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1 Real Estate Closings This research will review some of the key terms and concepts used during a real estate closing. However, there are many other concepts that are involved in the closing process. I will be discussing the HUD-1 settlement statement, a deed of trust, a promissory note, and closing costs. Within this research the meaning of each term and the relation with a real estate closing will be described. I will be discussing the importance of each term along with any concerns or issues with the concepts during the closing process. This research will acknowledge the advantages and disadvantages from the terms mentioned previously. A real estate closing can be overwhelming, but gaining a better understanding of the terminology can help ease this process. HUD-1 Settlement Statement The HUD-1 Settlement Statement is a document that records a combination of all charges and credits to both the buyer and seller in a real estate closing (CFBP, 2017). This statement is received by all borrowers at closing. The term HUD comes from the U.S. Department of Housing and Urban Development and was designed to provide each party with a list of incoming and outgoing funds that was used by a settlement/closing agent (Wickell, 2020). The HUD-1 settlement tatement was received by anyone who applied for a mortgage on or before October 3, 2015. A mortgage that was applied for after October 3, 2015 received a Closing Disclosure in replacement of the HUD-1 document (CFBP, 2017). However, presently, this statement is only used for reverse mortgages (Wickell, 2020). The Closing Disclosure has been implemented in replacement of both the Truth-in-Lending statement and the HUD-1 (Huber, 2019). Usually, this form is received within three business days of a closing. It is important to properly review both the HUD-1 Settle Statement and the Closing Disclosure to assure the information is accurate. All of the expenses are recorded for the charges

2 of the buyer and seller, which makes this document easily comprehendible. This document is important to both buyer and seller. The HUD-1 statement or Closing Disclosure addresses the expenses each party is responsible for or any fee that mutually pertains to both parties. Both parties receive an advantage from this document because it addresses awareness to the fees involved with outgoing and incoming funds. This documents clearly depicts the buyer’s cost in one column and the seller’s costs in another. The HUD-1 form is broken down into several sections. These sections contain information regarding the type of loan used to pay for the property, personal information, information pertaining to the borrower and seller, as well as the financing process (Berger, 2019). A disadvantage to the HUD-1 statement is to be aware that costs have the ability to change until the final closing. The Good Faith Estimate (GFE) is the final note to the HUD-1 Settlement Statement. The GFE is used to compare different offers from lenders or brokers. The Real Estate Settlement Procedures Act (RESPA) requires mortgage lenders or brokers to provide borrowers with a GFE. The GFE is a document that should be compared to the HUD-1 statement and received within three days of a loan application. The borrowers utilize these documents to compare actual cost and fees associated with the GFE (Berger, 2019). The advantage to a Good Faith Estimate is that it allows the borrower to make an informed decision on choosing a suitable loan. However, if a mortgage was applied for on or after October 3, 2015, the document received is a Loan Estimate, which replaces the GFE in most kinds of mortgage loans (CFPB, 2017). Throughout this process and in review of these documents, it is critical to ask questions or raise any concerns to assure the documentation is precise and accurate. When a buyer’s offer is accepted, the buyer’s agent will assist the buyer in submitting a Uniform Residential Loan Application (RPI), (Huber, 2019).

3 Deed of Trust A deed of trust acts as a type of security for a loan (Weintraub, 2020b). This security device is used to give lenders assurance that the debt owed by the borrower will be repaid. In the case of a default on repayment, the lender, who funds a real estate transaction or refinancing, requires borrowers to use the property involved as collateral (Huber, 2019). This secured real estate transaction is used in replacement of a mortgage in some states (Cornell Law School, n.d.). The purpose of a deed of trust, or a trust deed, is to serve as an agreement between the homebuyer and lender (Weintraub, 2020b). There are three parties involved with a deed of trust. The lender provides a borrower with money, the borrower provides a lender with one or more promissory notes, and a trustee is transferred the real property interest from the borrower (Cornell Law School, n.d.). When a deed of trust is signed, the borrower is promising to pay the debt within the terms of a loan as well as the taxes and maintenance of the real estate. The trustee, in this situation, maintains the deed of trust until the loan is completely paid off. This document is important to a lender because when a borrower fails to make loan payments, the lender is able to auction property to retrieve back their money. This document is needed if the house were to be sold because it shows proof that the real estate is fully paid off. A deed of trust can have advantages and disadvantages. An advantage to having a deed of trust is that a borrower can expedite approval from a lender. Also, it helps a borrower in the case that he or she is unable to find a lender that will approve. The deed of trust is the legal document that provides an agreement to pay. By having a deed of trust, the closing cost involved can be significantly lower, which is another advantage. A disadvantage to a deed of trust is that the trustee has control to file a notice of default on the real estate if debt obligation is not met (Weintraub, 2020b). Within a deed, there is an acceleration clause, which states a lender must be

