Settlement Costs
A HUD Guide - Revised Edition
|
Introduction |
||
|
|
For
many people, buying a home is the single most significant financial step of a
lifetime. The Real Estate Settlement Procedures Act of 1974 (RESPA), a
Federal statute, helps to protect you at this step. Settlement is the
formal process by which ownership of real property passes from seller to
buyer. It is the end of the home buying process, the time when title to the
Property is transferred from the seller to the buyer. RESPA covers most
residential mortgage loans used to finance the purchase of one- to
four-family properties, such as a house, a condominium or cooperative
apartment unit, a lot with a manufactured home, or a lot on which you will
build a house or place a manufactured home immediately following settlement.
RESPA does not apply to loans to refinance the home. RESPA is not designed to
set the prices of settlement services. Instead, it provides you with
information to take the mystery out of the settlement process, so that you
can shop for settlement services and make informed decisions. This information
booklet was prepared as provided in RESPA by the Assistant Secretary for
Housing - Federal Housing Commissioner of the U.S. Department of Housing and
Urban Development. Part One of this booklet describes the settlement process and nature of
charges and suggests questions you might ask of lenders, attorneys and others
to clarify what services they will provide you for the charges quoted. It
also contains information on your rights and remedies available under RESPA,
and alerts you to unfair or illegal Practices. Part Two of this
booklet is an item -by-item explanation of settlement services and costs,
with sample forms and worksheets that will help you in making cost
comparisons. Remember that terminology varies by locality so that terminology
used here may not exactly match that used in your area. For example,
settlement is sometimes called closing, and settlement charges are frequently
referred to as closing costs. |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
||
|
|
|
|
|
Settlement Costs - Part I
|
|
|
|
|
|
What Happens and When |
|
Suppose
you have just found a home you would like to buy. In a typical situation,
when you reach an agreement with the seller on the price, you then sign a
sales contract. The terms of the sales contract relating to settlement costs
can be negotiated to your benefit, as the booklet explains below. Next you will probably
seek a mortgage loan to finance the purchase. (A mortgage is known as a deed
of trust or security deed in some areas.) This booklet suggests questions you
should raise as you shop for a lender. When you file your
application for a loan, the lender is required by RESPA to provide a Good
Faith Estimate of the costs of settlement services and copy of this booklet.
The lender has three business days, after written loan application, to
deliver or mail these materials to you. Between loan
application time and settlement, you usually have a chance to shop for
settlement services, to ensure that you will obtain good value for your
money. Finally, one business
day before settlement if you so request, the person conducting the settlement
must allow you an opportunity to see a HUD-1 Settlement Statement that shows
whatever figures are available at that time for settlement charges you will
be required to pay. At settlement, the completed HUD-1 Settlement Statement
will be given to you. Note: In some parts of
the country where there is no actual settlement meeting, or in cases where
neither you nor your authorized agent attend the closing meeting, the person
conducting settlement has the obligation to deliver the HUD-1 Settlement
Statement to you as soon as practicable after settlement. There is no standard
settlement process followed in all localities; therefore, what you
experience, involving many of the same services, will probably vary from the
description in this booklet. |
|
|
|
|||
|
Shopping for Services |
|
At the
time of settlement, you are committed to complete the purchase of the
property and may have made a partial payment, sometimes called earnest money,
to the seller or his agent. Services may have been performed for which you
are obligated to pay. Unless a seller fails to perform a legally binding
promise or has acted in a fraudulent fashion, you are normally obligated to
complete your part of the contract and pay settlement costs. Thus the time to
decide the terms of sale, raise questions, and establish fair fees is not at
time of settlement, but earlier, when you negotiate with the seller and providers
of settlement services. By the time of settlement any changes in settlement
costs and purchase terms may be difficult to negotiate. You can also negotiate
with the seller of the home about who pays various settlement fees and other
charges. There are generally no fixed rules about which party pays which
fees, although in many cases this is largely controlled by local custom. Among the many factors
that determine the amount you will pay for settlement costs are the location
of your new home, the type of sales contract you negotiate, the arrangements
made with the real estate broker, the lender you select, and your decisions
in selecting the various firms that provide required settlement services. If
the chosen home is located in a "special flood hazard area",
identified as such by the Federal Emergency Management Agency (FEMA) on a
flood insurance map, the lender may require you to purchase flood insurance
pursuant to Federal law. Information on flood insurance availability, limits
of coverage and copies of maps can be obtained through the National Flood
