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Unformatted text preview: from area to area but is always negotiable. 14-32 Licensing School for Appraisal, CPA, Contractors, Insurance, Real Estate, Notary, Nurse, Food Handlers, Tax and Securities 14: THE LOAN PROCESSING
RECURRING CLOSING COSTS
Recurring closing costs are the expenses the borrower also pays at closing. These expenses continue as long as the borrower owns the property, and includes items such as taxes, insurance, interest, and rents. Tax Reserve – This item is also called an impound, escrow, or trust fund account. A tax reserve is collected when the monthly loan payment will include not only principal and interest but also taxes and hazard insurance. On certain loans such as FHA and high (95 percent) LTV ratios, the collection is mandatory. In other cases, buyers may request that their payments include taxes and insurance. This is a depositor's own account; the bank does not control it. As the lender collects these funds each month, they are set aside. When the tax and insurance bills become due, the buyer/owner pays them out of the accumulated funds. To the borrowers, these funds are like their own bank account and are not under the disposition of the lender. Lenders must pay 2% interest on impound accounts when they collect. If loan payments are to include taxes and insurance, the lender sets up a tax reserve at time of closing. The amount of reserve collected varies according to the date of the first monthly payment. Lenders use schedules to determine the tax reserve. A typical tax reserve schedule appears in Figure 14–1. Why do lenders need what appears to be a one–month cushion? lenders with impound accounts must pay property taxes by December 10 and April 10, or the taxes become delinquent. If the lender relied solely on the December and April payments, it might not have enough in the account to make the proper payments, since the borrower has a 15–day grace period. Thus, the lender has a “right” to the one–month cushion. Tax Proration – Most sales agreements provide for proration of taxes between bu...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10