total Reserves. The figures that you are concerned with are: 1) the $3,600 Tax Reserve, from which you are Instructed that the lender will pay the taxes due and therefore you will be left with a certain amount in reserve; and 2) $576 Hazard Insurance Reserve which buyer is assuming – so you have to treat it as described above.
Interest on Loan Assumed:
Finding the interest on a loan is simpler than it looks - and does not require amortizing (in the sense of having an amortization table or calculator). It is covered first in the Math chapter (Ch. 13. A couple of examples are questions #1 and #28), and then in the Closings chapter - the examples on the first 20 pages or so, and the answer sheets to each of Problems #1 - #4.
Anyway - it's simple. To find the Interest on the loan, you multiply the balance of the loan (in Problem #6/Part II of the Closings exam, this is $152,691.35) times the Interest Rate (7%, there). That figure represents the "yearly" interest right now. (Yes - it will change next month and every month as each mortgage payment is made and reduces the overall loan balance - but we are talking about this month, right now.)
Take that "yearly" figure and divide it by
365 days (New Loans) OR 12 months, and then the actual number of days in that month (Assumptions)
And that is your "daily" interest ("per diem"). Remember on every step to only use 3 decimal places (see the introductory materials to the Closings course.)
Then multiply that number ("per diem") times the number of days before closing, because that is the seller's responsibility for that month. (They already took care of last month's interest by paying the loan payment which was due on the 1st of this month. Remember, interest is paid in arrears - so the loan payment you make this month pays for last month's interest.)
Make sure that you are carrying out the decimal places correctly on your calculator. (See the Instructional material at the very beginning of the Closings course, which tells how many decimal places you need to use, that you should clear out your calculator after each part of a multiple-part proration, etc.)
What is the significance of the statement to the effect that the "unpaid balance of the assumed loan is approximately $152,500”?
What matters is the exact figures on the Assumption statement as to the actual loan balance – and also that that figure applies after the April payment. Therefore, you are being subtly instructed as to two different figures that must be entered on the worksheet. Note that “loan payment due” means the payment for the prior month (as are all loan payments).
Loan Payment Due:
Make the full loan payment - it is never prorated. Remember, this loan payment (due) pays for last month! Who owned the property last month for the entire month?
Buyer will be making the payment due at the beginning of next month... but it is for the previous month... which is the month we are in now - the month of closing. So, since buyer will be paying for the whole thing on the first of the following month, but seller was in the property for a few days (before closing), then seller must pay buyer (DEBIT SELLER/CREDIT BUYER) for a prorated share of the interest for this month.
Multiply the Total Loan Balance x the interest rate. Since it is an Assumption, you take that figure and divide it by 12 (months) and then by the actual number of days in that month (of closing). That is the daily ("per diem") rate for interest, so multiply that per diem times the number of days prior to the date of closing. That is the Interest on Loan Assumed that Seller must pay to Buyer.
Notary fee:
The Notary Fee is a charge to whoever is signing the document (the person whose signature is being witnessed and notarized).
Similarly, a recording fee will usually be for whoever's document is being recorded. However, in Colorado - we attribute almost all the "normal" items to be recorded to the buyer: the deed of trust, the deed, etc.
Taxes for Preceding Year:
This is a slightly unusual situation, but you are specifically (but subtly) instructed what to do with the Prior Year’s Taxes and the Reserves - in the instructions to this problem.
Taxes for Current Year:
We won’t know what this year’s taxes will be owed until the beginning of next year. But seller will be long gone by that time, so we have to figure out something for seller to pay to buyer for the time that seller has been in the house before closing. So we base it on the most recent figure that we have and prorate it until closing. What are the taxes (for “last” year)? Take that figure and divide by 365 days and then multiply it times the number of actual days before closing. That is the figure that the seller must pay to buyer at closing – always.
Tax and Hazard Insurance Reserve:
Since seller was the one who paid for them originally, buyer must pay back the seller.
