Mortgage Closing and Settlement 2 — Questions and Answers
Question 1: What is an escrow account in the context of a mortgage loan?
- An account where the down payment is held awaiting underwriting approval
- An account held by the lender or servicer to collect and pay property taxes and insurance on behalf of the borrower (Correct answer)
- A special government savings account for first-time homebuyers
- An account used to hold the lender's origination fee until after closing
Correct answer: An account held by the lender or servicer to collect and pay property taxes and insurance on behalf of the borrower
An escrow account (also called an impound account) is used by the lender to collect monthly portions of property taxes and insurance premiums and pay them when due.
Question 2: The HUD-1 Settlement Statement was replaced by which document under the TRID rule?
- Loan Estimate
- Good Faith Estimate
- Closing Disclosure (Correct answer)
- Truth in Lending Disclosure
Correct answer: Closing Disclosure
The TRID rule (effective October 2015) replaced the HUD-1 Settlement Statement and final TIL disclosure with the Closing Disclosure for most residential mortgage loans.
Question 3: What does 'settlement' mean in the context of a real estate transaction?
- A compromise agreement between lender and borrower about the interest rate
- The process where property ownership is officially transferred, funds are disbursed, and all parties receive what they are owed (Correct answer)
- A negotiation between buyer and seller to reduce the purchase price
- The final appraisal confirming the property value
Correct answer: The process where property ownership is officially transferred, funds are disbursed, and all parties receive what they are owed
Settlement (also called closing) is the formal process where title transfers from seller to buyer, the lender disburses loan funds, and all costs are paid.
Question 4: Which of the following costs is typically NOT paid by the borrower at closing?
- Loan origination fees
- Prepaid homeowner's insurance
- The seller's real estate commission (Correct answer)
- Title search fee
Correct answer: The seller's real estate commission
The seller's real estate commission is paid by the seller from their proceeds; it is not a closing cost obligation of the buyer/borrower.
Question 5: What is a seller concession (seller credit) at closing?
- Money the seller receives back as a rebate from the title company
- An amount the seller agrees to contribute toward the buyer's closing costs, reducing cash needed at closing (Correct answer)
- A discount on the purchase price granted by the seller after inspection
- A fee the seller pays to the lender for underwriting the loan
Correct answer: An amount the seller agrees to contribute toward the buyer's closing costs, reducing cash needed at closing
A seller concession is a negotiated contribution from the seller to cover some or all of the buyer's closing costs, effectively reducing the cash the buyer needs at settlement.
Question 6: How is prepaid interest at closing calculated?
- By charging one full month of interest as the first payment
- By calculating the per diem interest rate and multiplying by the number of days from closing through the end of the month (Correct answer)
- By applying the APR to the loan amount for a 30-day period
- By adding three months of interest to the down payment
Correct answer: By calculating the per diem interest rate and multiplying by the number of days from closing through the end of the month
Prepaid interest covers the interest accrued from the closing date through the last day of the month, since the first mortgage payment is typically due on the first of the following month.
Question 7: What is a 'no-closing-cost' mortgage?
- A government program that eliminates all fees for eligible first-time homebuyers
- A loan where closing costs are either rolled into the loan balance or offset by the lender through a higher interest rate (Correct answer)
- A mortgage where the lender waives all fees as a promotional offer
- A loan that only requires the down payment with no additional fees ever
Correct answer: A loan where closing costs are either rolled into the loan balance or offset by the lender through a higher interest rate
In a no-closing-cost mortgage, the borrower does not pay upfront closing costs; instead they accept a higher interest rate (lender credit) or the costs are added to the loan balance.
Mortgage Closing and Settlement 2
What is an escrow account in the context of a mortgage loan?