The largest part of any real estate transaction is the money disbursement. How do banks handle it? Who is paid first? These are just a few of the questions buyers and sellers often have when buying/selling a home. The truth is the bank does not usually handle the disbursement – a third party, such as the title company or the real estate attorney handles the disbursement and it usually occurs in no particular order. The funding bank does have final say in who receives what money, but the bank does not do the physical act of moving the money – the closing agent handles it and is why they receive payment from the buyer and seller in order to facilitate the closing.
Buyers Bringing Money
Before money can begin to exchange hands, the buyer must bring their required amount of money to the table. It needs to either be in official form, which means a cashier’s check or wire transfer in order to ensure the validity of the money. This not only ensures the title company or attorney that the funds are good, but also that they can be distributed to the appropriate party. Generally, buyers bring money to the table for the down payment, closing costs, and to set up their escrow account for taxes and insurance. As long as this money is in official form, the title company can forward the money to the appropriate parties and reimburse themselves with the cashier’s check the buyer brought, which is considered an official form of payment.
Paying off the Bank
In most cases, the bank receives the first payment. This bank holds the seller’s mortgage. Sometimes there is more than one bank involved if there were multiple mortgages held by the seller. Once the bank receives their funds, the closing agent is free to disburse the remaining funds to the seller, real estate agent, and third parties involved in the process. In order for the buyer to receive a title that is free and clear of any liens with the exception of their own mortgage, however, the seller’s banks must be paid off first.
Paying the Real Estate Agent
Once the bank receives their funds and there is no longer a lien on the property, the seller pays the real estate agent. This usually comes directly out of the proceeds of the sale. In general, real estate agents receive around 6% of the sales price of the home as a commission. If you sold your home for $200,000 and you owed $150,000 on it, this would leave $50,000 in proceeds. Out of that $50,000, the title company would cut a check to the real estate agent for $12,000.
Paying Third Parties in a Real Estate Transaction
Aside from the real estate agent, typically other third parties require payment. Some of these charges are the responsibility of the buyer and others are the seller’s responsibility. Every transaction will differ, but in general, sellers pay or help pay for the recording fees, escrow fees, transfer tax, home warranty (if applicable), and title insurance. Every contract will differ based on the agreed upon terms between the buyer and seller as well as the local requirements in your area. These third parties also receive certified funds from the closing agent unless the buyer or seller pays them outside of the closing (POC).
Setting Up an Escrow Account
If the lender requires the buyer to set up an escrow account or the buyer wishes to have one set up, the buyer must bring the funds to the closing. These funds go directly to the account, which pays for the taxes and insurance throughout the year. The time of year you close on the purchase of the home will determine how much money you must bring to fund the account. At a minimum, 2 months’ worth of reserves is the general requirement in order to ensure there is enough money to pay the bills when they become due.
Paying the Seller
The final person to receive funds is the seller. The seller receives any funds left over after the appropriate parties receive payment. Of course, the seller is not responsible for every cost that takes place at the closing. In fact, the seller should know exactly how much money he will receive at the closing before he gets there. The law requires both buyer and seller to receive a closing statement, or HUD-1, before the closing. This enables the seller to go over the statement and make sure everything is documented as was agreed upon during the negotiations. In addition, the seller’s attorney can have time to look over the closing statement to ensure everything is as it should be.
The money, which exchanges hands at a closing, can be either a check or “live funds” which are wire transfers. How the third parties, real estate agent, and seller receive their funds depends on the preference of the title company or attorney closing the loan. If there is a specific preference of any party involved, they should make these needs known ahead of time. Sometimes if a wire transfer is requested, the receiving party might have to wait a little longer for the money, but it is an instant transfer, so the funds do not take long. If the closing agent writes a check, you usually receive it right at the closing.
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