Street Special Assessment ($475):
See the text under FINAL SETTLEMENT WHEN A LOAN IS ASSUMED, EXPLANATION OF OTHER CHARGES AND ADJUSTMENTS FOR A LOAN ASSUMPTION (Paragraph "20", approximately page 25 in the Closings course): “it is not unusual for the buyer to agree by contract to assume the balance of taxes due for special improvements. If the special assessments are assumed, only a memo notation should be made of the amount assumed in the description column on this line, and no entry in either the debit or credit column.” Therefore, since the instructions specifically say "The buyer will assume an existing special assessment", how do we treat this special assessment?
Sewer special tax:
This is to be paid out at closing by the Seller.
Hazard Insurance Premium Assumed:
Note that the hazard insurance runs from February 1 of this year through Jan. 31 of next year. Hazard insurance is always paid in advance before closing (therefore, by seller), and at an "odd" time of year (never January 1).
Since Seller already paid the hazard insurance (on Feb. 1), buyer has to pay seller "back" at closing for the number of days from closing until the next premium is due.
Are the three Hazard Insurance figures on the Assumption Statement related… they don’t seem to add up to each other?
The three cases of hazard insurance on the Assumption statement are dealt with in different ways (used to calculate different things) - therefore, they aren't "related":
1) The $64 in the "Monthly Payment Breakdown" isn't really used at all... It is just one component of the Monthly Payment, and as such - is ignored. (The total monthly payment, however, is not - that is what Seller has to pay for last month.)
2) The Hazard Insurance Reserve (on the Assumption Statement) is what you need to have pay back Seller (just like remainder of the Tax Reserve) because buyer is getting the reserves that seller already paid for, and has to give seller credit back, since it isn't seller's loan anymore.
3) The last figure on the page is Hazard Insurance Premium. You use that to figure out what is the total proration credit that buyer must give seller at closing because seller already paid for them.
So, they aren't "related" to each other - they are used (or not used) in three different ways - on two different entries on the worksheet.
Item P - hazard reserve - Doesn't the buyer only have to be debited for two months reserve?
Hazard Reserve: The "putting two months into the Reserve" thing is only for New Loans... to make up for the two months that will pass before the buyer has to make the first loan payment (and therefore any funds go into the reserve.) This has nothing to do with assumptions, because this is an already-existing loan, and the seller has already been paying into the reserve.
Since the seller has already been paying into the reserve, whatever amount is in that "account" (according to the Assumption statement) must be paid back to the seller (credit), but since it is the buyer who is assuming that amount, it is always paid by the buyer (debit).
Prepaid Rents and Prepaid Security Deposit.
These are the opposite problem as Reserves. Here the SELLER previously received the money and is holding it. But since buyer is responsible for it later on (i.e., will have to give the tenant the deposit back some day, etc.), the seller must “pay back” the buyer at closing.
Shouldn’t the rent and security deposit elements be completely outside this closing, since it involves a new lease?
The new lease (with seller as tenant and buyer as landlord) is something that will go on long after the closing occurs, but that is not the same thing as saying that it is "completely outside of closing".
The only things that are "completely outside of closing" are things that explicitly say, "buyer will assume" (because that translates to, "buyer will pay for later"), or it specifically says something like, "this will be paid outside of/before/after closing."
If the instructions to a particular closing problem/question tell you to pay something (or that something is "due" or "must be paid", etc.) then you must plug that figure into the worksheet.
Here, it explicitly tells you that both these figures must be paid (entries on the worksheet):
"you must ... account for the security deposit of $1,000.00" and
"Seller will need to pay a prorated part of April’s rent and a $1,500 security deposit."
Rents due and Security Deposit Due:
This is a different situation than the “pre-paids”, because at closing Seller becomes Buyer’s tenant and Buyer becomes the (owner and) landlord. But the net result – as far as the figures on the worksheet – is the same. Seller has to pay buyer since seller is now buyer's tenant. Although the Security Deposit from Seller (tenant) to Buyer (landlord) is for the full amount, “Rents Due” won't be for the entire month, since closing takes place partway through the current month. So prorate: divide the amount of monthly rent by 30 days (in this month) and then multiply by the remaining days in the month from closing on.