Insurance Program (NFIP) by calling this toll- free number 800-638-6620 (in
Maryland - 800-492-6605) or by writing to NFIP, P.O. Box 619, Lanham,
Maryland 20706. |
|
|
|
|||
|
Role of the Broker |
|
Although
real estate brokers provide helpful advice on many aspects of home buying,
they serve the interests of the seller, not you, the buyer. The broker's
basic objective is to obtain a signed contract of sale which properly
expresses the agreement of the parties, and to complete the sale. However, as
State licensing laws require that the broker be Pair in his dealings with all
parties to the transaction, you should feel free to point this out to the
broker if you feel you are being treated unfairly. If you have any questions
concerning the conduct of an agent or broker, you should contact your State
Real Estate Commission or licensing department. A broker may recommend
that you deal with a particular lender, title company, attorney, or other
provider of settlement services. Ask brokers why they recommend a particular
company or firm in preference to others. Advise them that while you welcome
their suggestions (and, indeed, they probably have good contacts), you
reserve the right to pick your own providers of services. |
|
|
|
|||
|
Negotiating a Sales Contract |
|
If you
have obtained this booklet before you have signed a sales contract with the
seller of the property, here are some important points to consider regarding
that contract. The sales agreement you
and the seller sign can expressly state which settlement costs you will pay
and which will be paid by the seller although some may be negotiable up to
time of settlement. Buyers can and do negotiate with sellers as to which
party is to pay for specific settlement costs. The success of such
negotiations depends upon factors such as how eager the seller is to sell and
you are to buy, the quality of the home itself, how long the home has been on
the market whether other potential buyers are interested, and how willing you
are to negotiate for lower costs. If the contract is silent on these costs,
they are still open to negotiation. There is no standard
sales contract which you are required to sign. You are entitled to make any
modifications or additions in any standard form contract to which the seller
will agree. You should consider including the following clauses:
Before you sign the
sales contract, make sure that it correctly expresses your agreement with the
seller on such important details as the sales price of the home, method of
payment, the time set for your taking possession, what fixtures, appliances,
and personal property are to be sold with the home, and the other items
described above. The above list is not
complete, but does illustrate the importance of the sales agreement and its
terms. Before you sign a sales contract you may want to ask an attorney to
review the proposed agreement and determine if it protects your interests,
for once signed, the contract is binding on you and the seller. If you do not
know of an attorney, you may wish to consult the local bar association
referral service or neighborhood legal service office. |
|
|
|
|||
|
Selecting an Attorney |
|
If you
seek the aid of an attorney, first ask what services will be performed for
what fee. If the fee seems too high, shop for another lawyer. Does the
attorney have substantial experience in real estate? The U.S. Supreme Court
has said that it is illegal for bar associations to fix minimum fee schedules
for attorneys, so do not be bashful about discussing and shopping for legal
fees you can afford. Your attorney will understand. Questions you may wish
to ask the attorney include: What is the charge for reading documents and
giving advice concerning them? For being present at settlement? Will the
attorney represent any other party in the transaction in addition to you? In
some areas attorneys act as closing agents handling the mechanical aspects of
the settlement. A lawyer who does this may not fully represent your interests
since, as closing agent, he would be representing
the seller and other interests as well. |
|
|
|
|||
|
Selecting a Lender |
|
Your
choice of lender will influence not only your settlement costs, but also the
monthly cost of your mortgage loan. Lending institutions
may require certain settlement services, such as a new survey or title
insurance and they may charge you for other settlement-related services, such
as the appraisal or credit report. You may find, in shopping for a lender,
that other institutions may not have such requirements. Part Two of this
booklet provides a description of the various kinds of services that may be
required and fees that may be charged to you. You will also find a worksheet
in Part Two, which you can use to compare requirements and cost estimates
from different lenders. Many lending
institutions deal regularly with certain title companies, attorneys,
appraisers, surveyors, and others in whom they have confidence. They may want
to arrange for settlement services to be provided through these parties. This
booklet discusses your rights in such a situation under the section below on
Home Buyer's Rights. If you choose a lending institution which allows you a
choice of settlement service providers, you should shop and compare among the
providers in your area, to find the best service for the best price. Where
the lender designates the use of particular firms, check with other firms to
see if the lender's stated charges are competitive. Questions you may want
to ask the lender should include these:
Once you have selected
a lender, you will probably visit its office and complete a loan application.
