Settlement Costs Booklet
- Updated March 3, 2001 1:59 p.m.
Settlement Costs Booklet
- Updated March 3, 2001 1:59 p.m.
A HUD Guide -- Revised Edition August 1988
The content of this booklet has been prepared, prescribed and approved by the U.S. Department of Housing and Urban Development, as required by Section 5 of the Real Estate Settlement Procedures Act of 1974 (Public Law 93-533), effective on June 30, 1976.
This publication may be reprinted. However, in no case may any change, deletion, or addition be made in its content. As of July 30, 1996, this publication is being officially revised.
Table of Contents
Part I
Home Buyer's Obligation (Repayment of Loan and Maintenance of Home)
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.
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.
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 (See page 31). 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.
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 fair 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.
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:
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The seller provides title, free and clear of all liens and encumbrances except those which you specifically agree to in the contract or approve when the results of the title search are reported to you. You may negotiate as to who will pay for the title search service to determine whether the title is "clear". |
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A refund of your deposit (earnest money) shall be made by the seller or escrow agent with cancellation of the sale if you are unable to secure from a lending institution a first mortgage or deed-of-trust loan with an amount, interest rate, and length of term, as set forth in the contract, within a stated time period, or if the Seller is unable to satisfy any other condition of the Sales Contract. |
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A certificate shall be provided at time of settlement, stating that the home is free from termites or termite damage. |
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A certificate or other assurance shall be provided by the Seller at the time of settlement, stating that the plumb- ing, heating, electrical systems and appliances are in working order, and that the home is structurally sound. Negotiate who pays for any necessary inspections. There is no uniform custom in most areas. Most buyers prefer to pay for these inspections because they want to know that the inspector is conducting the service for them, not for the seller. (In many areas, you can also purchase a warranty to back up the inspection, if you wish.) |
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An agreement on how taxes, water and sewer charges, condominium fees, premiums on existing transferrable insurance policies, utility bills, interest on mortgages, and rent (if there are tenants) are to be divided between buyer and seller as of the date of the settlement. |
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.
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.
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.
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 taking the initiative in arranging for settlement and selecting the firm and location which meets your needs.
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.
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.
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 L 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. 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, title 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. It 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.
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.
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, Washington, D.C. 20551.
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 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 listing 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.
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.
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 Washington, D.C. or the nearest FTC regional office. The FTC Buyer's Guide No. 7: Fair Credit Reporting Act is a good summary of this Act.
The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided that the applicant has the capacity to enter into a binding contract), because all or part of the applicant's income derives from any public assistance program, or because the applicant has in good faith exercised any right under the consumer Credit Protection Act. If you feel you have been discriminated against by any lender, you may have a private right of legal action against that lender and you may wish to consult an attorney; or you may wish to consult the Federal agency that administers compliance with this law. Inquire of the lender regarding the identity of that agency. You may also contact your regional Board of Governors of the Federal Reserve System about your rights under this Act.
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:
U.S. Department of Housing and Urban Development Director
Office of Insured Single Family Housing
Attention: RESPA
451 Seventh Street, S.W.
Washington, D.C. 20410
(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 (HUD-426 (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.
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.
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. (Pest or other inspections made by companies other than the lender are discussed in connection with line 1302.)
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 accrued 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 16, 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 of 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, if 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.
1301. Survey: Usually the buyer pays the surveyor's fees, but sometimes this may be handled by the seller (line 1301).
1302. Pest and Other Inspections: This fee is to cover inspections for termite or other pest infestation of the home. This may be important if the sales contract included a promise by the seller to transfer the property free from pests or pest-caused damage. Be sure that the inspection shows that the property complies with the sales contract before you complete the settlement. If it does not you may wish to require a bond or other financial assurance that the work will be completed. This fee can be paid either by the borrower or seller depending upon the terms of the sales contract. Lenders vary in their requirements as to such an inspection.
Fees for other inspections, such as for structural soundness, are entered on line 1303.
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.