Appraisal Fee: Why isn't broker debited for the $300 appraisal as it was supposed to be a reimbursement to broker from seller?
Think of it this way: Broker already paid for it and is being paid back.... In other words, “being credited for it”. A payment is a debit (here, Debit Seller $300), and whoever is getting paid is a credit. That holds true no matter whether it is a New Loan, Cash Deal, Assumption, etc.
Water/Sewer:
It says that the Water/Sewer is due - which means that the bill must be paid (OUT) at closing - with a portion due from seller and a portion due from buyer (they will each have a debit, with the total bill being paid OUT). Even though it is being paid partially in advance, we must pay the entire thing, so buyer is going to also have a prorated share (larger than seller).
Are unpaid bills (water/sewer, for example) always paid at closing? Why not debit seller/credit buyer for just days before close?
Bills that are due should normally be paid at closing. Then, who pays (and how much) will be determined by what period the bill covers. If it is a bill that is paid in arrears (before closing) then it would be seller's debt to completely pay at closings (debit seller/credit OUT). If it is a bill that is paid in advance (for a period starting after closing) then it would be the buyer's complete responsibility (debit buyer/credit OUT). If it is a bill that covers a period partly before closing, and partly after – then it will be partly paid (debit) by seller (before), partly buyer (after), with the credit being a DISBURSEMENT OUT).
Loan Transfer Fee:
Since it is a loan fee, and - unless otherwise stated in the problem - all loan fees are the buyer’s responsibility, this is a buyer charge.
Loan Payment Due:
When you make a loan payment, it is actually paying last month's interest. So, your April payment pays March's interest. That's why at closing the seller will make the full payment for last month, because it is last month’s payment – and seller owned the property for the entire last month. Therefore, never, ever, prorate the payment between the seller and buyer.
That is also why seller pays buyer for the prorated number of days for Interest ("on Ln Assumed") this month - because buyer will have to make the full payment for this month on the first of next month (for the entire previous month).
Loan Payment Due: Do I have to break the loan payment into its “Reserve” components?
No. Seller will pay the entire “Loan Payment Due” – since it is for the previous month.
Don’t worry about the Hazard Insurance Reserve, Tax Reserve, etc., components of the payment. The escrow reserve parts of the payment and the Balance of the Escrow Reserves (i.e., Hazard Insurance, Tax, etc.) that buyer is crediting to seller are two different things - so it is not important how they fit in with each other.
Just know that on an Assumption, you will have to both: 1) have buyer pay "back" the balance of each escrow (T – property Taxes, I – hazard Insurance, I – mortgage insurance, if any) to seller, as given on the Assumption statement. (You don't have to figure it out - it gives you that information on the Assumption statement); 2) Seller will have to make the full payment - for "last month"; and 3) seller will credit buyer for prorated days interest.
Line Z – HOA Deposit:
This is an item that seller already paid for previously and now Buyer gets and must pay back seller at closing.
HOA maintenance fee:
Is prorated and is a fee that Seller has already paid. So buyer must pay back the seller.
Buyer’s closing fee:
(Debit Buyer) is the combination of two closing fees: Half of the Sale Closing fee plus the entire Loan Closing Fee.
Earnest Money.
If you are tempted to put it in the Debit Buyer/Credit Broker columns, look at every other example and problem: Is it ever shown as a Debit Buyer/Credit Broker?
The buyer has already given it to the broker previously. If it was Debit Buyer/Credit Broker at the closing, then that would mean that they would be giving it again to the Broker. I don’t know many buyers who would put up with that. The broker must “give it back” to buyer at closing so that it can credit to the bottom line that buyer must pay.
"Trust Deed - Assumption" figure.
This is the exact figure given on the Assumption statement for the current balance (or "balance after this month's payment is paid"). You don't have to do any math with unrelated figures to determine the amount of the trust deed being assumed by Buyer; the exact figure that you will use is right there in the Assumption statement, as are many other "Assumed Loan" figures such as the reserves.
