Buying Your Home: Settlement Costs and Helpful
Information
Table of Contents
I. Introduction
I. Introduction
CONGRATULATIONS! You have decided to buy a new
home. This booklet will help
you take
this big financial step by describing the home buying, home financing,
and
A. Introduction
settlement process.
Lenders and mortgage brokers are required by federal law,
the Real
Estate Settlement Procedures Act ("RESPA"), to give you this booklet.
You
II. Buying & Financing a Home
should receive it when
applying for a loan, or within three business days
afterwards.
Real
estate brokers frequently hand out this booklet as well.
A. Role of the Real Estate
Broker
B. Selecting an Attorney
You probably started the
home buying process in one of two ways: you saw a home
C. Terms of the Agreement of
Sale
you were
interested in buying or you consulted a lender to figure out how
much
D. Shopping For a Loan
money you could borrow
before you found a home (sometimes called pre-qualifying).
E. Selecting a Settlement
Agent
The next
step is to sign an agreement of sale with the seller, followed by
applying for
F. Securing Title Services
a loan to purchase your new
home. The final step is called "settlement" or "closing,"
G. RESPA Disclosures
where the legal title to
the property is transferred to you.
H. Processing Your Loan
Application
I. RESPA Protection Against
Illegal Referral Fees
At each
of these steps you often have the opportunity to negotiate the
terms,
J. Your Right to File
Complaints
conditions and costs to your advantage. This booklet will
highlight such opportunities.
You will
also need to shop carefully to get the best value for your money. There
is no
III. Your Settlement Costs
standard home buying
process used in all localities. Your actual experience
may
vary
from those described here. This booklet takes you through the general
steps to
A. Specific Settlement
Costs
buying a
home, to eliminate, as much as possible, the mysteries of the
settlement
B. Calculating the Amount You Need At
Settlement
process.
C. Adjustments To Costs Shared By Buyer
and Seller
D. HUD-1 Settlement
Statement
IV. Appendix
A. Appendix
A. Role of the Real Estate Broker
Frequently, the first person you consult about
buying a home is a real estate agent or broker. Although real estate
brokers provide helpful advice on many aspects of home buying, they may
serve the interests of the seller, and not your interests as the buyer.
The most common practice is for the seller to hire the broker to find
someone who will be willing to buy the home on terms and conditions
that are acceptable to the seller. Therefore, the real estate broker
you are dealing with may also represent the seller. However, you can
hire your own real estate broker, known as a buyer's broker, to
represent your interests. Also, in some states, agents and brokers are
allowed to represent both buyer and seller.
Even if the real estate broker represents the
seller, state real estate licensing laws usually require that the
broker treat you fairly. If you have any questions concerning the
behavior of an agent or broker, you should contact your State's Real
Estate Commission or licensing department.
Sometimes, the real estate broker will offer to help
you obtain a mortgage loan. He or she may also recommend that you deal
with a particular lender, title company, attorney or settlement/closing
agent. You are not required to follow the real estate broker's
recommendation. You should compare the costs and services offered by
other providers with those recommended by the real estate
broker.
B. Selecting an Attorney
Before you sign an agreement of sale, you might
consider asking an attorney to look it over and tell you if it protects
your interests. If you have already signed your agreement of sale, you
might still consider having an attorney review it. An attorney can also
help you prepare for the settlement. In some areas attorneys act as
settlement/closing agents or as escrow agents to handle the settlement.
An attorney who does this will not solely represent your interests,
since, as settlement/closing agent, he or she may also be representing
the seller, the lender and others as well.
If choosing an attorney, you should shop around and
ask what services will be performed for what fee. Find out whether the
attorney is experienced in representing home buyers. You may wish to
ask the attorney questions such as:
What is the charge for negotiating the agreement of
sale, reviewing documents and giving advice concerning those documents,
for being present at the settlement, or for reviewing instructions to
the escrow agent or company?
Will the attorney represent anyone other than you in
the transaction?
Will the attorney be paid by anyone other than you
in the transaction?
Please note, in many areas of the country attorneys
are not normally involved in the home sale. For example, escrow agents
or escrow companies in western states handle the paperwork to transfer
title without any attorney involvement.