The application will ask for information such as your place of employment,
assets, liabilities, and other similar information which the lender will rely
upon in judging whether you are an acceptable credit risk. Many defaults
occur because homebuyers provide, either on their own or with the assistance
of others, incomplete or false information when applying for their mortgage
loan. False application data can lead to loss of your home, an adverse credit
rating, and, in the case of a Government guaranteed or insured loan, criminal
prosecution by the Government. It is important, therefore, that you Do Not:
If you are applying for
a mortgage loan that will be insured or guaranteed by the Federal Government,
you should be aware that there are severe penalties for fraud. intentional misrepresentation or conspiracy to influence
the issuance of mortgage insurance or guarantee by the Federal Government
Providing false information on the loan application can subject you to a
possible prison term and/or a fine of up to $10.000. If you are aware of any
fraud in a Federal Government program, you should report it to the Office of
Inspector General for that particular agency. |
|
|
|
|||
|
Selecting a Settlement Agent |
|
Settlement
practices vary from locality to locality, and even within the same county or
city. In various areas, settlements are conducted by lending institutions,
title insurance companies, escrow companies, real estate brokers, and
attorneys for the buyer or seller. By investigating and comparing practices
and rates, you may find that the first suggested settlement agent may not be
the least expensive. You might save money by tailing the initiative in
arranging for settlement and selecting the firm and location which meets your
needs. |
|
|
|
|||
|
Securing Title Services |
|
A title
search may take the form of an abstract a compilation of pertinent legal
documents which provides a condensed history of the property ownership and
related matters. In many areas title searches are performed by extracting
information from the public record without assembling abstracts. In either
situation, an expert examination is necessary to determine the status of
title and this is normally made by attorneys or title company employees. In
areas where both title insurance companies and attorneys perform these and
other settlement services, compare fees for services (such as title
certification, document preparation, notary fee, closing fee, etc.), provided
by each to determine the better source for these services. In many jurisdictions a
few days or weeks prior to settlement the title insurance company will issue
a binder (sometimes called a Commitment to Insure) or preliminary report a
summary of findings based on the search or abstract It is usually sent to the
lender for use until the title insurance policy is issued after the
settlement The binder lists all the defects in and liens against the title
identified by the search. You should arrange to have a copy sent to you (or
to an attorney who represents you) so that you can raise an objection if
there are matters affecting the title which you did not agree to accept when
you signed the contract of sale. Title insurance is
often required to protect the lender against loss if a flaw in title is not
found by the title search made when the home is purchased. You may also get
an owner's title policy to protect yourself. In some States, attorneys
provide bar-related title insurance as part of their services in examining
title and providing a title opinion. In these States the attorney's fee may
include the title insurance premium, although the total title-related charges
in the transaction should be taken into account in determining whether you
will realize any savings. A title insurance
policy issued only to the lender does not protect you. Similarly, the policy
issued to a prior owner, such as the person from whom you are buying the
home, does not protect you. If you want to protect yourself from loss because
of a mistake made by the title searcher, or because of a legal defect of a
type which does not appear on the public records, you will need an owner's
policy. Such a mistake rarely occurs but when it does, it can be financially
devastating to the uninsured. If you buy an owner's policy it is usually much
less expensive if purchased simultaneously with a lender's policy. To reduce title
insurance costs, be sure to compare rates among various title insurance
companies, and ask what services and limitations on coverage are provided by
each policy so that you can decide whether a higher rate is consistent with
your needs. Depending upon practice
in your jurisdiction, there may be no need for a full historical title search
each time title to a home is transferred. If you are buying a new home or a
home which has changed hands within the last several years, call the title
company that issued the previous title insurance policy and ask about a
"reissue rate", which would be a lower charge than for a new
policy. If the title insurance policy of the previous owner is available,
take it to the title insurer or lawyer whom you have selected to do your
search. To mark the boundaries
of the property as set out in the title, lenders may require a survey. You
may be able to avoid the cost of a repetitive complete survey of the property
if you can locate the surveyor, who previously surveyed the property, and
request an update. However, the requirements of investors who buy loans
originated by your lender may limit the lender's discretion to negotiate this
point Check with the lender or title company on this. |
|
|
|
|||
|
Home Buyer's Rights |
|
Special
Information Booklet When you submit or the lender prepares your written
application for a loan, the lender is legally required, under RESPA to give
you a copy of this booklet If the lender does not give it to you in person on
the day of your loan application, it must deliver it to you or put it in the
mail to you no later than three business days after your application is
filed. |
|
|
|
|||
|
Good Faith Estimate |
|
When
you file your application for a loan, the lender must also, under the terms
of RESPA, provide you with a Good Faith Estimate of settlement services
charges you will likely incur. If the lender does not give it to you in
person on the day of your loan application, it has three business days in
which to put it in the mail or deliver it to you. See Part Two of this
booklet for a full item-by-item discussion of settlement services. On the
form entitled "Settlement Statement", you will find Section L,
which lists possible settlement services and charges you will encounter. The lender is required
to give you a Good Faith Estimate, based upon the lender's experience in the
locality in which the property is located, for each settlement charge in
Section i of the HUD-1 Settlement Statement that
the lender anticipates you will pay, except for paid-in-advance hazard
insurance premium (line 903) and other reserves deposited with the lender
(all Section 1000 items). The Estimate may be stated as either a dollar
amount or range for each charge. Where the lender designates the use of a
particular firm, the lender must make its Good Faith estimate based upon the
lender's knowledge of the amounts charged by the firm. The form used for this
Good Faith Estimate must be concise and clear, and the estimates must bear a
reasonable relationship to the costs you will likely incur. If the lender
provides to you a Good Faith Estimate in the form of ranges, ask the lender
what the total settlement costs will most likely be. While the lender is not
obligated to provide this information under RESPA, it is important for you to
know as you evaluate the different mortgage packages being offered you. Lenders are not
required to give a Good Faith Estimate for reserves deposited with them or
for the prepaid hazard insurance premium because these charges require
information not normally known to the lender at time of loan application. It
is important for you to make these calculations because they can represent a
sizeable cash payment you may have to make at settlement Calculation of the
reserve items is presented later in this booklet under "Reserve
Accounts". Ask the lender what its policies are in terms of reserve
accounts, for what items the lender requires reserves and for what period of
time. You may want to ask the lender to run through a hypothetical
calculation for you based upon the date you will most likely close on the home.