Remember that in an Assumption, we are talking about an existing loan (seller's), not a carry-back or New Loan, so the sales price, security deposit, etc., have nothing to do with that amount; it is simply the exact figure that the lender (through the Assumption Statement) says it is.
Title Insurance.
If you can’t get these to add up correctly, you are probably not properly attributing the different title insurance fees to the correct parties: Seller pays (debit seller) the entire owner's title insurance, and buyer pays (debit buyer) the loan ("mortgagee's") title insurance. Then, the total of those two figures go in the Broker Credit (which means "Disbursement OUT") column.
Warranty Deed Recording Fee.
This is being paid by buyer and then being PAID OUT (to the county). Just like ALL items that are being paid out (such as the title insurance) this figure goes into the Broker Credit ("Disbursement OUT") column.
Warranty Deed Notary fee.
This is a totally different charge than the recording fee (above). While a recording fee is paid to the county clerk & recorder for every page of every document (such as a deed) that is being put into the public record - the Notary Fee gets paid to the individual who witnessing and notarizing that document.
Like virtually ever charge on the worksheet, which party paying for this is subject to negotiation.
In this particular transaction, the charge goes to the seller, because it is their signature being notarized.
Isn’t the total amount being disbursed the total of the broker credit column plus the amount paid to the seller?
You might think that the "total" amount being disbursed should be all the checks going OUT in the Broker Credit Column (which is the Subtotal line of Broker Credit) and the check going out to the Seller (the "carryover" figure from the "TOTAL DUE TO SELLER" Debit Seller column). But this is not correct.
This is a subtle distinction, but really it is because when we (really, the title company who really does the settlement statements) say "total amount that will be disbursed at closing", we are really saying, "the total amount of the checks in the Broker Credit (Disbursement OUT) column.” Although – yes – in practice the check to the seller is being “paid out”, it is truly a totally different line-item.
Furthermore, that other figure is simply a carry-over from the from the "TOTAL DUE TO SELLER" (Debit Seller column - which was derived from the difference between Seller Credit totals less the Seller Debit totals). It is not a figure derived from the Broker columns. (In other words, you don't get that figure by finding the difference between the Broker columns.)
In fact, it is only carried over so that you can determine that your worksheet balances. (For example, you can determine if you did something wrong if the subtotal of the Broker Debit column PLUS the "Balance Due from Buyer" is not the same as the subtotal of the Broker Credit column PLUS the "Balance Due to Seller".)
Besides, if the "total amount that will be disbursed at closing" were the same as Subtotal of Broker Credit column PLUS the "Balance Due to Seller" figure, one of the possible answers would have been one of your choices. Since that number is not one of the given choices, this kind of thinking cannot determine the correct answer.
Closing fee: Is this the same as the assumption fee?
No, even though the wording of the facts/instructions for problem #6 might lead you to believe they are the same. In the middle of those instructions, it is talking about the CLOSING FEE (which is paid to the closing company): "The closing fee for the sale will be $150 - split between buyer and seller [$75 each], and for the assumption [...closing fee] $75 by the buyer."
The “assumption fee” is actually called a "transfer fee" in this problem, and is noted in the Assumption statement.
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Closing Problem #7
Interest on Loan assumed:
April’s interest is really April’s payment - so we must put an entry in Loan Payment Due for Seller making April’s full payment.
Then, based on calculating the daily interest, you need to have Seller (in a separate entry than the payment, above) pay Buyer for four days of interest (since Buyer will be making the full payment for May on the first of next month – just like Seller did, above for April).
Never, EVER, prorate the full payment. As mentioned above, the loan payment is Seller’s full responsibility (because it is last month’s payment – and seller owned the property for the entire last month). And don’t break down the payment into its reserve components.
Attorney Fees (Line 9) and Title Exam (Line 10) – I thought you couldn’t charge attorney fees and Title exam fees on closing costs?
Not true! An attorney can charge attorney fees and a title company will charge title fees (and closing fees, in real life).