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4 paid back the remaining balance in full if the property were to foreclose. This can present itself as another disadvantage to the borrower if debt is not repaid. When the debt ends or is paid back fully, the trust deed ceases. The beneficiary is invalid once the full amount of money is received under the note(s) and deed of trust. Upon fully repaying debt, any claim of security interest afterward is invalid. There are three ways to remove the trust deed from the title to the property. The deed of trust is removed in foreclosure issued by the trustee’s deed, full repayment by reconveyance, or a mutual agreement by a deed-in-lieu of foreclosure (Huber, 2019). A reconveyance is the document that releases the trust deed lien from the title to real estate when the secured debt is paid in full (Weintraub, 2019a). A deed-in-lieu of foreclosure is the transfer of a home’s title by the homeowner to the lender that holds the mortgage (Weintraub, 2020a). When a loan is taken out to purchase a home, the borrower will either sign a mortgage or a deed of trust. It is important to understand the differences between a mortgage and a deed of trust. A mortgage is used throughout the United States and a deed of trust is only used in some states. Mortgages only involves two parties opposed to three that a deed of trust holds. In a deed of trust, the trustee holds the legal title to the property until debt is received in full, but in a mortgage, both the lender and borrower have interest in the property until the debt is paid off (Weintraub, 2020b). Promissory Note On the other hand, there is a written document that legally holds a promise to pay the underlying debt owed called a promissory note. This document is not considered debt; it stands as evidence that there is existing debt (Huber, 2019). The debtor or payor signs this document and delivers it to the creditor. A promissory note states the written promise of the sum of money to be paid back on demand or at a specified date in the future. Within a promissory note contains

5 all terms regarding indebtedness, the principal amount, interest rate, maturity date, in addition to the issuer’s signature (Barone, 2020). A promissory note can be issued by anyone lending money, usually a bank, individual, company, or business (Weintraub, 2019b). An important piece of information in the promissory note to be aware of is whether or not the interest rate is fixed or subject to change. Before a promissory note is signed, it is in the best interest of the borrower to review the terms of this document and clarify any questions so that everything is fully understood. This document is important to both the buyer and lender. A promissory note is a critical document to a lender because it is the legal agreement that the buyer will repay the lender the full amount of debt. It is important that a borrower acknowledges any early payment penalty associated within the terms of the promissory note. Promissory notes are used in several situations. A promissory note can be used informally or personally; this type of note is typically from a friend or family member to another. Promissory notes are also used for commercial, real estate, and investments (Weintraub, 2019b). Similar to a deed of trust, if a borrower defaults to repay a loan secured by real estate, the lender has the legal authority to foreclose the property and auction off or send debt to a debt collection agency (Weintraub, 2019b). This document is mutually important to both buyer and lender because it withholds a legal promise that both parties agree upon. A promissory note holds both advantages and disadvantages for the borrower and lender. The key advantage to a promissory is the flexibility it holds. The flexibility of a promissory note allows the borrower to specify terms that appropriately suit the needs of a borrower before signing (Wright, 2016). A promissory note may not be beneficial for complex situations requiring a formal loan. An advantage to a promissory note is that they tend to be less lengthy and do not require as much detail as a traditional loan (Kokemuller, 2017). The main advantage is that a promissory note simplifies the

6 loan process. A disadvantage is that it does not offer as great protection against borrower’s default as a formal loan agreement. (Kokemuller,2017). Another disadvantage to a promissory note is that they can be misunderstood due to fine print. The importance of reviewing such documents cannot be stressed enough throughout the real estate process. A promissory note has some similarities to a loan or mortgage. However, a loan contains more detailed information and explains the consequences if the loan is not repaid. During the agreement in a promissory note, the lender is entitled to the note until it is paid off and returned back to the borrower. A promissory note and a mortgage are quite comparable when purchasing a home. The difference between the two is that a promissory note is the legal promise to pay, and the mortgage or previously referred trust deed, documents the actions that will take place in the case a borrower was to default (Weinstraub,2019b). In this case, the mortgage obtains the promissory note along with the title to the house and is recorded in public records (Weintraub, 2019b). Generally, promissory notes are not recorded. The key elements a borrower should be aware of before signing a promissory note are the effective date the promise is to be repaid, the amount owed, the interest rate, and the date of payments along with the promissory notes end. Closing Costs Closing costs are the expenses involved with regard to the price of the property. This transaction involves both the buyer and seller to complete in a real estate closing process (Chen, 2019). The closing costs includes fees associated with the loan origination and underwriting of a mortgage, the real estate commissions, insurance, taxes, and record filing (Chen, 2019). Referring back to the Good Faith Estimate, a lender is legally obligated to share these costs within three business days of an application. In the real estate process, the closing costs are involved when the seller transfers the title of the property to the buyer. The closing costs vary on

