Some Terms Used In Escrow
Impound account costs for taxes and insurance are referred to as recurring costs.
Monthly payments for taxes and fire insurance often are required in a real estate loan transaction. The lender estimates the funds needed for taxes and insurance, which vary from year to year. These funds are placed in a special trust fund called an impound account. When the sale of the property is final and the loan is paid off, the seller is entitled to the unused portion of the impound account.
If an existing loan is to be paid or assumed by the buyer, the escrow agent will obtain a beneficiary statement showing the exact balance due from the one holding the deed of trust so that the buyer can receive the proper amount of credit.
If the seller has a loan that is not being assumed by the buyer, the loan must be paid off to clear the title. The seller instructs the escrow agent to pay off the loan, for which the seller receives a deed of reconveyance. A reconveyance fee is charged the seller for this service. The sum due the lender is entered in the seller’s escrow instructions as an estimate. The total figure will not be known until the final computations are made by the escrow officer at the time of closing.
The sum that the seller and buyer have to pay beyond the purchase price is called the closing costs. Closing costs consist of fees charged for the mortgage loan, title insurance, escrow services, reconveyances, recording of documents, and transfer tax, among others. Amounts vary, depending on the particular locale involved and the price of the property. Costs also vary, not only from area to area, but also from institution to institution within an area. Some costs change with fluctuations in the economy
The adjustment and distribution of costs to be shared by buyer and seller is called proration. Costs typically prorated include; interest, taxes, insurance and in the event income property is involved, prepaid rents. Costs are prorated in escrow as of the closing of escrow or an agreed-on date.
Property taxes are levied annually (July 1 to June 30 is the tax year) and are paid in two installments. Taxes usually require proration. If, for example, the seller had paid the first installment of a given year’s taxes but completed the sale before that tax period was over, he/she would receive a credit for the remainder of that period’s taxes. If, on the other hand, the seller retained the property through part of the second tax period but had not yet paid taxes for that period, the amount due would be prorated between seller and buyer, with the seller having to pay for the portion of the tax period during which he/she still owned the property.
Fire insurance is normally paid for one year in advance. If the buyer assumes a fire insurance policy that has not yet expired, the seller is entitled to a prorated refund of the unused premium.
If a loan of record is being taken over by the buyer, interest will be prorated between buyer and seller. Because interest is normally paid in arrears, if a closing is set for the 15th of the month and the buyer assumes a loan with payments due on the 1st of the month, the seller owes the buyer for one-half-months interest.
Prepaid rents will be prorated in cases involving income-producing properties.
CLTA (California Land Title Association) Policy; Standard
A CLTA Policy protects the buyer as to matters of record and specified risks. The policy is called a standard policy. The standard policy of title insurance covers matters of record, if not specifically excluded from coverage, as well as specified risks not of record. Be sure to ask your Realtor® or escrow officer what your coverage covers.
Title insurance is paid for once, at the time title passes from one owner to another and remains in effect until the property is sold again, at which time title passes to the new owner. If a property owner dies, title insurance continues to protect the owner’s heirs.
Generally, in southern California the seller pays for the standard policy of title insurance. In some northern California communities the buyer pays for this coverage. Any agreement of the parties as to who pays takes precedence over local custom.
ALTA (American Land Title Association) Policy; Extended Policy
In 1987 the title insurance industry issued a new set of policies, with new coverage’s and exclusions. An ALTA lender policy provides extended coverage to the lender, not the buyer. The buyer pays for this lender protection. It insures that the lender has a valid and enforceable lien, subject to only the exclusions from coverage noted in the exception schedule of the policy. It insures the lender for the amount of the loan, not the purchase price of the property. There are three basic ALTA policies; One deals with homes described by lot, block, and tract; one deals with homes described by either the metes-and –bounds or government survey system; and one deals with construction loans.
Be sure to check with your lender about this coverage.
Closing statements do not follow usual bookkeeping formulas. In a normal accounting situation, such as balancing a checkbook, all the credits (deposits to the account) are added. Then all the debits (checks written) are totaled and deducted from the credits, and the remainder is the balance.
At a closing, separate statements are issued for the buyer and the seller. Each settlement sheet includes debits (amounts owed) and credits (amounts entitled to receive). In contrast to usual accounting procedures, on the seller’s settlement sheet all the credits to the seller are added (selling price of the property, prorations, etc). Any debits owed by the seller are then totaled and deducted from the credits. The difference is entered as a cash credit (usually) to the seller, and the escrow agent forwards a check for this amount at the close of escrow.
On the buyer’s settlement sheet the buyer is charged (debited) with the purchase price of the property. The loans the buyer has obtained are credited to him or her. Cash is credited, prorations may be debited or credited (as the case warrants) and escrow fees and closing costs are debited. The difference between the total debits and credits usually is required in cash by the escrow agent. The cash payment into escrow becomes an additional credit and forces the account to balance. Because of the forced balances, the totals on buyers’ and sellers’ statements will be different from each other and from the purchase price.
Be sure you receive a HUD-1 statement from Title/Escrow.