You may be getting this confused with the rule that says that brokers cannot charge for document preparation; but this is completely unrelated. (Besides, we are learning – and being tested on – rules regarding brokers and the license exam is not going to ask you what are regulations imposed on attorneys… Other than the licensing exemption in C.R.S. 12-61-101(4)(e) – Chapter 14.)
On every closing (worksheet), the point is for you to collect the fees, charge it to the correct party (therefore that party will have the debit - because s/he is paying that fee) and then pay it (credit) either to the other party or OUT (which is the entire point of the "Broker Credit"/"Disbursement OUT" column.)
Who pays for the tax certificate? (The instructions in this problem are misleading.)
Regardless of the wording of this problem, in Colorado one party always pays for the tax certificate (except on an FHA-insured loan, where regulations prohibit the buyer/borrower from paying it – so the seller or the broker must pay for it). See who on every closing where a tax cert is mentioned. See the example on (approximately) page 12 of the Closings introductory materials: “This certificate from the county treasurer's office is the buyer's insurance that the county may later lay claim for any taxes other than as stated on the certificate… In this example, in the absence of contract provision to the contrary, the person who benefits pays for the document.”
Taxes for Preceding Year:
Taxes have not been paid for last year so seller must pay them "OUT". (Note that it says “the taxes for the previous year are still due, in the amount of…”) Similarly, if it says “last year’s taxes are paid” or “not yet due”, etc., then they don’t need to be paid.
Conversely, if an exam question states that the property taxes are “unpaid” or “due”, then that means they need to be paid.
Tax Reserve, Hazard Insurance Reserve and Mortgage Insurance Reserve:
Aren’t the reserves the sellers responsibility? The reason I’m confused is that the first Closing example (approximately page 13) says “debit buyer and credit broker for Hazard Insurance”.
That first example problem is for a New Loan, not an assumption! You absolutely must make that distinction, because what goes in a certain column for a New Loan does not go in the same places for an Assumption – because buyer/seller are “paying” these items to different parties in either case. That figure for Hazard Insurance (New Loan) was to put money into the reserve (held by the lender so that the lender can pay it out later – in a year - when it comes due).
However, for Closing Problems #6 and #7 (Assumptions), the money was originally paid in by Seller, but now Buyer is assuming that money. So Buyer must “pay back” Seller that amount.
On the $15,000 “private” loan, wouldn't a title company usually collect the 27 days interest for May and then not have payment due until July 1st?”
With a seller-carry-back – such as this – that would be very unusual. Carry-backs are usually pretty loosey-goosey, so the problem would have to specifically instruct you to do this. (Unlike with an institutional lender on a New Loan problem… There, you will always make buyer pay the interest, here 27 days.)
Security Deposit:
Since a renter always pays the security deposit "in advance", the seller is holding the security deposit. So seller must pay the buyer that security deposit (because buyer will have to pay it back to the tenant later on).
Interest on Loan Assumed:
Seller is paying interest for the first four days of May (since s/he lived there). S/he is paying it to the buyers (and not the loan company) because the buyers now "own" the loan, and will paying all of May's interest when they pay June's payment (which covers May's interest) to the lender.
Remember that on Assumptions, you must"divide the “yearly” interest by 12 months, then again by the number of days in that month, Then multiply by the number of days before closing - for seller's share of current month's interest. (Note that on New Loans, you will divide the “yearly” interest instead by 365 days then multiply by the number of days before closing.)
Loan Payment Due: I want to prorate the full loan payment ($1775) and debit seller and buyer each for part of it. But that is obviously not an answer.
Never, ever, prorate the loan payment. The loan payment is for last month, therefore it is all seller's responsibility. (This month is taken care of with the Interest figure: Since buyer is going to pay for May's interest with the June payment, then seller must pay buyer a prorated share of interest - 4 days - at closing.)
You also never “prorate” interest. (In other words, part seller and part buyer) – because you aren’t paying this month’s interest at closing. You are already paying last month’s interest with “Loan Payment Due”, but this interest will be paid on the first of next month when buyer makes his/her first payment. So, you don’t have to do a “debit buyer” transaction for this month’s interest, because buyer will take care of this anyway.
