Introduction
Real estate transaction refers to a process in which the right of property ownership is transferred from the seller (the person who owns the property) to the buyer. This transaction is finalized when the seller issue a legal title deed to the seller at closing after all the purchasing terms and conditions are met. In this background, closing refers to the point at which the parties to the transaction of real estate complete the purchase and sale details and the title transfer eventually takes place. Closing is important because it is a way to ensure that both parties certify the conditions for closing.
As such, various terminologies are used in the closing deal which includes and not limited to HUD-1, escrow closing, deed, note, mortgage, marketable title, title search, binder, deed of trust, warranty or other deeds, closing costs, prorated prepaid expenses and transfers tax among others. For research purposes, this paper will discuss four terminologies such as mortgage, HUD-1, deed, and escrow closing, and their importance to real estate parties. The paper will include any important concerns or advantages and disadvantages thereof.
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Deed
According to Murphy (2015), a deed is a legal document which bears title to the property. The deed is the significant primary document for conveyance at closing, which the seller uses to transfer the property title to the buyer. It should thus be prepared with care because it is the only means by which the seller can notify the public of the title transfer after a transaction is closed. Therefore it should be valid and have a proper format. In this context, there are mainly three types of deed recognized by most states, and each solely differs by the protection degree that the seller (grantor) warrants to the buyer (grantee). These types of deeds include a general warranty deed, a special warranty deed, and quitclaim deed. With the deed of general warranty, the seller delivers the title and also give a warrant for various imperfections arising prior and during the period of ownership by the seller. If any of the warranted defects arise, the seller has to compensate the buyer for a considered amount paid by the buyer.
On the other hand, in a special warranty deed (also known as a deed with limited warranty) the seller is responsible for compensating only the defects of the title that arise during its ownership period. In the quitclaim deed, the seller incorporates no warranties and conveys merely any title the seller has to the buyer. Quitclaim deed is used most of the time for technical defect clear up, and examples include correction or release deeds (Murphy, 2015). In many circumstances, the type of deed to be delivered in a real estate transaction is always specified in a contract of real estate to inform the parties and lawyers from the outset the kind of deed to be prepared and conveyed. The deed should strictly follow the common law language and give little room for negotiation by parties, and the lender and title company should accept the language used in the deed (Brueggeman & Fisher, 2006).
The Importance of Deed
As Brueggeman and Fisher (2006) explain, the significance of deed conveyance includes: giving the seller an absolute right to legally own a real estate property and enjoy it without a defective title that will cause problems to the new owner. A deed also enables the seller to redevelop the property in case the property is destroyed, for instance, by earthquake or floods. Additionally, according to Murphy (2015), a deed acts as a covenant to compensate the buyer in case the buyer is evicted from possession.
Mortgage
According to Kollen-Rice (2003), mortgage refers a loan given to a borrower (mortgagor) by the lender (mortgagee), where real estate property is used as security for repayment to enable real estate purchase or development. Brueggeman and Fisher (2006) define mortgage as a legal document where a property is pledged to the lender to act as security for debt payment. The mortgage instrument has two part namely; the mortgage which is the pledge; and the promissory note which is the debt actual evidence and repayment promise (Fisher, 2006). In the U.S., in case of obligation default by the mortgagor, the mortgagee may file a foreclosure which causes selling of property at auction, and the amount raised is used to repay the debt, and the excess proceeds returned to owner (Fisher, 2006).
In this background, there are various types of mortgages such as fixed-rate mortgages (FRM), reverse annuity mortgages, graduated payment mortgage, adjustable rate mortgages (ARM), price level adjusted mortgages, and renegotiable mortgage rates (Kollen-Rice, 2003). In an FRM, the rate of interest and monthly payments remain permanent over the life of the mortgage, while in the ARM the rate of interest that the borrower pays varies according to current market rate index over the loan life.
On the other hand, in a price level adjusted mortgage, the principal amount and not the interest rate, is adjusted down or up yearly or according to the agreed period depending on the inflation index prescribed (Kollen-Rice, 2003). Contrary, in graduated payment mortgage, the fixed rate mortgage’s monthly payment gradually increases over the debt life, while reverse annuity mortgages are where home equity is used as a security to earn an annuity which brings monthly income over an agreed period or lifetime of the owner. This type of mortgage is usually aimed at older people who own homes and have a fixed income.
