Closing Costs Explained Visually 'Good Introduction' to Settlement Process

If you're shopping for a home and haven't had a chance to watch this quick introduction to title insurance, you may want to check it out. While "Closing Costs Explained Visually" is targeted toward consumers, real estate experts are also finding it useful.

"Rather than a detailed step-by-step dissertation on title and escrow -- which many consumers really need before the home buying begins -- the two-minute Federal Title & Escrow Co. video is useful as a primer to get you into the basics of the process," writes Broderick Perkins, editor of Deadline News and the Real Estate News Examiner blog.

After a proper intro to the settlement process from Federal Title, home shoppers may then want to read Perkins' thorough three-part title insurance series for a better understanding of today's title insurance industry.

My favorite installment: Part 3 - Shop Around for Title, Escrow Services.

Title insurance companies sometimes get a bad rep, but we're not all bad. Some companies are committed to giving their customers the lowest rate possible on insurance premiums. Federal Title for one is saving home buyers as much as $2,000 through our REAL Credit Program.

As a home buyer, the more you know about the settlement process, the more you'll be able to save on closing costs.

Washington Post Shows No Love for Title Insurance

By Nikki Smith
Marketing Director
Federal Title & Escrow Co.

The Washington Post ran an article in last Sunday's paper called Easing the Pain of Closing Costs. Considering closing costs pertain largely to the title insurance and escrow services, I was a little surprised to see just three sentences about choosing the right title company. See below:

Find cheaper title insurance. Title insurance protects against challenges to your ownership, with separate coverage for your lender and for you. But as much as 80 percent of the premium goes to paying commission to a title agent. Shop around for title insurance.

I wanted to throw in my two cents in the comments section at the WaPo website but the comments section has been closed! So since I already went the trouble of cobbling some thoughts together, I'll leave them here:

Where's the love for title insurance? Three sentences is all?!?

If somewhere down the road a title defect comes to light, title insurance is all a home buyer has to protect his/her real estate investment. In DC, the most common title defect is a result of fraud.

Lenders require home buyers to purchase a lender's title insurance policy, while an owner's policy is optional. So there is an opportunity to save some money there.

You can choose between standard coverage or enhanced coverage, too. Some title companies may downplay the standard option, but in many cases a standard policy is sufficient. And it's cheaper.

The main thing for home buyers to know if they have the right to choose: Home buyers choose the policy, and they can choose what title company handles the settlement. So don't let a mortgage lender or real estate agent steer you toward a title company without doing a little cost comparison of title companies on your own. Lots of companies offer online quotes. Some title companies (like Federal Title) offer extra savings just for ordering services directly from them online.

This video is a good introduction to the overall process.

... Anyway, the article represents title insurance unfairly. Yes, it can cost thousands of dollars on top of the sale price of your home (around 3-6 percent extra depending on where you live), but the peace of mind is worth it in the long run.

Here's a final thought: If closing costs are outside your budget, consider offering the seller more money for the home in exchange for him/her covering settlement and escrow fees.

New RESPA Rule FAQs - HUD-1 Forms

1) Q: How are courier and overnight delivery fees shown on the HUD-1 Settlement Statement?

A: Courier and overnight delivery fees are considered to be fees for administrative or processing services. They are part of a primary service, such as the origination service or title service, and may not be separately itemized.

2) Q: Does voluntarily using the HUD-1 in a transaction that otherwise is not subject to RESPA result in RESPA applying to the transaction?

A: No, using the HUD-1 form does not subject a transaction to coverage under RESPA.

3) Q: Does "conducting a settlement" (from the definition of "title service") have the same meaning as "conducting the closing"?

A: Yes. The terms "conducting a settlement" and "conducting the closing" have the same meaning under HUD's RESPA regulations and are subject to identical requirements under the regulations.

4) Q: What if at closing the seller is paying for a settlement service that was listed on the GFE, such as the Owner‘s title insurance policy? How is this shown on the HUD-1?