Note that this is different from a New Loan closing. There, we are paying off seller’s old loan (so the interest up to this day will be covered inside the complete loan payoff). Buyer is getting a new loan, so the interest for the rest of the month will, indeed, be a buyer debit. That way, buyer is covered for this month’s interest, and won’t have to pay for next month’s interest until his/her first regular payment over a month from now.
Since we are at the beginning of the month, for the Loan Payment Due figure, can I just have one (small) figure for seller paying (debit) part of the loan payment and then have another (large) figure to credit buyer the remainder of the loan payment?
Whatever you do, you cannot mix up your debits and credits on an item. If there is a debit in a certain amount, then you may only have a CREDIT for that item in the exact same amount. (Think of it as writing out a check: If I write you out a check for, say, $100 (=DEBIT SELLER) then how much is the check you are getting? (=CREDIT BUYER)… It’s $100!) Therefore, this line would be $100 Debit Seller and $100 Credit Buyer, because it is as if seller is giving a check (Debit Seller) to Buyer (Credit Buyer) for $100. That’s all!
Special Taxes, ($1712.42):
The problem doesn't say that that the special taxes are due - so you can't assume that they are paid or prorated at closing (which seems like the natural thing to do). “it is not unusual for the buyer to agree by contract to assume the balance of taxes due for special improvements. If the special assessments are assumed, only a memo notation should be made of the amount assumed in the description column on this line, and no entry in either the debit or credit column..” Therefore, they will never be prorated. (See FINAL SETTLEMENT WHEN A LOAN IS ASSUMED, EXPLANATION OF OTHER CHARGES AND ADJUSTMENTS FOR A LOAN ASSUMPTION, Paragraph "20", approximately page 25 in the Closings course.) This (final exam) problem specifically says: "The buyer will assume an existing special assessment", so how do we treat this?
Private Mortgage Insurance (PMI) assumed:
Mortgage insurance will also be prorated. The assumption statement says that the seller paid $1,858.20 for the full year’s mortgage insurance (Jan 1 through Dec 31). Buyer has to pay seller back (debit buyer/credit seller) for the prorated portion of the year that seller already paid for but won’t get the benefit of.
Meanwhile, seller has been paying a chunk of cash to the Mortgage Insurance escrow RESERVE with each loan payment he made. This is for next year and is a different line item than PMI Insured, which is what seller paid last year, in one lump sum.
The RESERVES will be built up until next year when the next advance payment for Mortgage Insurance is due. At that time, buyer will be paying for it (long after closing) - partly out of the reserve money in line 26 that buyer assumed (and paid seller back with another closing figure) and partly from money that the buyer later deposited in reserves with his subsequent payments - on the loan that he assumed with this closing).
It helps (with every item) to ask yourself: “Has seller already paid for this?” If yes, then seller will get a credit from buyer at closing. Then you ask yourself if it is a reserve. If so, then the buyer will probably pay seller back the entire amount of the escrow reserves for each item - separately. (i.e., mtg. ins., hazard ins., property taxes.) The exception is the occasion "trick" in the problem where it says "Such-and-such is due by the time of closing, so the lender will pay for it before closing. At closing, Buyer must credit seller back whatever is left over after that payment is made."
These two figures are not double-dipping - even though they sound like the same thing - because each line deals with a different time period for the Private Mortgage Insurance
Water/Sewer:
Since the bill is due, but covers the period from March 15 through June 14, then seller must pay the amount due up to closing, and the buyer must pay from day of closing through the last day covered.
Here is a good rule of thumb: If a bill is for a period completely in arrears (before closing) then seller is completely responsible. If the bill is in advance, for a period entirely after closing, then buyer is completely responsible. If the bill covers a period partially before closing and partially after closing (like this water bill) then you have to prorate - part seller/part buyer. Finally, the full amount due is “PAID OUT” (to the Water Company.)
