Real Estate Settlement Procedures Act, RESPA
Buying or selling a house can be a very complicated process. The term "real estate closing" can send chills up the spine of just about anyone who has gone through the process. For a person in the house flipping business, this is a critical step in the process, and the costs and fees associated with the sale can make the difference between profit and thinking of oneself as a "sucker."
Luckily, there are some legal protections for the buyer of a house seeking mortgage financing. These come in the form of the Real Estate Settlement Procedures Act (RESPA) that requires certain disclosures and notifications before a home loan can be issued. These disclosures are designed to detail costs and expenses that go hand-in-hand with the settlement.
The RESPA legislation was first passed in 1974 and was designed to help house buyers to be better shoppers. In particular, it sought to limit hidden costs passed onto the buyer and eliminate kickbacks and the sharing of fees between parties involved in selling the house. Any house flipper should be aware of these regulations and have a good understanding of the RESPA requirements.
In general, RESPA covers home loans for properties of from a one- to four-family dwelling. It covers mortgages, loan assumptions, and refinancing in addition to other home loans. It also requires that the person seeking a mortgage receive certain disclosure forms at various periods during the process.
Among the requirement of the legislation, RESPA mandates that a borrower be given a Good Faith Estimate (GFE) of the costs they will incur during the settlement and what they will have to pay in order to close and receive their loan. For a house flipper, such fees can cut into the profit. RESPA also requires the lender to disclose whether or not the loan will be transferred to another lender after the closing.
The act also prohibits certain fees and kickbacks between the sellers and their agents that can further increase the cost of the loan. It also requires that the seller disclose if they have referred the buyer to lender with whom the seller has an interest. Other provisions of the law involve annual disclosures that will be of less importance to the house flipper who does not intend to own the property long term.