A: If the seller is paying for a service that was on the GFE, such as Owner‘s title insurance, the charge remains in the borrower‘s column on the HUD-1. A credit from the seller to the borrower to offset the charge should be listed on the first page of the HUD-1 in Lines 204-209 and Lines 506-509 respectively.

5) Q: If there are additional government recording fees, such as to record a power of attorney or road maintenance agreement, are they included in Line 1201 of the HUD-1 or can they be charged separately?

A: Line 1201 is used to record the total government recording charges. Additional items the lender requires to be recorded, other than those already enumerated in Line 1202, must be itemized on Line 1206. The charges for these additional items must be stated outside the column.

6) Q: How do settlement agents get the information to prepare page 3 of the HUD-1? Do they have to search through all of the loan documents to get this information?

A: The lender is required to transmit the information necessary to complete the HUD-1. The instructions for completing the HUD-1 state that the lender must provide information to the settlement agent in a format that permits the settlement agent to simply enter the necessary information to complete the loan terms section on page 3 of the HUD-1 without having to refer to the loan documents.

7) Q: Is it a violation of the tolerance if some of the items in the 10% category in the Comparison Chart exceed 10%, but other items in the category do not exceed 10%?

A: The tolerance applies to the total of all charges shown in the category ―Charges That in Total Cannot Increase More Than 10%.‖ A tolerance violation of this category means that the total of all actual charges in this category exceed the total of all estimated charges in this category by more than 10%.

*The preceding Q&A was originally published on the HUD website.

Federal Title President Joins Expert Click Community

Todd Ewing, president of Federal Title & Escrow Company is among the newest members of the Expert Click community. Expert Click connects journalists and experts in a variety of fields. For information about the title insurance business, how to calculate closing costs and laws and regulations like the Real Estate Settlement Procedure Act, or RESPA, visit Todd's profile.

MD 1st Time Homebuyers: True/False

STATEMENT: As long as you have not owned a principal residence in Maryland in three years, you qualify as a Maryland First Time Homebuyer.
FALSE: The code does not provide a reset clause – if you have ever previously owned a principal residence in Maryland, no matter when, you are not eligible for the exemption.

STATEMENT: If you have previously owned a property in Maryland, but have never lived in that property, you qualify for the exemption.
TRUE: The requirement is that you must not have previously owned a principal residence in Maryland. Previously owning a non-principal residence does not disqualify you, as long as the property that you are purchasing will be your principal residence.

STATEMENT: It does not matter how you title the property, you will receive the exemption as long as you are a Maryland First Time Homebuyer.
FALSE: If the purchaser is a Trust, a Partnership, an LLC, or a Corporation, it can not qualify as a Maryland First Time Homebuyer.

STATEMENT: If two people are buying a principal residence, as long as one of the buyers has never previously owned a principal residence in Maryland, they can receive the exemption.
FALSE: Every purchaser who intends to live at the property as a principal residence must have never previously owned a principal residence in Maryland.

STATEMENT: While I qualify for the exemption, my parents who will be on title only to help me get the loan disqualify me since they already own a principal residence in Maryland.
FALSE: The Maryland Code will still allow the exemption as long as the parents sign an affidavit stating that they are a co-maker or guarantor of a purchase money deed of trust and that they will not occupy the residence as their principal residence.

Location Survey - WHY?

The GCAAR Regional Sales Contract makes only one reference to the survey and is found in para.#19 as follows: "The title report and survey, if required, will be ordered promptly . . . ." Note the key phrase "IF REQUIRED." What does that mean?

"IF REQUIRED" means if required by the purchaser's lender. Nearly all mortgage lender underwriting will require the title insurer to issue a lender's title insurance commitment without exception to survey matters. In other words, a lender will not accept a title insurance policy without coverage for survey matters.

Closing Costs Explained Visually

Finally - our new video!!
We have been working on producing a video that explains closing and settlement costs, visually. Buying a house is a huge financial committment and one that should not be taken lightly. The number one question we get from buyers and borrowers is "How much is this going to cost?" While there is no easy way to answer this question, we have created a suite of tools to get buyers and borrowers started.

But this new video is the one we are most excited about, take a look and let us know what you think.