The key is that it is a proration with charges both the seller and buyer - here since the bill is essentially paid "in advance", but the period runs partly through seller's time of owning the house, and partly when buyer will own the house. Hence, both buyer and seller will have a DEBIT (on the same line), and the corresponding (total) credit goes in the Broker Credit (Disbursement OUT) column. The concept of having buyer and seller each have a debit - but on the same line - is not uncommon.
It will usually happen with prorating:
water/sewer (or anything where the time period is "in advance" and the closing date is in the midst of that period), and
title insurance (like on our Closings final) where buyer and seller each have their own charges, but the "total" check (Disb. Out) is cut to the title company.
Why wait until May to pay a bill due in March?"
The instructions didn't say that it was "due in March" - they say that it covers the period from March 15 through June 14. Think of the bills you pay... some are due in advance (i.e. rent), some in arrears (i.e., home loan), and some are paid during the period (insurance, cable, water, etc.?) This water/sewer bill is part seller's responsibility (period before closing) and part buyer's responsibility (period of day of closing and after), so it will be prorated between the two (debit seller & debit buyer) and PAID OUT because it is "due" and must be paid at closing (credit broker/disbursement OUT).
Taxes for Current Year:
Seller is paying buyer for the time period (124 days) s/he has owned the house. Buyer will then be paying it all at the beginning of next year ("in arrears"). So, at this closing seller must pay buyer now for that first portion of this year when seller owned the house.
Prepaid Rents:
Since a renter always pays rent in advance, the seller already has been paid “this month’s” rent.
But seller only owns the property 4 of the 31 days in this month (May), and buyer then becomes the owner/landlord.
So seller will have to pay Buyer (at closing) for the other 27 days.
Trust Deed Assumption:
The loan balance to be assumed is always a Debit to Seller and a Credit to Buyer. This is because it is as if seller is paying (debit) the loan to the buyer (credit). After all, the buyer is “taking” the loan from seller, or assuming it.
You don't have to do any math with unrelated figures to determine the amount of the trust deed being assumed by Buyer; the exact figure that you will use is right there in the Assumption statement, as are many other "Assumed Loan" figures such as the reserves.
Remember that in an Assumption, we are talking about an existing loan (seller's)… not a carry-back or New Loan, so the sales price, security deposit, etc., have nothing to do with that amount. It is very simply the exact figure that the lender (through the Assumption Statement) says it is.
And - ignore the figure that says "approximate balance of…" which should tell you right off that (just like the "asking price") that figure is not an accurate figure that should be included on the worksheet.
Trust Deed Payable to Seller:
The seller carry-back should always be a Debit to Seller and a Credit to Buyer is because it is as if seller is paying the loan to the buyer. (After all, the buyer is taking the loan from seller, or assuming it.)
Tax Reserve:
Tax reserves that seller was accumulating through his payments before closing are not prorated. Seller already paid them, and is "getting out" of the loan, so buyer must “reimburse” seller at closing. In truth, the actual impounds didn't “go” anywhere - they are still sitting there with the lender, but buyer must take care of seller now.
Would not tax reserves be a debit on the buyer and credited to the broker for repayment to the loan company, to be held for future taxes?
No. If you debited the buyer and credited the broker column (Disbursement OUT), then that would mean that the buyer would be paying the lender money that the lender already has. Remember that the reserves are already there (with the lender): The seller has been paying for them with his/her payments over the last year.
So, since the seller has already paid into the reserves and is “getting out”, and the buyer is getting the benefit of those monies, then at closing the buyer must PAY BACK the seller (debit buyer/credit seller the amount of the reserve). In an ASSUMPTION the buyer will always PAY BACK the seller (debit buyer/credit seller) the amount of the reserve. (The ONLY exception was in Closing problem #6, where you were quietly but explicitly instructed to pay the taxes out of the reserve… However, the remainder was still debit buyer/credit seller.)
Loan Transfer Fee
will be the buyer's responsibility, since they are getting the "benefit" of the loan. (Unless the question, for some wild reason, instructs differently.)
Number of Entries in Broker Debit Column:
How many items is buyer paying out?
