Face-to-Face Closing
Face-to-face closings may be held at a number of locations, including the offices of the title company, the lending institution, an attorney for one of the parties, the broker, the county recorder, or the escrow company. Those attending a closing may include:
- the buyer or the buyer’s duly authorized agent,
- the seller or the seller’s duly authorized agent,
- the real estate licensees (both the buyer’s and the seller’s agents),
- the seller’s and the buyer’s attorneys,
- representatives of the lending institutions involved with the buyer’s new mortgage loan, the buyer’s assumption of the seller’s existing loan, or the seller’s payoff of an existing loan; and
- a representative of the title insurance company
Closing agent or closing officer
A closing agent may be a representative of the title company, the lender, the real estate broker, or the buyer’s or seller’s attorney. Some title companies and law firms employ paralegal assistants who conduct closings for their firms.
The closing agent orders and reviews the title insurance policy or title certificate, surveys, property insurance policies, and other items. After reviewing the agreement of sale (purchase agreement), the agent prepares a closing statement indicating the division of income and expenses between the parties. Finally, the time and place of closing must be arranged.
The exchange
When the parties are satisfied that everything is in order, the exchange is made. The seller delivers the signed deed to the buyer, who in return, provides the seller with the funds from the buyer’s loan and the buyer’s down payment. All pertinent documents are then recorded in the correct order to ensure continuity of title. The buyer’s new mortgage or deed of trust must be recorded after the deed because the buyer cannot pledge the property as security for the loan until he owns it.
Closing in Escrow (Non Face-to-Face Closing)
An escrow is a method of non face-to-face closing in which a disinterested third party is authorized to act as escrow agent and to coordinate the closing activities. The escrow agent also may be called the escrow holder. The escrow agent may be an attorney, a title company, a trust company, an escrow company, or the escrow department of a lending institution.
Escrow Closing Procedure
When a transaction will close in escrow, the buyer and seller execute escrow instructions to the escrow agent after the sales contract is signed. One of the parties selects an escrow agent. Which party selects the agent is determined either by negotiation or by state law. Once the contract is signed, the broker turns over the earnest money to the escrow agent, who deposits it in a special trust, or escrow, account.
Buyer and seller deposit all pertinent documents and other items with the escrow agent before the specified date of closing.
The seller usually deposits:
- the deed conveying the property to the buyer,
- title evidence – abstract and attorney’s opinion of title, certificate of title, title insurance
- existing hazard insurance policies,
- a letter or mortgage reduction certificate from the lender stating the exact principal remaining (if the buyer assumes the seller’s loan),
- affidavits of title (if required);
- a payoff statement (if the seller’s loan is to be paid off),
- bill of sale,
- survey,
- transfer tax declarations,
- paid water bill, and
- other instruments or documents necessary to clear the title or to complete the transaction.
The buyer deposits:
- the balance of the cash needed to complete the purchase, usually in the form of a certified check,
- loan documents (if the buyer secures a new loan),
- proof of hazard insurance and flood insurance (if required), and
- other necessary documents, such as inspection reports required by the lender.
The escrow agent has the authority to examine the title evidence. When marketable title is shown in the name of the buyer and all other conditions of the escrow agreement have been met, the agent is authorized to disburse the purchase price to the seller, minus all charges and expenses. The agent then records the deed and mortgage or deed of trust (if a new loan has been obtained by the purchaser).
If the escrow agent’s examination of the title discloses liens, a portion of the purchase price can be withheld from the seller. The withheld portion is used to pay the liens to clear the title.
If the seller cannot clear the title, or if for any reason the sale cannot be consummated, the escrow instructions usually provide that the parties be returned to their former statuses as if no sale occurred. The escrow agent re-conveys title to the seller and returns the purchase money to the buyer. If the seller dies prior to the closing date, but after having given a signed deed to the escrow agent, the closing still may proceed, with the escrow agent transferring title to the buyer and turning the purchase price over to the seller’s estate.
IRS Reporting Requirements
Certain real estate closings must be reported to the Internal Revenue Service (IRS) on Form 1099-S. The affected properties include sales or exchanges of:
- land (improved or unimproved), including air space,
- an inherently permanent structure, including any residential, commercial, or industrial building,
- a condominium unit and its appurtenant fixtures and common elements( including land), or
- shares in a cooperative housing corporation. Information to be reported includes
- the sales price,
- the amount of property tax reimbursement credited to the seller,
- the seller’s Social Security number.
If the closing agent does not notify the IRS, the responsibility for filing the form falls on the mortgage lender, although the real estate licensees or the parties to the transaction ultimately could be held liable.
Licensee’s Role at Face-to-Face Closings
In Illinois the Licensee’s role is limited to simply collecting the commission. A licensee’s job is essentially finished as soon as the sales contract is signed. After the contract is signed, the attorneys take over. Even so, a licensee’s service generally continues all the way through closing because it is in the licensee’s best interest that the transactions move successfully and smoothly to a conclusion. This may mean actively arranging for title evidence, surveys, appraisals, and inspections or repairs for structural conditions, water supplies, sewage facilities, or toxic substances.
Real estate licensees usually attend the face-to-face closing. Often, the parties look to their agents for guidance, assistance, and information during what can be a stressful experience.
Licensees should avoid recommending sources for any inspection or testing services. If a buyer suffers any injury as a result of a provider’s negligence, the licensee might also be named in any lawsuit. The better practice is to give clients the names of several professionals who offer high-quality services. In addition, licensees who receive any compensation or reward from a source they recommend to a client must disclose such an arrangement to the client. Licensees must never receive compensation from an attorney or a lender.
Lender’s Interest at Closing
Whether a buyer obtains new financing or assumes the seller’s existing loan, the lender wants to protect its security interest in the property. The lender has an interest in making sure the buyer gets good, marketable title and that tax and insurance payments are maintained. Lenders want their mortgage lien to have priority over other liens. They also want to ensure that insurance is kept up-to-date in case property is damaged or destroyed.
As a result, the buyer must also provide a fire and hazard insurance policy (along with a receipt for the premium) at closing, effective as of the date of closing.
A lender usually requests that a reserve account be established for tax and insurance payments so that these payments are maintained.
Mortgage Disclosure Improvement Act
Since its effective date of July 31, 2009, the Mortgage Disclosure Improvement Act (MDIA) has changed how buyers and sellers, lenders, mortgage brokers, title agents, and real estate licensees prepare for a closing. The timeliness of certain disclosures now affects the date of closings. Lenders and licensees should keep in mind the numbers 3, 7, and 3:
- 3 business days from application to provide the truth-in-lending statement (TIL) and good-faith estimate (GFE)
- 7 business days before the signing of loan documents, after the borrower receives the final truth-in-lending statement and good faith estimate
- 3 business days to wait for closing if the APR has changed more than 0.125 percent from the original or most recent TIL and GFE
Until the applicant/borrower receives the GFE and the TIL, the lender may collect only a reasonable fee for accessing the applicant’s credit history. Plus, the Home Valuation Code of Conduct (HVCC) requires that the borrower be provided with a copy of the home’s appraisal within three business days of closing.
If the Annual Percentage Rate increases more than 0.125 percent from the original T1L, then creditors must provide new disclosures with a revised Annual Percentage Rate (APR) and then wait an additional three business days before closing the loan. Consumers are permitted to accelerate the process if a personal emergency, such as a foreclosure, exists.
The intent of this law is to prevent consumers from receiving an enticing low rate at the initial application and then learning at settlement that the lender is charging more in fees.