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 onetime 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:
2 percent origination fee = 2 percent of loan amount $150 application fee = 0.25 percent of loan amount $300 lawyer's fee = 0.5 percent of loan amount Total 2.75 percent of loan amount
Since each 1 percent of the loan amount in charges is the equivalent of 1/8 percent increase in interest, the effective interest rate from Lender A is the quoted or "contract" interest rate, 12.5 percent plus .34 percent (2.75 times 1/8), or a total of 12.84 percent interest.
Since Lender B has offered a 13 percent interest rate, Lender A has made a more attractive offer. Of course, it is more attractive only if you have sufficient cash to pay Lender A's one-time charges and still cover your downpayment, moving expenses, and other settlement costs. This is simply a method to compare diverse costs on an equal basis. In the above illustration, Lender A does not receive the $300 lawyer's fee.
The calculation is sensitive to your assumption about the period of time you plan to own the home before paying off the mortgage. As indicated above, the factor increases to 1/4 if you expect to pay off the mortgage in five years. Applying this new factor to the above illustration, the effective interest rate for Lender A would be 12.5 percent plus .69 (2.75 x 1 /4) for a total of 13.19 percent interest. Lender A's offer is no longer more attractive than Lender B's which was 13.0 percent.
In doing these calculations you should also be careful as to which one-time fees you place into the calculation. For example, if Lender B in the above illustration did not include in this charge a legal fee but told you that you had to secure legal services in order to obtain the loan from him, you would have to add to Lender B's interest rate the legal fee that you had to incur.
You can use this method to compare the effective interest rates of any number of lenders if you are shopping for a fixed-rate loan. If the lenders have provided Truth-in-Lending disclosures, these are an even better comparative tool. You should question lenders carefully to make sure you have learned of all the charges they intend to make. The good faith estimate you receive when you make a loan application is a good checklist for this information, but it is not precise. Thus, you should ask the lender how the charges and fees are computed.
CALCULATING THE BORROWER'S TRANSACTIONS
A Sample Worksheet
This page is a sample worksheet for a family purchasing a $100,000 house and getting a new $80,000 loan. Line 103 assumes that their total settlement charges are $4,000. (This figure is the sum of all the individual settlement charges, which will be listed in detail in Section L of their HUD-1 Settlement Statement.) The $4,000 figure is merely illustrative. The amount may be higher in some areas and for some types of transactions, and lower for others.
J. Summary of Borrower's Transaction
100.Gross Amount Due From Borrower
101.Contract sales price 100,000.00
102.Personal Property
103.Settlement charges to borrower (line 1400) 4,000.00
104.
105.
Adjustments for items paid by seller in advance
106.City/town taxes to
107.County taxes to
108.Assessments 6/30 TO 7/31 (owners assn) 40.00
109.Fuel Oil 25 gasl. $1.00/gal 25.00
110.
111.
112.
120. Gross Amount Due From Borrower 104,065.00
200.Amounts Paid By Or In Behalf Of Borrower
201.Deposit of earnest money 2,000.00
202.Principal amount of new loan(s)
80,000.00
203.Existing loan(s) taken subject to
204.
205.
206.
207.
208.
209. Adjustments for items unpaid by seller
210.City/town taxes to
211.County taxes 1/1 to 6/30 $1,200/year 600.00
212.Assessments 1/1 to6/30 $200/yr. 100.00
213.
214.
215.
216.
217.
218.
219.
220. Total Paid By/For Borrower 82,700.00
300.Cash At Settlement From/To Borrower
301.Gross Amount due from borrower (line 120) 104,065.00
302.Less amounts paid by/for borrower (line 220) (82,700.00)
303. Cash From To
Borrower
Your Financial Worksheet
Once you have decided which providers you wish to use for your settlement services and have selected the lender who will make your loan, you can calculate the total estimated cash you will need to complete the purchase. The form below, which is a part of the HUD-1 Settlement Statement, can be used as a worksheet for this purpose.
J. Summary of Borrower's Transaction 100.Gross Amount Due From Borrower 101.Contract sales price 102.Personal Property 103.Settlement charges to borrower (line 1400) 104. 105.Adjustments for items paid by seller in advance 106.City/town taxes to 107.County taxes to 108.Assessments to 109. 110. 111. 112.