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7 the type of loan and property as well as the value of the property. A homebuyer usually pays between 2-5% of the purchase price and can be paid by either the seller or the buyer (Chen, 2019). Some of the fees related to the closing costs can be negotiated with the lender. The borrower should gather information and request quotes from multiple lenders that do not carry extra fees associated with the closing costs. A borrower is subject to a private mortgage insurance fee if the down payment is less than 20%. In relation to previous terms mentioned, closing costs pose advantages and disadvantages. As the seller, if the closing costs are not paid, it may be difficult to find a buyer that agrees to pay the fees. In addition, a buyer could potentially find a different property. As the borrower, the seller can increase the price of the property to compensate for paying the closing costs for the property. The advantages to the seller, is that the property is sold and both parties are satisfied with the terms. A disadvantage to the seller could be accruing the closing costs and the disadvantage to the buyer could be a higher cost of the property. At the end of the day, it comes down to negotiations between buyer and seller to find a suitable agreement between both parties. The seller’s advantages to paying for closing costs are a larger buyer pool, faster sale, and a higher purchase price (May 2016). It can be an advantage to a buyer’s savings if there are no closing costs; this allows for a larger down payment and presents a buyer with more money for things they need (Ray, 2019). Throughout the closing process, it is important to keep track of all costs and fees related to the closing costs. As the buyer, it is critical to have a clear understanding of costs and research where costs can be reduced. These costs can be reduced with negotiations, shopping around, comparing loan estimates and disclosure forms, or rolling costs into mortgage (Chen, 2019). With regards to the previous terms and concepts mentioned, closing

8 costs are just as vital to fully understand and agree upon throughout the real estate closing process. Conclusion The real estate closing process can seem overwhelming and complex. The terms and concepts mentioned throughout this research are explained to familiarize the importance and role it plays in real estate. The review of these terms is to provide beneficial information and grasp a better understanding of the real estate closing process. The closing process can be less complicated if proper research and review of specific real estate documents are recognized. As a buyer, one should interpret all documentation clearly and be sure to understand terms and conditions before signing. Speaking with appropriate professionals and raising any questions and concerns can help ease the closing process. When buying a home, proper analyzation and comprehension is critical to reduce costs and fees where applicable. This concludes the research of the following terms: The HUD-1 settlement statement, a deed of trust, a promissory note, and closing costs. These are just a few of the concepts throughout the real estate closing process that are important to review and help ease the complexity. Purchasing a home is exciting and understanding the process can help make critical decisions to best suit a buyer’s finances and needs.

9 References Barone, A. (2020). How Promissory Notes Work. Retrieved July 09, 2020, from https://www.investopedia.com/terms/p/promissorynote.asp Berger, R. (2019). HUD-1 Settlement Statement: How to Read a Closing Statement. Retrieved July 09, 2020, from https://www.doughroller.net/mortgages/hud-1-settlement-statement/ Chen, J. (2020). Closing Costs Definition. Retrieved July 10, 2020, from https://www.investopedia.com/terms/c/closingcosts.asp Cornell Law School. (n.d.). Deed of Trust. Retrieved July 09, 2020, from https://www.law.cornell.edu/wex/deed_of_trust Grimsley, S. (2016). The Advantages of a Promissory Note. Retrieved July 10, 2020, from https://yourbusiness.azcentral.com/advantages-promissory-21721.html Guttentag, J. M. (2010). The mortgage encyclopedia: The authoritative guide to mortgage programs, practices, prices, and pitfalls . New York, NY: McGraw-Hill. Hoagland, H. E. (1949). Chapter 65: Trust deed characteristics. In Real Estate Principles ... Second edition . New York: McGraw-Hill Book. Huber, W. (2019). Chapter 54: Conventional financing on a sale, and the buyer’s agent. In California Real Estate principles 16th edition (16th ed., p. 361). Educational Textbook Company. Kokemuller, N. (2017). Advantages and Disadvantages of a Promissory Note. Retrieved July 10, 2020, from https://www.sapling.com/6750772/advantages-disadvantages-promissory May, K. (2016). What Are the Benefits of Paying a Buyer's Closing Costs? Retrieved July 10, 2020, from https://smallbusiness.chron.com/benefits-paying-buyers-closing-costs- 37772.html Ray, J. (2019). No Closing Cost Mortgage Advantages and Disadvantages. Retrieved July 10, 2020, from https://thefinancenerd.com/no-closing-cost-mortgage-advantages-and- disadvantages/ Weintraub, E. (2019). A Deed of Reconveyance Shows That Your Loan Is Paid Off In Full. Retrieved July 09, 2020, from https://www.thebalance.com/what-is-a-deed-of- reconveyance-1798622 Weintraub, E. (2019). The Simple Elements of a Promissory Note as it Relates to Real Estate. Retrieved July 10, 2020, from https://www.thebalance.com/promissory-note-1798611

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10 Weintraub, E. (2020). Deed in Lieu of Foreclosure Defined. Retrieved July 09, 2020, from https://www.thebalance.com/what-is-a-deed-in-lieu-of-foreclosure-1798489 Weintraub, E. (2020). What Is a Deed of Trust? Retrieved July 09, 2020, from https://www.thebalance.com/definition-of-deed-of-trust-1798782 Wright, T. (2016). The Advantages of a Promissory Note. Retrieved July 10, 2020, from https://smallbusiness.chron.com/advantages-promissory-71963.html