Federal Laws That Affect Real Estate Closing

Generally, real estate closing must comply with a variety of federal laws. Many federal real estate regulations protect the heath and financial interests of ordinary consumers. Some federal regulations, however, are intended to protect government interests. For example, certain requirements assist the Internal Revenue Service with real estate taxation information.

The Real Estate Settlement Procedures Act requires that lenders provide good faith estimates of loan costs when borrowers apply for loans. Also, HUD-1 statements, which disclose final loan costs, must be prepared by lenders and signed by borrowers at closing. Borrowers may demand reviews of HUD-1 statements 24 hours before closing. RESPA also requires the disclosures of any referrals exchanged between parties, such as title companies, real estate agents or mortgage representatives.

Generally, sellers of residential structures built in 1978 or later must disclose any known presence of lead-based paint. Sellers and buyers must sign disclosures before closing acknowledging compliance with the lead-based paint disclosure requirements. A buyer may conduct a lead-based paint inspection within 10 days after signing a purchase agreement. Or, he may waive the inspection in writing to speed up the sale. Buyers also must receive government-approved pamphlets about the risks of lead-based paint before closing.

The Fair Housing Act prohibits discrimination in real estate transactions based on race, color, national origin, religion, sex, familial status, and disability. A person cannot engage in discrimination against a buyer or seller during the marketing, negotiation, lending or closing process. For example, a bank cannot require an Hispanic borrower to sign extra or different documents at closing based on his ethnicity. The U.S. Department of Housing and Urban Development accepts complaints for fair housing violations.

Closing agents must report to the IRS the amount of sales proceeds for certain real estate transactions. For example, residential properties that sell for more than $250,000, or $500,000 if the property is owned by a married couple, must be reported. Generally, residential home sales must be reported to the IRS if the sellers have not lived at the property for two of the preceding five years. Exceptions for reporting rules apply, such as transfers for nominal values between related parties.