TROUBLE BREWING; ESTATE TAX IN MD, DC AND VA

By: Jennifer Concino of Tobin, O'Connor, Ewing & Richard

With the average cost of a house rapidly rising in the DC Metropolitan area, it is especially important that homeowners recognize the need for tax and estate planning. Each and every homeowner should make sure that he has planned for his certain and eventual demise. For example, the estate of a resident of the District of Columbia with equity in a house of $1,500,000 could pay $64,400 in estate taxes to the District. Proper estate planning could help the homeowner defer, reduce or even potentially eliminate the tax.

The Federal Situation:
As you may already be aware, in 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) which, among other things, increased the federal estate tax applicable exclusion amount as follows:

Year -- APPLICABLE EXCLUSION AMOUNT
2006-2008 -- $2,000,000
2009 -- $3,500,000

EGTRRA eliminated the federal estate tax for individuals dying on or after January 1, 2010. However, unless between now and then, Congress and the President extend the law beyond December 31, 2010, or provide alternative tax relief, the estate tax as is existed in 2001, i.e. only a $1,000,000 applicable exclusion amount per person, will be reinstated on January 1, 2011, including a marginal rate of 55 percent.

Many of the documents drafted for our clients in the past include the establishment of a "by-pass trust" the funding of which is determined by a formula providing that the largest amount that can pass free of federal estate tax (the applicable exclusion amount) will fund such by-pass trust. By "forcing" the funding of a by-pass trust, each spouse is assured of utilizing his or her applicable exclusion amount thereby enabling each family to pass the largest amount possible of their estate to the next generation free of estate tax.

The States React:
Many states, facing deficits and losses in revenue as a result of EGTRRA, have taken action to prevent a similar increase in their exemption amounts for state death tax purposes. As such, the issue of "decoupling" has arisen. For example, even though the federal applicable exclusion amount is $2,000,000 this year, the State of Maryland and the District of Columbia have capped their exclusion amounts at $1,000,000.

Virginia has repealed its estate tax for individuals dying on or after July 1, 2007. Since many clients' estate planning documents include the forced by-pass trust formula, $2,000,000 (the federal applicable exclusion amount) would pass to the by-pass trust upon the death of the first spouse. This would result in no federal estate tax at the time of the first spouse's death, however, there would be a tax on the excess $1,000,000 in Maryland and the District of Columbia. The amount of that state death tax is pretty hefty; in 2007, the tax may be almost $85,000. For a death which occurs in 2009, where the federal applicable exclusion amount of $3,500,000 would pass to the by-pass trust (and Maryland and the District of Columbia continued to cap their exclusion amounts at $1,000,000) the state estate tax could be over a whopping $225,000! Maryland has, however, capped its estate tax to 16 percent of amounts over the $1,000,000 exclusion amount.

Our Response:
The current differences between the federal and state death taxes, as well as the differences among the local jurisdictions, require a case-by-case analysis for each client. For example, in some instances, it will be preferable to pay the state death tax assessed at the time of the first spouse's death by fully funding the by-pass trust with the federal applicable exclusion amount. Although this will accelerate the payment of state death taxes, the excess amount funded into the by-pass trust (i.e., $1,000,000 in 2007), including all appreciation thereon, will then be excluded from the surviving spouse's estate, thereby potentially sheltering significant wealth and saving federal tax at the top marginal estate tax rate which is 46 percent in 2007.

However, many clients may prefer to avoid the payment of state estate taxes upon the death of the first spouse and in such cases, it may be necessary to prepare new wills/revocable trusts. These new documents can provide that the by-pass trust will be funded with the lesser of the federal or state exclusion amounts. Another option provides that the entire estate would pass to the surviving spouse, subject, however, to the surviving spouse having a power to "disclaim" a portion of the bequest into the by-pass trust. This option would allow maximum flexibility on a post-mortem basis to the ever evolving estate tax landscape. Alternatively, the entire estate of the first spouse to die may be paid over to a marital trust for the benefit of the surviving spouse. In such case, the personal representative may determine after the death of the first spouse not to elect "marital deduction" treatment for any portion of the marital trust (the state estate tax exclusion amount or the federal estate tax exclusion amount).