Advantages of Mortgage
Firstly, it enables property buyer to purchase without paying the full amount of property in cash, thus acts as the better alternative financing of real estate investment for investors or buyers who have an inadequate capital or cash at hand. Secondly, it provides the lender with an income through the interest paid by the borrower during repayment (Kollen-Rice, 2003).
Escrow Closing
Escrow refers to a third party who is neutral to both seller and buyer, who holds money and documents of real estate transaction before closing (Murphy, 2015). In escrow closing, an escrow holder or coordinate agent activities of closing on behalf of seller and buyer. The two parties may select an escrow agent through negotiation, state or customs law, and the agent may be a trust company, an attorney, escrow Company or department of a lending body (Irwin, 2004).
Escrow Closing Procedure :
After signing sales contact, both seller and buyer perform instructions by escrow to an escrow agent. Once an escrow agent receives the instructions, it can only be changed through writing direction given by both the consent of seller and buyer. After that, the professional for real estate hands over the earnest money to an escrow agent who in turn deposit it into an escrow or special trust account. The seller and buyer then deposit all the required documents and other items as specified before the specified closing date.
After that, the escrow agent uses the power bestowed upon it to examine evidence of the title, and if confirmed that the marketable title is shown buyers name, all other escrow agreement conditions have been met. After both parties have received a disclosure statement, the agent is ratified to disburse to the seller the purchase price excluding all expenses and charges, and the agent then records the deed. If in any case the seller is unable to clear the title or the sale contract cannot be executed, then instructions from escrow usually provide the returning of the parties to their normal state assuming no sale has taken place. Then the agent gives back the title to the seller and money for purchase back to the buyer (Murphy, 2015).
Importance of Escrow Closing to Real Estate Parties
Using escrow agent at closing may help protect a lender, seller or buyer in a real estate transaction through an escrow account. This protection comes from ensuring that no transfer of property or fund occur until both parties meet all the terms and conditions. Also, in case the sale fails to happen the escrow agent helps to restore each party to the original state they were before the contract thereby preventing them from running losses (Irwin, 2004).
HUD-1
HUD (Housing and Urban Development) is a department of the U.S. government are responsible for property development and home ownership legislation within the U.S. The HUD-1 form also called the closing or settlement statement is a document that a borrower uses to lend money for real estate purchase. The document itemizes all the fees or services charged by the lender to the borrower when applying for purchasing or refinancing real estate loans and is given a day before the settlement date to allow time for the borrower inspection (Brueggeman & Fisher, 2006). The document consists of four major parts. Part one shows the transactions summary.
Part two details the charges associated with the settlement. Part three displays comparison between actual charges and estimates of Good Faith, and also the analysis of loan terms and monthly payments. Finally the fourth part provides a section for an acknowledgement for signing and approval by the parties involved (Murphy, 2015). Originally, the HUD-1 document was formed to provide each party with a real estate transaction a list complete with the outgoing and incoming funds. It was required by the Act for Real Estate Settlement Procedure (RESPA) that HUD-1 be used as the standard form for settlement of real estate involving federal mortgage loans. Since the beginning of October 3, 2015, it was changed by the Consumer Financial Protection Bureau to Closing Disclosure and became effective since then. The old HUD-1 is today used in reversed mortgages in the U.S. (Irwin, 2004). This document is essential to the lender because it acts a proof that occurred and the original HUD documents maintained by both parties in case of any default or issue.
References
Brueggeman, W., & Fisher, J. (2006). Real Estate Finance & Investments (Real Estate Finance and Investments) . Boston: McGraw-Hill/Irwin Google Scholar.
Irwin, R. (2004 ). Home Closing Checklist . Boston: McGraw-Hill.
Kollen-Rice, M. (2003). Buying real estate foreclosures . Boston: McGraw-Hill
Murphy, J. (2015). Closing Commercial Real Estate Transactions. Retrieved December 20, 2017, from https://www.martinpringle.com/assets/images/uploads/media/Closing_Commercial_Rea _Estate_Transactions_Jerry_Murphy.pdf