Other assumptions may be necessary, for example, the assessed value of the
property for determining property taxes. The lender can probably be more
specific on hazard insurance premiums, particularly for those coverages which a lender requires. Once you have obtained
these estimates from the lender be aware that they are only estimates. The
final costs may not be the same. Estimates are subject to changing market
conditions, and fees may change. Changes in the date of settlement may result
in changes in escrow and proration requirements. In
certain cases, it may not be possible for the lender to anticipate exactly
the pricing policies of settlement firms. Moreover, Your own careful choice
of settlement firms might result in higher costs. Remember that the lender's
estimate is not a guarantee. Further, RESPA does not give a specific remedy
to HUD to remedy material deviations from the Good Faith Estimate. |
|
|
|
|||
|
Lender Designation of Settlement
Service Providers |
|
Some
lending institutions follow the practice of designating specific settlement
service providers to be used for legal services. We examination services,
title insurance, or the conduct of settlement. Where this occurs the
Good Faith Estimate must clearly state that use of the particular provider is
required and that the estimate is based on charges of the particular
provider, give the name, address and telephone number of each designated
provider, and describe the nature of any relationship between each provider
and the lender. While designated firms
often provide the service needed. a conflict of
interest may exist. Take, for example, the situation where the provider must
choose between your interests and those of the lender. Where legal services
are involved, it is wise to employ your own attorney to ensure that your
interests are properly protected. k is wise for you
to contact other firms to determine whether their costs are competitive and
their services are comparable. A lender may not
require use of a provider if the lender and provider are part of a
"controlled business arrangement," which is discussed further under
"Protection Against Unfair Practices." |
|
|
|
|||
|
Disclosure of Settlement Costs One
Day Before Closing and Delivery |
|
One
business day before settlement you have the right to inspect the settlement
form, called the HUD-1 Settlement Statement on which are itemized the
services provided to you and fees charged to you. This form (developed by the
U.S. Department of Housing and Urban Development) is filled out by the
settlement agent who will conduct the settlement. Be sure you have the name,
address, and telephone number of the settlement agent if you wish to inspect
this form or if you have any questions. The settlement agent
may not have all costs available the day before closing, but is obligated to
show you, upon request, what is available. The HUD-1 Settlement
Statement must be delivered or mailed to you (while another statement goes to
the seller) at or before settlement If, however, you waive your right to
delivery of the completed statement at settlement it will then be mailed at
the earliest practicable date. In parts of the country
where the settlement agent does not require a meeting, or in cases where you
or your agent do not attend the settlement, the statement will be mailed or delivered
as soon as practicable after settlement and no advance inspection is
required. The HUD-1 Settlement
Statement is not used in situations where: (1) there are no settlement
charges to the buyer (because the seller has assumed all settlement-related
expenses); or (2) the total amount the borrower is required to pay for all
charges imposed at settlement is determined by a fixed amount and the
borrower is informed of this fixed amount at the time of loan application. In
the latter case, the lender is required to provide the borrower, within three
business days of application. an itemized list of
services rendered. |
|
|
|
|||
|
Escrow Closing |
|
Settlement
practices differ from State to State. In some parts of the country,
settlement may be conducted by an escrow agent, which may be a lender, real
estate agent title company representative, attorney, or an escrow company.
After entering into a contract of sale, the parties sign an escrow agreement
which requires them to deposit specified documents and funds with the agent
Unlike other types of closing, in a so-called escrow closing the parties do
not meet around a table to sign and exchange documents. The agent may request
a title report and policy; draft a deed or other documents; obtain rent
statements; pay off existing loans; adjust taxes, rents, and insurance
between the buyer and seller. compute interest on
loans; and acquire hazard insurance. All this may be authorized in the escrow
agreement If all the papers and monies are deposited with the agent within
the agreed time, the escrow is "closed". The escrow agent then
records the appropriate documents and gives each party the documents and
money each is entitled to receive, including the completed HUD-1 Settlement
Statement If one party has failed to fulfill its agreement, the escrow is not
closed and legal complications may follow. |
|
|
|
|||
|
Truth-in-Lending |
|
The
lender is required, usually within three days of receiving your application,
to give you or place in the mail to you a Truth-in-Lending statement that
will disclose the "annual percentage rate" (APR). The APR reflects
the cost of your mortgage loan as a yearly rate. This rate may be higher than
the rate stated in your mortgage or deed of trust note because the APR
includes. in addition to interest, loan discount or
points (as defined below in Item 802 of the Section of this Booklet which
discusses each specific settlement service), fees, and other credit costs.