Hazard Insurance Premium Assumed:
Hazard Insurance is different from property taxes, in that its due date can run from any date during the year - usually based on the yearly anniversary from the day the house originally was bought. (Not the "calendar" year of Jan. 1 to Jan. 1.)
What is the anniversary date from the last full payment of Hazard Insurance, and how many days are there between that day and the day of closing? Those days are the buyer's “responsibility”, and since the seller already paid them (the previous year) buyer must "pay back" the seller at closing that prorated amount.
Where is the figure for Hazard Insurance for this problem? Is this the same thing as Private Mortgage Insurance?
PMI is definitely NOT the same as Hazard Insurance – in this problem or any real-life instance.
They are two different things, and two different figures in any Closing.
As discussed above, PMI insures the loan. (= protects the lender in case the buyer defaults.) The Finance Chapter (Ch. 5), Short-Answer Question #17 has a nice summary of PMI:
“A conventional loan is one made without government insurance (FHA) or guarantees (VA). Some conventional loans are now insured by Private Mortgage Insurance (PMI) companies. This allows the lending institutions to make loans of up to 90% or 95% of the appraised value. The cost of insurance is paid by the borrower.”
On the other hand, Hazard Insurance (or Property Insurance) is something that pays for damage or destruction to the structure itself.
That Hazard Insurance figure can be found in the facts for this Problem #7 – specifically the Assumption Statement:
Insurance information:
Company: Allfarm Insurance
Amount: $220,000.00.
Annual Premium: $720.00, paid to October 1 of the current year.
Note that this is for the “prepaid” Hazard Insurance. The Hazard Insurance “Reserves” is a different figure and that balance (above the Hazard figure above, on the Assumption statement) is fully assumed (= buyer pays back the seller).
Survey/Credit Report:
In spite of how the wording makes it sound like seller "ordered" it, (making you think that seller should pay for it), both are buyer charges, because we are checking on the buyer's credit.
Another way to look at it for both New Loans and Assumptions is that these are buyer’s (borrower’s) loan charges; Seller - as lender - never pays for loan charges, and even though it indicates that seller wanted the credit report.
Loan Payment Due:
Loan payments pay the prior month’s interest – April. Loan payments are never prorated. They don’t need to be, since buyer didn’t own the property in the previous month!
Remember that the May 1 loan payment pays interest in arrears - so it is paying for the time seller owned the property (owed on the loan) in April. That is why the Assumption Statement says "May 1st payment is not paid, so please pay it at closing." (It normally wouldn't be so instructive.)
Then note that the Assumption statement says that the "Status of impound reserve account after May 1st payment." So it has already accounted for the escrow part of that May 1st payment, and you will give Seller credit for those items ($720 PMI, $560 Hazard, etc.) on other lines.
Second Loan: Should I collect an interest payment?
No. And the main reason you don’t do anything with it, is that you are not instructed to do so! (Put another way, you get in trouble if you assume certain items should go on a worksheet, even though the instructions don’t tell you to put it there.)
The reason you are not instructed to make either a payment or account for interest on the new seller-carry-back is because that is hardly, if ever, done. Since the carry-back note is between private parties (seller as lender, buyer as borrower) and not an institutional lender, it is just too much responsibility for the seller to calculate the interest, etc. Normally, these loans are calculated on simple interest (or even no interest) or a short-term loan with a balloon payment, etc., where the first loan payment is only due after the first full month after closing.
Should I pay at closing the Labor lien mentioned? Do the instructions tell me to pay them out? So does the buyer assume the lien?
The instructions don't explicitly say or even imply that the buyer should assume this charge. Instead, this is a lien (debt) that the seller incurred, so it is his/her responsibility to clear up at closing.
"Shouldn’t the yearly property taxes be paid by the lender from reserve."
Yes, in "real life" the seller’s lender would have paid the taxes when the bill said they were due. However, this isn’t a test of how it is done in “real life”, but whether you can follow instructions: The instructions don't say anything about a lender paying taxes, etc. - so all we care about is what the problem instructs you to
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