120.Gross Amount Due From Borrower
200.Amounts Paid By Or In Behalf Of Borrower
201.Deposit of earnest money
202.Principal amount of new loan(s)
203.Existing loan(s) taken subject to
204.
205.
206.
207.
208.
209. Adjustments for items unpaid by seller
210.City/town taxes to
211.County taxes to
212.Assessments to
213.
214.
215.
216.
217.
218.
219.
220. Total Paid By/For Borrower
300.Cash At Settlement From/To Borrower
301.Gross Amount due from borrower (line 120)
302.Less amounts paid by/for borrower (line 220)(
)
303. Cash From To
Borrower
100. Gross Amount Due From Borrower: Page 1 of the HUD-1 Settlement Statement summarizes all actual costs and adjustments for the borrower and seller, including total settlement fees and charges found on line 1400 of Section L.
101. Contract Sales Price: This is the price of the home agreed to in the sales contract between the buyer and seller.
102. Personal Property: If, at the time the sales contract was made, you and the seller agreed that some items were to be transferred with the home, the price of those items is entered here. If it was agreed to include these items in the price of the home, their cost will be part of the sales price recorded on line 101. Personal property could include items such as carpets, drapes. stove. refrigerator, etc.
103. Settlement Charges to Borrower: The total charges for the borrower detailed in Section L and totaled on line 1400, are recorded here. This figure includes ail of the items payable in connection with the loan, items required by the lender to be paid in advance, reserves deposited with the lender, title charges, government recording and transfer charges, and any additional related charges.
104-105. Additional Costs: This space is for listing any additional amounts owed the seller, such as reserve funds if the buyer is assuming the seller's loan. This may not be applicable to your settlement.
106-112. Adjustments: These include taxes, front footage charges, insurance, rent, fuel and other items that the seller has previously paid for covering a period which runs beyond the settlement date. The costs are usually divided on a proportional basis with the seller being reimbursed for charges accruing after the date of transfer of title.
120. Gross Amount Due: This is the total of lines 101 through 112.
200. Amounts Paid By or On Behalf Of Borrower: (See items 201-220)
201. Deposit or Earnest Money: This is the amount which you paid against the sales price when the sales contract was signed. It is credited to the purchase.
202. Principal Amount of New Loan: This is the amount of the new mortgage which you will repay to the lender in the future.
203. Existing Loan(s): If you are taking over the seller's mortgage(s) instead of obtaining a new loan, the amount still owed on those prior loans will be shown here.
210-219. Adjustments: This includes taxes or assessments which become due after settlement, but which the seller pays because they cover a period of time prior to settlement See "Reserve Accounts" for a further discussion of these matters.
This is the sum of lines 201 through 219.
300. Cash At Settlement From/To Borrower: Remaining are the summary lines which are
301-303 for the borrower (and 601 -603 for the seller). Subtracting line 302 (gross amount paid by or for the borrower) from line 301 (gross amount due from the borrower) results in the net cash the borrower must pay at settlement
In most instances, a monthly mortgage payment is made up of a payment on the principal amount of the mortgage debt which reduces the balance due on the loan, an interest payment which is the charge for use of the borrowed funds, and a reserve payment (also known as an escrow or impound payment) which represents approximately one-twelfth of the estimated annual insurance premiums, property taxes, assessments and other recurring charges.
When settlement occurs you may need to make an initial deposit into the reserve account; otherwise, your regular monthly deposits to it will not accumulate enough to pay the taxes, insurance or other charges when they fall due. Under RESPA, the maximum amount that the lender can require borrowers or prospective borrowers to deposit into a reserve account at settlement is a total gross amount not to exceed the sum of (a) an amount that would have been sufficient to pay taxes, insurance premiums, or other charges which would have been paid under normal lending practices, and ending on the due date of the first full monthly mortgage installment payment; plus (b) an additional amount not in excess of one-sixth (2 months) of the estimated total amount of taxes, insurance premiums and other charges to be paid on the dates indicated above during any twelve-month period to follow.
An illustration will help clarify this calculation. Assume the following set of facts on a loan, and that taxes are paid at the end of the period against which taxes are assessed.