The Truth-in-Lending statement also discloses other useful information, such
as the finance charge, schedule of payments, late payment charges, and
whether or not additional charges will be assessed if you pay off the balance
of your loan before it is due (prepayment penalty). Some of the information
that the lender is required to disclose may not be certain at the time the
lender is required to give you the Truth-in-Lending statement If so, the
lender will indicate that the uncertain disclosures are estimates. Should the
actual APR differ by more than a small amount from the lender's estimate, the
lender must give you a corrected Truth-in-Lending statement no later than at
settlement. However, if the estimated APR proves to be correct, the lender
need not give you a new Truth-in-Lending statement, even if other disclosures
have changed. For this reason, you may want to ask the lender shortly before
settlement if all the Truth-in-Lending disclosures are still accurate. For
more detailed information regarding Truth-in-Lending, contact the Division of
Consumer and Community Affairs, Board of Governors of the Federal Reserve
System, |
|
|
|
|||
|
Protection Against Unfair Practices |
|
A
principal finding of Congress in the Real Estate Settlement Procedures Act of
1974 is that consumers need protection from "...unnecessarily high
settlement charges caused by certain abusive practices that have developed in
some areas of the country." The potential problems discussed below may
not be applicable to most loan settlements, and the discussion is not
intended to deter you from buying a home. Most professionals in the
settlement business will give you good service. Nevertheless, you may save
yourself money and worry by keeping the following considerations in mind: Kickbacks: Kickbacks
and referrals of business for gain are often tied together. The law prohibits
anyone from giving or taking a fee, kickback, or anything of value under an
agreement that business will be referred to a specific person or
organization. It is also illegal to charge or accept a fee or part of a fee
where no service has actually been performed. This requirement does not
prevent title companies, attorneys, or others actually performing a service
in connection with the mortgage loan or settlement transaction, from
receiving compensation for their work. It also does not prohibit payments pursuant
to cooperative brokerage, such as a multiple listings service, and referral
arrangements or arrangements between real estate agents and brokers. The prohibition is
aimed primarily at eliminating the kind of arrangement in which one party
agrees to return part of its fee in order to obtain business from the
referring party. The danger is that some settlement fees can be inflated to
cover payments to this additional party. resulting
in a higher total cost to you. There are criminal penalties of both fine and
imprisonment for any violation of these provisions of law and the Government
may also seek injunctions against violators. There are also provisions for
you to recover three times the amount of the charge for any settlement
service, through a private lawsuit In any successful action to enforce your
right the court may award you court costs together with a fee for your
attorney. In 1983, RESPA was
amended to address "controlled business arrangements" which are
arrangements in which the party referring a homebuyer to a particular
provider of settlement services has a relationship with the provider which
involves an ownership or franchise arrangement. Payments made by parties to a
controlled business arrangement, such as dividends, may have the same effect
as referral fees. Congress recognized a special status for such payments,
however, and the law provides that such payments will not be illegal
kickbacks or referral fees if the controlled business arrangement is
disclosed, a written estimate of charges of the provider given and the
borrower is not required to use that particular provider. Title Companies. Under
the law, the seller may not require, as a condition of sale, that title
insurance be purchased by the buyer from any particular title company. A
violation of this will make the seller liable to you in an amount equal to
three times all charges made for the title insurance. Fair Credit Reporting.
There are credit reporting agencies around the Nation which are in the
business of compiling credit reports on citizens, covering data such as how
you pay your bills, if you have been sued, arrested, filed for bankruptcy,
etc. In addition, this file may include your neighbors' and friends' views of
your character, general reputation, or manner of living. This latter
information is referred to as an "investigative consumer report". The Fair Credit
Reporting Act does not give you the right to inspect or physically handle
your actual report at the credit reporting agency, nor to receive an exact
copy of the report. But you are entitled to a summary of the report, showing
the nature, substance, and sources of the information it contains. If the terms of your
financing have been adversely affected by a credit report you have the right
to inspect the summary of that report free of charge or for a small fee. The
accuracy of the report can also be challenged, and corrections required to be
made. For more detailed information on your credit report rights, contact the
Federal Trade Commission (FTC) in Equal Credit |
|
|
|
|||
|
The Right to File Complaints |
|
As with
any consumer problems, the place to start if you have a complaint is back at
the source of the problem (the lender, settlement agent, broker, etc.). If
that initial effort brings no satisfaction and you think you have suffered
damages through violations of the Real Estate Settlement Procedures Act of
1974, as amended, you may be entitled to bring a civil action in the U.S.
