Settlement Pitfalls II: The HUD 1 Settlement
If you are in the process of buying or selling a home, or contemplate doing so in the near future, this is vital information to help you understand all of the "numbers" involved in your transaction. If you are not in the process at the present time, this may be about as exciting as watching paint dry. However, VR SAM recommends you print this page and use it when reviewing your settlement statement.
Remember, this is your money and the Realtor, lender, settlement company and Attorney (if applicable) are all working for you. You are paying for, and deserve complete explanation of every charge -- to the penny.
For starters, the HUD 1 form (Housing and Urban Development Form) is the universal document used to settle almost all real estate transactions. This is where all the moving parts of your transaction come together. It contains all of the important financial information relating to your transaction -- and it can be very confusing and frustrating! Your settlement company (sometimes called title or escrow company) will assimilate all of the financial information from your lender, real estate agent, taxes, government charges, and their own service fees into a bottom line for the buyer and seller, all on one document -- the HUD 1.
Ideally the final HUD 1 with "the final numbers" should be given to both parties and their agents at least one day prior to settlement for review. Unfortunately, this rarely happens and is frequently due to final "lender underwriter" requirements or backlog within the settlement company. None the less, it is prudent to insist that the HUD 1 with the best available information be presented to you and your agent in ample time to review prior to settlement. Don't be bashful about pressing this issue -- they are all working for you. It is much easier to resolve discrepancies (and they do happen) in advance rather than to hash them out during the actual settlement. It's also important to know how much money the buyer needs to bring to the table (usually by certified bank check which requires lead time). The seller is understandably interested in knowing the actual amount of the proceeds from the sale. Since the purchaser's charges are usually more extensive and confusing, we will deal only with those charges below.
VR SAM recommends that you specifically request the HUD 1 be faxed or emailed to you and your agent three days in advance and that you be notified of any delays and the reasons for the delays.
There are two pages to the HUD 1. On both pages, the purchaser's "numbers" are in the left column, the sellers in the right column. Below are the categories of charges for the purchaser:
- Lender fees (lines 800-811) -- these fees are sent from the lender to the settlement company and should correspond closely to the Good Faith Estimate received by the purchaser from the lender. If they don-t, you should contact your loan officer immediately to reconcile discrepancies. By the way, in the past,
VR SAM has emphasized the importance of working with a service-oriented, reputable loan officer/company. It always preferable to have your loan officer physically at the settlement to resolve any late issues on these charges as the settlement company will not be able to do so.
Examples of lender fees are:
o Origination or discount points (note: origination points are how the lender is paid and is essentially his/her fee for their work. Discount points essentially "buy down" the interest rate and may be considered deductible interest on your tax return (check with your tax preparer). Therefore, the distinction between the two is important.
o Processing Fees
o Credit Check
o Flood Certification Fee
- Pre-paids and/or escrows (lines 900-1009): These monies actually belong to the purchaser, but are held in escrow to protect the lender's interest. The lender requires them, the settlement company calculates them. They will typically include:
o Escrow for property taxes
o Escrow for home owner's insurance
o Pre-paid interest from the day of settlement through the end of the month
Most lenders' loan products will charge the purchaser interest, prorated daily, for interest from the day of settlement through the end of the month. However, from that point forward, interest is paid in arrears. Example, if you settle on March 15, you will pay pre-paid interest, at settlement, for March 15 through March 31. However, your next payment will be on May 1 -- for the month of April. There are loan products that are exceptions to this norm, so verify your product with your loan officer.
The final escrow requirements are often significantly different from the lender's Good Faith Estimate and can be a major surprise and cause for consternation for the purchaser. The difference can be caused by a change in settlement date, the actual date property taxes are paid from escrow to the tax collection department, or errors in the Good Faith Estimate. It is important to remember that when the purchaser subsequently sells the home, escrow balances should be returned at (or shortly after) settlement. The settlement company should explain exactly how these requirements were calculated.
- Title Charges (lines 1100-1113): These are charges by the settlement company for their services, or collected on behalf of the government. Generally, the purchaser chooses the settlement company and you should compare and compete settlement charges BEFORE executing a contract. Settlement companies will typically email or fax you a copy of their normal fees/charges upon request. Examples are:
o Title Insurance -- this may be the largest settlement cost in some areas of the country and is usually based on the total loan/s amount. It is very important that you understand the purpose of title insurance and ensure that you are buying BOTH lenders and owners title insurance. Don't hesitate to query the settlement company on this charge and ask them if they will discount the charge.
o Document preparation fees
o Attorney fees
o Title search fees
o Courier fees
- Government Recording / Transfer Charges (lines 1200-1204)
o Recording fees
o Government stamps -- this varies by state / county / city and are essentially transaction (or sales) taxes based on the purchase price and calculated by the settlement company.
- Miscellaneous (lines 1300-1308)
o Survey (required by lender)
o Pest (Termite Inspection fees -- required by lender
o Home Owners Association capital account and / or advance dues
Note: Generally the broker's commission is paid for by the seller and does not show up as a charge to the purchaser (lines 700-703). Make sure you understand your arrangement with your broker! Also, ensure that any credits received from the seller or any other entity show up in the purchaser's column (ie. for an agreed upon home repair).
Line 1400 (at the very bottom) will show the sum of all charges and credits to the purchaser. This number will be entered in the appropriate lines of page one, left (purchaser?s) column. This portion of the settlement statement is thankfully somewhat more intuitive.
It first looks at the total amount due from the borrower to include the sales price, settlement costs (from line 1400, second page), and other miscellaneous charges. It then considers the source of funds to pay these charges such as the loan/s, earnest money, and additional down payment. Finally, it looks at any credits due from the seller for pro rated taxes or other seller concessions. It then sums all of the charges, source of funds, and credits to the amount the purchaser must "bring to the table" in line 303 -- the bottom line. (Note, in some cases, the purchaser may be due a refund).
We hope this helps demystify the HUD 1. While we can't cover the endless possibilities that can occur within a settlement, we close with this advice:
Stay engaged throughout the process. Insist on explanation of every charge on the HUD 1. And as always, prior preparation is the key to a successful settlement.
We hope you will join us next month as we pay a special tribute to military spouses who successfully navigate the home purchase / sale transactions solo. We think you will find them inspiring and nothing short of awesome!