Example:
Settlement date: April 30, 1987 Due Date of first mortgage loan repayment: June 1, 1987 Taxes due yearly $720.00 Monthly tax accrual: $60.00 Due Date for taxes: December 1st for the Calendar year
The reserve amount for category (a) is $360.00. This represents the amount of taxes accruing between December 1, 1986 (the last tax due date) and May 30, 1987 ($60.00 x 6 months). Reserve amounts chargeable under category (b) could be up to two months advance payment times $60.00 or a total of $120.00. Therefore, total reserve deposits for taxes at settlement would be a maximum of $480.00. Changing the due date for taxes and/or the first mortgage payment results in a different reserve amount for the same illustration.
The same procedure is used to determine the maximum amounts that can be collected by the lender for insurance premiums or other charges. You need to know the charges and due dates in order to compute the amounts.
Once you begin your monthly mortgage payments, you cannot be required to pay more than one-twelfth of the annual taxes and other charges each month, unless a larger payment is necessary to make up for a deficit in your account or to maintain the cushion of the one-sixth of annual charges mentioned in (b) above. A deficit may be caused, for example, if your taxes or insurance premiums are raised.
You should note that the above monthly mortgage payments reserve limitations apply to all RESPA covered mortgage loans whether they were originated before or after the implementation of RESPA.
Adjustments Between Borrower and Seller
The previous section dealt with setting up and maintaining your reserve account with the lender. At settlement it is also usually necessary to make an adjustment between borrower and seller for property taxes and other charges. This is an entirely separate matter from the initial deposit which the borrower makes into the new reserve account.
The adjustments between borrower and seller are shown in Sections J and K of the HUD-1 Settlement Statement. In the example given in the foregoing section, the taxes, which are payable annually, had not yet been paid when the settlement occurs on April 30. The borrower will have to pay a whole year's taxes on the following December 1. However, the seller lived in the house for the first four months of the year. Thus, one third of the year's taxes are to be paid by the seller. Accordingly, lines 211 and 511 on the HUD-1 Settlement Statement would read as follows:
County taxes 1/1/87 to 4/30/87 $240.00
The borrower would be given credit for this amount in the settlement and the seller would have to pay this amount or count it as a deduction from sums payable to the seller.
In some areas taxes are paid at the beginning of the taxable year. If, in our example, the taxes were paid by the seller on January 1, 1987 for the following tax year ending December 31, 1987, the borrower will have to compensate the seller for the taxes paid by the seller for those months that the borrower will be in possession of the property (April 30-December 31). This adjustment will be shown on lines 107 and 407 of the HUD-1 Settlement Statement. With settlement occurring on April 30, those lines will read as follows:
County taxes
4/30/87 to 12/31/87 $480.00
This amount would be credited to the seller in the settlement
Similar adjustments are made for insurance (if the policy is being kept in effect), special assessments, fuel and other utilities, although the billing periods for these may not always be on an annual basis. Be sure you work out these prorations with the seller prior to settlement. It is wise for you to notify utility companies of the change in ownership and ask for a special reading on the day of settlement, with the bill for presettlement charges to be mailed to the seller at his or her new address. This will eliminate much confusion that can result if you are billed for utilities which cover the time when the seller owned the property.
Consumer Information and Literature on Home Purchasing and other
Related Topics
U.S. Department of Housing and Urban Development
For consumer information regarding: FHA-insured home mortgage loans
on one-to-four family dwellings; Contact:
Office of Insured Single Family Housing
451 Seventh Street, S.W.
Washington, D.C. 20410
For consumer information regarding Manufactured home financing
through HUD; Contact:
Office of Manufactured Housing and Regulatory
Functions
451 Seventh Street, S.W.
Washington, D.C. 20410
U.S. Veterans Administration
Pointers for the Veteran Homeowner (VA-26-5), Questions and Answers
on Guaranteed Loans for Veterans (VA-26-4), or To the Home-Buying
Veteran (VA-26-6) Contact: Your Nearest VA Regional Office
U.S. Department of Agriculture
Home Ownership Loans (No. 977) Contact: Your FmHA County Office
General Services Administration
Consumer Information: A Catalog of Selected Federal Publications
Contact: Consumer Information Center, Pueblo, Colorado 81009
(303-948-3334)
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