District Court or in any other court of competent jurisdiction for the District
in which the property is located, or where the violation is alleged to have
occurred. This is a matter best determined by your lawyer. Any suit you file
under RESPA must be brought within one year from the date of the occurrence
of the alleged violation. You may have legal remedies under other State or
Federal laws in addition to RESPA. RESPA provides for specific legal
sanctions only under the provisions which prohibit kickbacks and unearned
fees, and which prohibit the seller from requiring the buyer to use a
particular title insurer. If you feel you should recover damages for
violations of any provision of RESPA, you should consult your lawyer. Most
settlement service providers are supervised by some governmental agency at
the local, State and/or Federal level. Others are subject to the control of
self-policing associations. If you feel a provider of settlement services has
violated RESPA, you can address your complaint to the agency or association
which has supervisory responsibility over the provider. For the names of such
agencies or associations, you will have to check with local and State
Governments or consumer agencies operating in your area. You are also
encouraged to forward a copy of complaints regarding RESPA violations to the
HUD Office of Housing, which has the primary responsibility for administering
the RESPA program. Your complaints can lay the foundation for future
legislative or administrative actions. Send copies of complaints, and
inquiries to:
|
|
|
|
|||
|
The Home Buyer's Obligations
(Repayment of Loan and Maintenance of Home) |
|
At
settlement you will sign papers legally obligating you to pay the mortgage
loan financing the purchase of your home. You must pay according to the terms
of the loan interest rate, amount and due date of each monthly payment,
repayment period - specified in the documents signed by you. You will probably
sign at settlement a note or bond which is your promise to repay the loan for
the unpaid balance of the purchase price. You will also sign a mortgage or
deed of trust which pledges your home as security for repayment of the loan. Failure to make monthly
mortgage payments on time may lead to a late payment charge, if provided for
in the documents. If you default on the loan by missing payments altogether
and do not make them up within a period of time usually set by State law, the
documents also specify certain actions which the lender may take to recover
the amount owed. Ultimately, after required notice to you, a default could
lead to foreclosure and sale of the home which secures your loan. You should
also be careful to maintain your home in a proper state of repair, both for
your own satisfaction and comfort as the occupant and because the home is
security for your loan. The mortgage or deed of trust must in fact
specifically obligate you to keep the property in good repair and not allow
deterioration. In the event you do get
into financial difficulty you may wish to contact your local HUD office for a
copy of two publications, Avoiding Mortgage Default (HUD426 (PA)(7)) and
Equity Skimming (Mortgagee Letter 85- 21). The publication on equity skimming
warns homeowners about various methods which unscrupulous investors have used
to take advantage of homeowners under the pretense of offering to help them
out of their financial difficulty. Read the documents carefully at or before
settlement and be aware of your obligations as a homeowner. |
|
Settlement Costs - Part II
|
|
|
|
|
|
|
|
|
This
part of the booklet provides an item-by-item discussion of possible
settlement services that may be required and for which you may be charged. It
also provides a sample of the HUD-1 Settlement Statement form, and worksheets
which you may find handy for comparing costs from different service
providers. Sections A through I of
the HUD-1 Settlement Statement contain information concerning the loan and
parties to the settlement. Sections J and K contain a summary of all funds
transferred between the borrower, seller, lender, and providers of settlement
services. The bottom line in the left-hand column shows the net cash to be
paid by the borrower, while the bottom line in the right-hand column shows
the cash due the seller. Section L is a list of settlement charges that may
be required and for which you may be charged. Blank lines are provided for
any additional settlement charges. You would add up the
costs entered on the lines of Section L, and carry them forward to Sections J
and K, in order to arrive at the net cash figures on the bottom lines of the
left and right columns. |
||
|
|
||||
|
Use of This Form |
|
1.
Settlement services comparisons. As you shop for settlement services, you can
use the Settlement Cost Worksheet as a guide, noting on it the different
services required by different lenders and the different fees quoted by
different service providers. 2. Disclosure of actual
settlement costs. A copy of this form, or one with similar terminology,
sequence and numbering of line items, must be filled out by the person
conducting the settlement meeting. Your right to inspect the form one
business day before settlement was discussed earlier in this booklet. The
form will be completely filled in at the settlement meeting. |
||
|
|
||||
|
Specific Settlement Services |
|
The
following defines and discusses each specific settlement service. The numbers
correspond to the items listed in Section L of the HUD-1 Settlement Statement
form. |
||
|
|
||||
|
700.
Sales/Broker's Commission. This is the total dollar amount of sales commission, usually paid by
the seller. Fees are usually a percentage of the selling price of the home,
and are intended to compensate brokers or sales agents for their services.
Custom and/or the negotiated agreement between the seller and the broker
determine the amount of the commission. 701-702. Division of
Commission. If
several brokers or sales agents work together to sell the home, the
commission may be split among them. If they are paid from funds collected for
settlement, this is shown on lines 701-702. 703. Commission Paid at
Settlement.
Sometimes the broker will retain the deposit against the sales price (earnest
money) to apply towards the commission. In this case, line 703 will show only
the remainder of the commission which will be paid at settlement. |
|
|||
|
|
||||
|
800.
Items Payable in Connection with Loan. These are the fees which lenders charge to process,
approve and make the mortgage loan. 801. Loan Origination. This fee covers the lender's
administrative costs in processing the loan. Often expressed as a percentage
of the loan, the fee will vary among lenders and from locality to locality.
Generally the buyer pays the fee unless another arrangement has been made
with the seller and written into the sales contract. 802. Loan Discount. Often called "points", a
loan discount is a one-time charge used to adjust the yield on the loan to
what market conditions demand. It is used to offset constraints placed on the
yield by State or Federal regulations. Each "point" is equal to one
percent of the mortgage amount. For example, if a lender charges four points
on a $60.000 loan this amounts to a charge of $2,400. 803. Appraisal Fee. This charge, which may vary
significantly from transaction to transaction, pays for a statement of
property value for the lender, made by an independent appraiser or by a
member of the lender's staff. The lender needs to know if the value of the
property is sufficient to secure the loan if you fail to repay the loan
according to the provision of your mortgage contract, and the lender must
foreclose and take title to the house. The appraiser inspects the house and
the neighborhood, and considers sales prices of comparable houses and other
factors in determining the value. The appraisal report may contain photos and
other information of value to you. It will provide the factual data upon
which the appraiser based the appraised value. The appraisal does not,
however, give rights to the purchaser nor necessarily detect or discuss
defects in the property or title to the property. While most reasonable
lenders will furnish you a copy of the appraisal upon request, they are not
required to do so unless State law covers this situation. Therefore, it is
important that you reach an understanding with your lender if you wish to see
the appraisal, preferably at the time of payment of the appraisal fee. The appraisal fee may be
Paid by either the buyer or the seller, as agreed in the sales contract In
some cases this fee is included in the Mortgage Insurance Application Fee.
