chapter 9: processing: escrow settlement, title and appraisal

©2011 Cengage Learning

Chapter 9: Processing:

Escrow Settlement, Title

and AppraisalBy Dr. D. Grogan

M.C. “Buzz” Chambers


PREVIEW1. The mortgage loan broker does not close the loan. 2. The process is handled by an escrow agent and the title company. 3. The escrow agent:

• makes sure all documents are prepared and properly signed.• calculates the various charges to be assessed against each party.• deposits all the necessary funds.• gives each party an itemized list of the costs, charges and fees associated with

the transaction. 4. The title company:

• handles the existing loan payoff, if any.• receives the new loan proceeds. • records the necessary documents with the recorder’s office.

5. An appraisal is normally required for most loans. After all these items have been completed, the loan is then in a position to fund and close.


Student Learning Outcomes

1. Outline the what, why, who, and how of the escrow process.

2. Discuss escrow instructions, expenses handled by escrow and the impound account.

3. Describe title insurance, a preliminary title report, and a binder.

4. Differentiate between a title company and a title insurance policies.

5. Review the appraisal report.


What is escrow?

An independent stakeholder. A neutral depository for things of value to be

handled according to the terms and conditions of the mutually agreed upon escrow instructions given to the escrow holder, agent or officer.

Money and instruments include the down payment, deposits, deeds, and documents.


Escrow = Confidentiality Parties in an escrow must have:

an interest Lien Claim Estate into or on the property

Outside parties are not privileged to any information on the property held “in escrow”


A binding Escrow

All parties must execute written escrow instructions. All parties must deliver written escrow instructions to the

escrow holder. Represent a written statement of instructions to the

escrow agent: The lender is not required to sign instructions (refinance) Failing to sign and return the instructions may be deemed

“breach of contract” on a separate contract (usually the offer to purchase form).


Southern California Escrow

1. Title Insurance company, escrow division, under the insurance commissioner.

2. Broker-owned escrow, division of sales office, under the California Department of Real Estate (DRE) commissioner.

3. Independent escrow services, under the California Department of Corporation (DOC) commissioner.


Northern California Escrow Title insurance company Broker-owned escrow services (very few) Regulation falls under the California

Insurance Commissioner Handle the escrow and write the title

insurance policy


Escrow Opening of Escrow

Instructions come by phone, fax, email Certified escrow instructions Verification of funds deposited Affidavit of occupancy Vesting to be held by borrower(s) Competent parties Lawful object of the subject matter


Why is an Escrow needed? Assurance of an exchange of a deed for money Clear and marketable title Clearance of tax liens Clearance from government agencies A neutral third party to determine execution in

good faith of escrow instructions--orders


Escrow During escrow period

Property profile/Preliminary title report The escrow “take sheet” Existing liens and the assessor’s parcel number

(APN) (AIN) Amendments to escrow Lender instructions: No or Only approved junior

liens Supporting documents: Reconveyance deed, riders Buyer signs many documents


Escrow At Close of Escrow (COE)

Lien clearances Closing statements on property

Preparing the HUD-1

Insurance policies: hazard flood Earthquake other types of insurance


When is an escrow required, by law?

Escrow is required for LIPS: L – iquor license I – mpound account involved P – robate S – ecurities transfer


Who pays the expenses of escrow?

Seller pays:Buyer pays:

Conventional escrow fee(1/2) FHA escrow fee Documentary preparation fee Drawing the 2nd trust deed Recording fee-trust deed(s) Loan tie-in fee Loan origination fee Assumption fee Appraisal fee

Conventional escrow fee(1/2) DVA escrow fee FHA escrow fee Documentary transfer tax Drawing the grant deed Recording fee-grant deed Beneficiary demand stmt Reconveyance fee Existing loan pay off Home warranty policy


Who pays the expenses of escrow?

Termite: Correction Survey Unpaid liens CLTA title insurance Sub-escrow fee (1/2) Prepaid rent/taxes/assn dues Unpaid taxes/insurance

Buyer pays:

Termite: Prevention Credit report Appraisal ALTA title insurance Sub-escrow fee (1/2) Preliminary Title report Assumed taxes/insurance

Seller pays:


Escrow documents

Contingent upon: Sale of another property Purchase of another property Loan rate not to exceed “X%” Appraised value of not less

than “$X” Loan amount to be “$X” Seller carrying back a second

trust deed for “$X”

Memorandum Items Personal property included in

sales price Working conditions of utilities &

appliances Date for transfer of physical

possession Any other agreement or event

outside of escrow


Supplemental/Additional Escrow Requirements

Foreign Investors Real Property Tax Act (FIRPTA) Additional tax assessments Preliminary Change of Ownership Report (PCOR) Smoke detector requirements Internal Revenue Code (IRC) Section 6045 (E) Revenue & Taxation Code Sections 18805 &

26131


Homeowner Association

www.hoacerts.com Current Budget Balance Sheet Evidence of Fidelity Bonding and/or Directors