Make an Appointment:
We recommend that each of our clients have their existing estate planning documents reviewed as soon as possible. Please contact us (202-362-5900) to arrange a time to discuss your documents and what changes, if any, are appropriate for your needs.

FIRPTA - How to protect your buyer

By: Joseph Gentile

What is FIRPTA?
The Foreign Investment in Real Property Tax Act (FIRPTA), 26 U.S.C. § 1445, provides that a buyer must withhold 10 percent of the amount realized by the foreign seller in the sale of an interest in U.S. real property. If the seller is a foreign person and the buyer fails to withhold, the buyer may be held liable for the tax.

My seller is a resident alien, does that mean FIRPTA applies?
A resident alien, for purposes of FIRPTA, is not a foreign person. FIRPTA defines a foreign seller as a non-resident alien individual, a foreign corporation not treated as a domestic corporation, or a foreign partnership, trust or estate. There are two ways to determine if a person qualifies as a resident alien under FIRPTA: 1) if a person has been issued an alien registration card ("green card") or 2) the substantial presence test that requires a person be physically present in the United States for a certain number of days a year. 183 days (pursuant to IRS Code).

My seller does not have a green card. What qualifies under the substantial presence test?
The short answer is that if your seller was physically present in the United States for at least 183 days in the previous calendar year, he or she qualifies as a resident alien and is not subject to FIRPTA withholding. Even if the seller does not meet this requirement, he or she might still be exempt from FIRPTA, by using the complicated formula found in IRS Code § 7701 that states that a seller qualifies as a resident alien if:

* the seller was present in the United States on at least 31 days during the calendar year, and
* (the number of days present in current year) + (the number of days present in preceding year x 1/3) + (the number of days present in 2nd preceding year x 1/6) equals or is greater than 183.

How do you determine the amount realized for FIRPTA?
The amount realized typically is the sales or contract price. Please note that the outstanding amount of any liability assumed by the buyer does not reduce the amount realized. If the property is owned jointly by foreign and non-foreign persons, the amount realized is to be allocated among the owner based on capital contributions, with spouses treated as having contributed 50% each. Generally, the amount to withhold is 10% of the amount realized, unless the seller is a corporation, partnership, trust, or estate in which case the amount may be 35%.

I am buying a house from a foreign person as defined by FIRPTA, what do I need to do now?
The buyer must use IRS Forms 8288 (www.irs.gov/pub/irs-pdf/f8288.pdf) and 8288-A (www.irs.gov/pub/irs-pdf/f8288a.pdf) to report and pay to the IRS any tax withheld on the purchase of U.S. real property interests. Generally, these forms need to filed with the IRS within 20 days of the date of transfer, defined as the date consideration is first paid, excluding earnest money or deposits. Failure of the buyer to withhold the proper amount may cause the buyer to be liable for the payment of the tax plus penalties and interest as well as possibly making the buyer subject to criminal penalties.

Even though the seller is a foreign national, are there any exceptions to the withholding?
Several exceptions do apply and exempt the buyer from withholding. Here is a partial list of the most common exceptions in a real property transfer:

* The property is purchased for $300,000.00 or less and is to be used by the buyer as his or her residence. The test for a residence is if the buyer is to reside in the property for at least 50% of the days in the next two 12 month periods.
* The seller provides to the buyer a Non-Foreign Status Certification containing the transferor's U.S. taxpayer identification number and stating that the transferor is not a foreign person. The buyer need not investigate the validity of the certification, but will be held liable if he or she has actual knowledge that it is false.
* The seller provides to the buyer a withholding certificate from the IRS that excuses or lowers the withholding amount.
* No consideration is paid (for example the property was transferred as a gift).
* An option to acquire real property is signed (however, withholding is required on the sale when the option is exercised).
* The purchaser is the United States, a U.S. state or possession or political subdivision, or the District of Columbia.
* The seller provides a notice signed under penalties of perjury stating that the seller is not required to recognize gain or loss on the transfer because of a nonrecognition provision of the Internal Revenue Code or a provision in a U.S. tax treaty.