See line 806. 804. Credit Report Fee. This fee covers the cost of the
credit report, which shows how you have handled other credit transactions.
The lender uses this report in conjunction with information you submitted
with the application regarding your income, outstanding bills, and
employment, to determine whether you are an acceptable credit risk and to
help determine how much money to lend you. Where you encounter credit
reporting problems you have protections under the Fair Credit laws as
summarized under "Home Buyer's Rights" in this booklet 805. Lender's
Inspection Fee.
This charge covers inspections, often of newly constructed housing made by
personnel of the lending institution or an outside inspector. ( 806. Mortgage Insurance
Application Fee.
This fee covers processing the application for private mortgage insurance
which may be required on certain loans. It may cover both the appraisal and
application fee. 807. Assumption Fee. This fee is charged for processing
papers for cases in which the buyer takes over the payments on the prior loan
of the seller. |
|
|||
|
|
||||
|
900.
Items Required by Lender to Be Paid in Advance. You may be required to prepay
certain items, such as interest mortgage insurance premium and hazard
insurance premium, at the time of settlement. 901. Interest. Lenders usually require that
borrowers pay at settlement the interest that accrues on the mortgage from
the date of settlement to the beginning of the period covered by the first
monthly payment. For example, suppose your settlement takes place on April 1 6, and your first regular monthly payment will be due June
1, to cover interest charges for the month of May. On the settlement date,
the lender will collect interest for the period from April 16 to May 1. If
you borrowed $60,000 at 12 percent interest the interest item would be
$303.30. This amount and per diem charges will be entered on line 901. 902. Mortgage Insurance
Premium. Mortgage
insurance protects the lender from loss due to payment default by the
borrower. The lender may require you to pay your first premium or a lump sum
premium covering the life of the loan in advance, on the day of settlement.
The premium may cover a specific number of months. a
year in advance or the total amount. With this insurance protection, the
lender is willing to make a larger loan, thus reducing your downpayment requirements. This type of insurance should
not be confused with mortgage life, credit life, or disability insurance
designed to pay off a mortgage in the event of physical disability or death
of the borrower. 903. Hazard Insurance
Premium. This premium
prepayment is for insurance protection for you and the lender against loss
due to fire, windstorm, and natural hazards. This coverage may be included in
a Homeowners Policy which insures against additional risks which may include
personal liability and theft. Lenders often require payment of the first
year's premium at settlement. A hazard insurance or homeowner's policy
may not protect you against loss caused by flooding. If your mortgage is
Federally insured and your property is within a special flood hazard area
identified by FEMA, you may be required by Federal law to carry flood
insurance on your home. Such insurance may be purchased in participating
communities under the National Flood Insurance Act. |
|
|||
|
|
||||
|
1000.
Reserves Deposited With Lenders. Reserves (sometimes called "escrow" or "impound"accounts) are funds held in an account by
the lender to assure future payment for such recurring items as real estate
taxes and hazard insurance. You will probably have to pay an initial amount
for each of these items to start the reserve account at the time of
settlement. A portion of your regular monthly payments will be added to the
reserve account RESPA places limitations on the amount of reserve funds which
may be required by the lender. Read "Reserve Accounts" in this
booklet for reserve calculation procedures. Do not hesitate to ask the lender
to explain any variance between your own calculations and the figure presented
to you. 1001. Hazard Insurance. The lender determines the amount
of money that must be placed in the reserve in order to pay the next
insurance premium when due. 1002. Mortgage
Insurance. The
lender may require that part of the total annual premium be placed in the
reserve account at settlement. The portion to be placed in reserve may be
negotiable. 1003-1004. City/County
Property Taxes.
The lender may require a regular monthly payment to the reserve account for
property taxes. 1005. Annual Assessments. This reserve item covers
assessments that may be imposed by subdivisions or municipalities for special
improvements (such as sidewalks, sewers or paving) or fees (such as homeowners association fees). |
|
|||
|
|
||||
|
1100.
Title Charges.
