Chapter 48
The Closing Statement
INTRODUCTION
The following pages explain how the closing agent obtains the information required to complete the HUD Settlement Statement which is used in the majority of residential real estate closings. While the formulas and procedures outlined here may vary in day to day practice, the discussion will provide a detailed illustration of the process of completing a settlement statement.
SETTLEMENT COSTS
The amounts of the settlement costs come from different sources and types of calculations. A large portion of the settlement costs are provided by the lender and are required to be disclosed to the borrower on a good faith estimate within 3 days of applying for a loan. Third parties will provide figures for some costs. For example if the closing official is to pay the cost of the pest inspection report or clearance letter at closing, the pest control company will provide the amount of the charges. The buyer and seller will share some costs on a proportional or prorated basis; taxes and community association assessments fees are prime examples. The preparer will prorate these costs by taking into account the date of closing or some other time period. The preparer will calculate other costs, such as the real estate commission, based on the sales price. Advance payments, often referred to as initial escrow deposits, by the buyer (in the form of reserves deposited with the lender as allowed by law in certain circumstances for taxes, insurance, and interest) will require other types of calculations by the preparer.
PRORATIONS
The most common types of prorated costs on a settlement statement are real estate taxes, community association assessments and solid waste fees. In assigning prorated costs to buyers and sellers, the preparer must first determine who pays for the day of closing. Unless the parties agree otherwise, generally, the seller will pay the prorated fee on the day of closing.
| (a) | TAX PRORATION – In the tax jurisdictions in Georgia, real estate taxes are due on a specific day of the year, but that day in a particular jurisdiction may fall in almost any month. Whatever the due date, taxes are billed on the basis of the calendar year from January 1 through December 31. Using the actual due date for the taxes, closing statement preparers credit the buyer and debit the seller if closing takes place before the due date and before the seller has paid the taxes or assign a debit to the buyer and a credit to the seller if closing takes place after the due date and the seller has paid the taxes. To calculate the amount of the proration, prepares use the following formula: | ||
| Annual Taxes ÷ 365 Days = One Day’s Tax × the Number of Days.* *This figure is the number of days owed by the seller if the seller has not yet paid the taxes or by the buyer if the seller has paid the taxes. If the seller has not paid the taxes nor received the current year’s tax bill, the preparer will use the previous year’s tax amount and have the buyer and seller sign an agreement to prorate any difference between the tax amount used for closing the current year’s amount. |
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| (b) | INTEREST PRORATION – The seller will have an interest proration expense when the buyer assumes the seller’s loan. Since interest is paid in arrears, the buyer’s first payment on the new loan will include interest for that part of the previous month in which the seller owned the property. That interest proration will be a debit for the seller and a credit for the buyer. The buyer will usually have an interest proration expense when he or she obtains a new loan to purchase the property. The buyer’s initial mortgage payment is due on the first of the month after a full month’s interest has accrued. If closing occurs on any day other than the first of the month, the lender will collect in advance at closing the interest for the partial month. This interest proration is a debit for the buyer and does not affect the seller’s proceeds. Settlement statement preparers use the following formula to calculate either interest proration. | ||
| Loan Amount × Interest Rate = One Year’s Interest One Year’s Interest ÷ 360 Days = One Day’s Interest × Number of Days Owed. |
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DUE DATE FOR FIRST PAYMENT ON A NEW LOAN
When a buyer secures a new loan, the closing date determines the date of the first monthly payment. If closing is on the first of the month, the due date of the first monthly payment is the first of the next month. If closing is on any other day of the month, the due date of the first monthly payment is the first of the second month following the month of closing. Note: Occasionally, if the closing occurs during the first couple of days of the month, the lender my provide the buyer a daily interest rate per diem credit and the first payment will be the first on the next month.
| Closing Date January 1 January 2 January 15 January 31 |
Due Date February 1 March 1 March 1 March 1 |
RESERVE (ESCROW) ACCOUNTS
Under RESPA guidelines lenders can require a borrower to establish an escrow or impound account out of which the lender will pay the property taxes, the hazard insurance, and mortgage insurance, if applicable.
| (a) | HAZARD INSURANCE – In addition to having a fully paid hazard insurance policy, lenders require that borrowers pay the equivalent of two (2) months’ premiums at closing to establish that portion of the impound account. The preparer uses the following formula to calculate the amount: | ||
| Annual Premium ÷ 12 Months = One Month’s Premium × 2 Months. | |||
| (b) | MORTGAGE INSURANCE – Lenders require the FHA borrower to pay an upfront mortgage insurance premium at closing and annual premiums. The upfront premium is determined based on the type of loan the borrower is obtaining and varies between 1.50 percent and 3.00 percent of the loan amount. Additionally, there is a monthly premium payment that varies between 0.50 percent and 0.55 percent for annual premium based on the type of loan.
For additional information on mortgage insurance click here. |
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| (c) | PRIVATE MORTGAGE INSURANCE Private mortgage insurance is generally required for loans where the loan to value ratio is 80 percent or more, meaning the borrower has 20 percent or less equity in the property. For private mortgage insurance, the reserve depends upon the carrier’s requirements. One formula that has been used is the following: | ||
| Loan Amount x .0025 = One Year’s Premium One Year’s Premium ÷ 12 = One Month’s Premium × 2 Months. |
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| This formula will only be used when the borrower pays only part of the private mortgage insurance at closing and has the remainder financed in monthly payment. | |||
| (d) | PROPERTY TAXES – RESPA limits the maximum amount the lender can require borrowers to deposit into a reserve account at settlement. That limitation is an amount equal to the amount of taxes owed up to the due date of the first monthly payment plus a maximum amount equal to two additional months of taxes. The example below illustrates the calculation. | ||
| Settlement date: September 30 Due date of first mortgage loan payment: November 1 Taxes due yearly: $360.00 Monthly tax accrual: $30.00 Due date for taxes: July 1 for the calendar year The amount due before the date of the first payment is $120.00. This represents the amount of taxes accruing between July 1 (the last tax due date) and October 31 ($30.00 X 4 months). Two months advance payment times $30.00 equals a total of $60.00. Therefore, total reserve deposits for taxes at settlement would be $180.00. |
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| (e) | ASSESSMENTS – Reserves for assessments for public improvements or association fees, if applicable, could be calculated as follows: | ||
| Assessment ÷ 12 Months = One Month’s Payment × 3 Months. | |||
DOWN PAYMENTS & LOAN AMOUNTS
When calculating a buyer’s down payment and loan amount on a new loan, preparers sometime round the down payment figure up to the next highest fifty-dollar increment and conversely round the loan amount down to the next lowest fifty-dollar increment.