Where can I get more information on FIRPTA?
We would be glad to answer any questions that you might have on FIRPTA, but additional information, applicable forms, the withholding certificate application process, and more, can be found at www.irs.gov.

Settlement proceeds may be subject to income tax withholding

Maryland Nonresident Sellers Beware:
Your Settlement Proceeds are Subject to
Income Tax Withholding

By: Jennifer Concino

A nonresident individual seller of Maryland real property may be surprised to learn that the check he walks away with from the closing table will be much less than anticipated; about six (6%) percent less than expected to be exact.

Surprisingly, many agents do not realize that their nonresident sellers may acquire a Certificate of Full or Partial Exemption from the tax, as discussed below. Indeed, we strongly advise agents to assist their nonresident sellers in applying for the Certificate of Exemption as soon as the contract of sale is executed; application for an exemption must be made to the Comptroller of Maryland no later than twenty-one (21) days before closing and with such a Certificate, the nonresident seller can walk away from settlement with all of his proceeds of sale.

In 2003, the Maryland Legislature passed an Act mandating the withholding of income tax on the sale of all real property by nonresident individuals and nonresident entities. Settlement officers are directed to ensure sufficient funds are withheld from the closing and are also required to pay the withheld tax to the recording office at the time the deed is submitted for recordation. The amount of tax currently required to be withheld is six (6%) percent of the "total payment" to a nonresident individual and 7% to a nonresident entity. Indeed, the Clerk of the Land Records office will not accept an instrument for recording unless the withheld tax is paid or the instrument refers to one of the exemptions from the withholding requirement.

Those exemptions are:

1. a certification under penalties of perjury or an acknowledgment in the deed that the seller is a resident of the State of Maryland;
2. a certification under penalties of perjury or an acknowledgment in the deed that the property sold is the seller's primary residence as determined under the Internal Revenue Code;
3. the property is transferred pursuant to foreclosure or a deed in lieu of foreclosure;
4. the property is transferred to the government;
5. a statement in the deed indicating that the consideration paid for the property is zero; and
6. a certificate issued by the Comptroller of Maryland stating that no tax or a reduced amount of tax is due on that particular sale or that the seller has provided adequate security to cover the tax liability.



With regard to exemption to number 6. (six), above, the Comptroller has noted several circumstances under which he will issue such a certificate. A sample of those circumstances are:

* The tax due has already been paid;
* The transfer is made on an installment sales basis under Section 453 of the Internal Revenue Code;
* The seller is a tax exempt entity under Section 501(a) of the Internal Revenue Code;
* The transfer is to a partnership in exchange for a partnership interest so that no gain or loss is recognized under Section 721 of the Internal Revenue Code;
* The transfer is a like-kind exchange under Section 1031 of the Internal Revenue Code; or
* The transfer is between spouses or incident to a divorce in accordance with Section 1041 of the Internal Revenue Code.

Frequently Asked Questions:

Is the amount of tax withheld calculated on the sales price or the net proceeds?
The "total payment" on which the Maryland income tax is withheld is equal to the total sales price for the property less (1) debts of the seller securing the property that are being satisfied at closing; and (2) expenses of the seller arising out of the sale of the property that are disclosed on the settlement statement. However, debts being satisfied at settlement that are secured within ninety (90) days of closing cannot be deducted from the "total payment" calculation.

How are taxes withheld where there are both resident and nonresident joint sellers?
The "total payment" will be divided into as many shares as there are sellers. Each seller's residency will then be separately determined and any share of a nonresident will be subject to withholding.

If income tax is withheld on the sale, does the nonresident seller still have to file a Maryland nonresident income tax return?
Yes.

If a nonresident seller believes too much money was withheld, can he request a refund before filing the nonresident income tax return for that year?
The seller may file an Application for Tentative Refund of Withholding on Sales of Real Property by Nonresidents with the Comptroller sixty (60) days or more after the tax was paid.

Is tangible personal property sold with the property by a nonresident seller also subject to withholding?
Yes.