Title charges may cover a variety of services performed by title companies
and others and include fees directly related to the transfer of title (title
examination, title search, document preparation) and fees for title
insurance, legal charges, which include fees for lender's, seller's or
buyer's attorney or the attorney preparing title work and fees for settlement
agents and notaries. The specific charges discussed in connection with lines 1101
through 1109 are those most frequently incurred at settlement. Due to the
great diversity in practice from area to area, your particular settlement may
not include all of these items or may include others not listed. Ask your
settlement agent to explain how these fees relate to services performed on
your behalf. An extended discussion is presented in "Securing Title
Services" earlier in this booklet. 1101. Settlement or
Closing Fee. This
fee is paid to the settlement agent. Responsibility for payment of this fee
should be negotiated between the seller and buyer, at the time the sales
contract is signed. 1102-1104. Abstract or
Title Search, Title Examination, Title Insurance Binder. These charges cover the costs of
the search and examination of records of previous ownership, transfers, etc.,
to determine whether the seller can convey clear title to the property, and
to disclose any matters on record that could adversely affect the buyer or
the lender. Examples of title problems are unpaid mortgages, judgment or tax
liens, conveyances of mineral rights, leases, and
power line easements or road right-of-ways that could limit use and enjoyment
of the real estate. In some areas, a title insurance binder is called a
commitment to insure. 1105. Document Preparation. There may be a separate document
fee that covers preparation of final legal papers, such as a mortgage, deed
of trust note, or deed. You should check with the settlement agent to see
that these services, if charged for, are not also covered under some other
service fees. 1106. Notary Fee. This fee is charged for the cost
of having a licensed person affix his or her name and seal to various
documents authenticating the execution of these documents by the parties. 1107. Attorney's Fees. You may be required to pay for
legal services provided to the lender in connection with the settlement such
as examination of the title binder or sales contract. Occasionally this fee
can be shared with the seller, a so stipulated in the sales contract If a
lawyer's involvement is required by the lender, the fee will appear on this
part of the form. The buyer and seller may each retain an attorney to check
the various documents and to represent them at all stages of the transaction
including settlement. Where this service is not required and is paid for
outside of closing, the person conducting settlement is not obligated to
record the fee on the settlement form. 1108. Title Insurance. The total cost of owner's and
lender's title insurance is shown here. The borrower may pay all, a part or
none of this cost depending on the terms of the sales contract or local
custom. 1109. Lender's Title
Insurance. A
one-time premium may be Charged at settlement for a lender's title policy
which protects the lender against loss due to problems or defects in
connection with the title. The insurance is usually written for the amount of
the mortgage loan and covers losses due to defects or problems not identified
by title search and examination. The borrower may pay all, a part or none of
this cost depending on the terms of the sales contract or local custom. 1110. Owner's Title
Insurance. This
charge is for owner's title insurance protection and protects you against
losses due to title defects. In some areas it is customary for the seller to
provide the buyer with an owner's policy and for the seller to pay for this
policy. In other areas, if the buyer desires an owner's policy he or she must
pay for it. |
|
|||
|
|
||||
|
1200.
Government Recording and Transfer Charges. These fees may be paid either by borrower or
seller, depending upon your contract when you buy the home or accept the loan
commitment The borrower usually pays the fees for legally recording the new
deed and mortgage (line 1201). These fees, collected
when property changes hands or when a mortgage loan is made, may be quite
large and are set by State and/or local governments. City, county and/or
State tax stamps may have to be purchased as well (lines 1202 and 1203). |
|
|||
|
|
||||
|
1300.
Additional Settlement Charges. The lender or the title insurance company may require
that a surveyor conduct a property survey to determine the exact location of
the home and the lot line, as well as easements and rights of way. This is a
protection to the buyer as well. Usually the buyer pays the surveyor's fees,
but sometimes this may be handled by the seller (line 1301). 1302. |
|
|||
|
|
||||
|
1400.
Total Settlement Charges. All the fees in the borrower's column entitled "Paid from
Borrower's Funds at Settlement" are totaled here and transferred to line
103 of Section J, "Settlement charges to borrower" in the Summary
of Borrower's Transaction on page 1 of the HUD-1 Settlement Statement. All
the settlement fees paid by the seller are transferred to line 502 of Section
K, Summary of Seller's Transaction on page 1 of the HUD-1 Settlement Statement.
|
|
|||
|
|
||||
|
Comparing Lender Costs |
|
If a
lender is willing to reduce its fees for such items as loan origination,
discount points and other one-time settlement charges, it may gain it back if
it charges a higher mortgage interest rate. Here is one rule of
thumb which you can use to calculate the combined effect of the interest rate
on a fixed- rate loan and the one-time settlement charges (paid by you) such
as "points." While not perfectly accurate, it is usually close
enough for meaningful comparisons between lenders. The rule is, that one-time
settlement charges equaling one percent of the loan amount increase the
interest charge by one-eighth (1/8) of one percent. The 1/8 factor
corresponds to a pay back period of approximately 15 years. If you intend
instead to hold the property for only five years and pay off the loan at that
time, the factor increases to 1/4. Here is an example of the rule. Consider
only those charges that differ between lenders. Suppose you wish to borrow
$60,000. Lender A will make a fixed-rate loan at 12.5 percent interest, but
charges a two percent origination fee, a $150.00 application fee, and
requires that you use a lawyer, for title work, selected by the lender at a
fee of $300. Lender B will make a fixed-rate loan at 13 percent interest, but
has no additional requirements or charges. As part of that 13 percent
interest, though, Lender B will not charge an application fee and will absorb
the lawyer's fee. What are the actual charges for each case? Begin by relating all
of Lender A's one-time charges to percentages of the $60,000 loan amount:
| ||