& Officers Liability Insurance CC&Rs Articles of Incorporation By Laws


Vesting

Sole Ownership A single man A single woman An unmarried man An unmarried woman A married man (or woman)

as his (or her) sole & separate property

Corporation Trust

Co-Ownership Community property Joint tenancy Tenancy in common Partnership


9.2 Statement of Information (SI)

Areas:

Name, birthplace, date of birth, marital status

Residences for past 10 years

Occupation/employment for past 10 years

Former marriages or deceased spouses

Signature & date

Purposes: Not intended as any invasion

of privacy Strictly confidential Not available for public

examination Accuracy is important Not used for credit check Available in most all

languages


9.3 Impound Account& Property Taxes

P I T I – Principal, Interest, Taxes (Property), Insurance(s)

Prorate Taxes at close of escrow Prop 13 – 1% of PCOR at close of escrow Mello-Roos Supplemental property tax bill


9.4 Title Insurance Preliminary Title Report shows:

Encumbrances on subject property Easements affecting subject property

Policy of Title Insurance Lenders require Special Endorsements

Mineral leases Street address Street access Private road agreement All-include endorsements to protect lender

Recordation of document: Deeds & Riders


Title company personnel

Advisory title officer (ATO) Title officer (TO) National Title desk Inner counties department Customer services department Market department Sales department


Title company customer service for loan originators

Farm package – information on people, geographic area, type of property

Address labels – for marketing plan Property profile – recorded documents Legal and vesting – existing title holder Property information – liens, room count, lot

size, CC&Rs, public record (year built)


What is a Preliminary Title Report?

Designed to provide interim response to an application for a title insurance policy.

Identifies existing title, estate, interest and land description.

Contains a list of defects, liens, encumbrances & restrictions to be excluded from coverage.


3 elements of a prelim1. An offer to issue a title insurance policy.

2. A partial reporting of the chain of title.

3. A statement of the terms and conditions of the offer to issue a title policy.• Note: See Appendix F.


Types of Title Insurance CLTA

Standard coverage To shield buyer from unforeseen claims

ALTA Coverage for the lender

Extended Coverage To cover above standard coverage

Binder When a future sale is anticipated in a short time


9.5 APPRAISAL Uniform Residential Appraisal Report

(URAR) (10-0-4) Depository Institutions Deregulation & Monetary

Control (DIDMCA of 1980 Regulated under Financial Institution’s Reform &

Recovery Act (FIRREA) Appraisers abide by Uniform Standards of

Professional Appraisal Practice (USPAP) Appraiser receives a state license


Appraisal format

Subject property description Neighborhood characteristics Planned unit development (PUD) Description of site and improvements Three approaches to value sections

Cost approach Sales Comparison analysis Income approach


Appraisal form has 5 areas: Complete visual inspection of the interior &

exterior areas of subject property. Inspection of the neighborhood. Inspection of each comparable sale. Collection, confirmation & analysis of data. Recording of analysis, opinions &

conclusions in the appraisal report.


Appraisal Report

Reconciliation may be with conditions Appraiser date – license number & signature Sketch of property exterior measurements Recorded plat map Map location with subject and comparables Disclaimer, certification & limiting conditions Photographs of subject and street view


FHA Appraiser shall: Be certified by the state in which the property

is located. Be certified by a nationally recognized

appraisal organization. Demonstrate verifiable education in FHA

appraisal requirements.


Appraisal

Non state licensed appraiser work: Used for non-federally related or portfolio loans Used for quality control purposes

Review Appraisal Responsible for clarifications on appraisal report May add conditions or reject the appraisal report

Appraisal report Used to qualify the property for LTV Used for solutions to conditions of the appraisal


Appraisal Management Company (AMC)

AMC specifically authorized by the lender. AMC selects, retains & provides payment of

all compensation to the individual appraiser on behalf of the lender.

Appraiser correctly identifies the lender as the lender/client on the appraisal report.

Lender policies & procedures in place to comply with the code.


Appraisal Licensing Criteria: Trainee

150 hours/education – no experience-property that supervising appraiser is permitted to appraise

Residential 150 hours education – 2000 hours experience in past 12 months,

1-4 unit up to $1million & non-residential up to $250,000 Certified Residential

200 hours education – 2500 hours experience in past 30 months, 1-4 unit & non-resident up to $250,000

Certified General 300 hours education + 3000 hours experience in past 30 months

w/1,500 hours must be non-residential.


Lender approval for appraiser:

Copy of current state license or certificate Current resume Sample work References Copy of errors & omissions insurance Sample appraisal review


Conditions and Reconsideration

Appraisal conditions: Specific property conditions

for the appraisal to be valid Loan broker, lender or

appraiser may verify that condition has been met

Usually work on the property

May be permits or work of others: termite, survey,etc

Reconsideration: Must submit a cover letter

with explanation and summary

Documented closed comps or backup data must be provided

chapter 9: processing: escrow settlement, title and appraisal

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