Buying Your Home: Settlement Costs and Helpful
Information
C. Terms of the Agreement of Sale
If you receive this Booklet before you sign an
agreement of sale, here are some important points to consider. The real
estate broker probably will give you a preprinted form of agreement of
sale. You may make changes or additions to the form agreement, but the
seller must agree to every change you make. You should also agree with
the seller on when you will move in and what appliances and personal
property will be sold with the home.
Sale Price:
For most home purchasers, the sales price is the
most important term. Recognize that other non-monetary terms of
the agreement are also important.
Title:
"Title" refers to the legal ownership of your new
home. The seller should provide title, free and clear of all claims by
others against your new home. Claims by others against your new home
are sometimes known as "liens" or "encumbrances." You may negotiate who
will pay for the title search which will tell you whether the title is
"clear."
Mortgage Clause:
The agreement of sale should provide that your
deposit will be refunded if the sale has to be canceled because you are
unable to get a mortgage loan. For example, your agreement of sale
could allow the purchase to be canceled if you cannot obtain mortgage
financing at an interest rate at or below a rate you specify in the
agreement.
Pests:
Your lender will require a certificate from a
qualified inspector stating that the home is free from termites and
other pests and pest damage. You may want to reserve the right to
cancel the agreement or seek immediate treatment and repairs by the
seller if pest damage is found.
Home Inspection:
It is a good idea to have the home inspected. An
inspection should determine the condition of the plumbing, heating,
cooling and electrical systems. The structure should also be examined
to assure it is sound and to determine the condition of the roof,
siding, windows and doors. The lot should be graded away from the house
so that water does not drain toward the house and into the
basement.
Most buyers prefer to pay for these inspections so
that the inspector is working for them, not the seller. You may wish to
include in your agreement of sale the right to cancel, if you are not
satisfied with the inspection results. In that case, you may want to
re-negotiate for a lower sale price or require the seller to make
repairs.
Lead-Based Paint Hazards in Housing Built Before
1978:
If you buy a home built before 1978, you have
certain rights concerning lead-based paint and lead poisoning hazards.
The seller or sales agent must give you the EPA pamphlet "Protect Your
Family From Lead in Your Home" or other EPA-approved lead hazard
information. The seller or sales agent must tell you what the seller
actually knows about the home's lead-based paint or lead-based paint
hazards and give you any relevant records or reports.
You have at least ten (10) days to do an inspection
or risk assessment for lead-based paint or lead-based paint hazards.
However, to have the right to cancel the sale based on the results of
an inspection or risk assessment, you will need to negotiate this
condition with the seller.
Finally, the seller must attach a disclosure form to
the agreement of sale which will include a Lead Warning Statement. You,
the seller, and the sales agent will sign an acknowledgment that these
notification requirements have been satisfied.
Other Environmental Concerns:
Your city or state may have laws requiring buyers or
sellers to test for environmental hazards such as leaking underground
oil tanks, the presence of radon or asbestos, lead water pipes, and
other such hazards, and to take the steps to clean-up any such hazards.
You may negotiate who will pay for the costs of any required testing
and/or clean-up.
Sharing of Expenses:
You need to agree with the seller about how expenses
related to the property such as taxes, water and sewer charges,
condominium fees, and utility bills, are to be divided on the date of
settlement. Unless you agree otherwise, you should only be responsible
for the portion of these expenses owed after the date of
sale.
Settlement Agent/Escrow Agent:
Depending on local practices, you may have an option
to select the settlement agent or escrow agent or company. For states
where an escrow agent or company will handle the settlement, the buyer,
seller and lender will provide instructions.
Settlement Costs:
You can negotiate which settlement costs you will
pay and which will be paid by the seller.
Buying Your Home: Settlement Costs and Helpful
Information
D. Shopping for a Loan
Your choice of lender and type of loan will
influence not only your settlement costs, but also the monthly cost of
your mortgage loan. There are many types of lenders and types of loans
you can choose. You may be familiar with banks, savings associations,
mortgage companies and credit unions, many of which provide home
mortgage loans. You may find a listing of some mortgage lenders in the
yellow pages or a listing of rates in your local newspaper.
Mortgage Broker:
Some companies, known as "mortgage brokers" offer to
find you a mortgage lender willing to make you a loan. A mortgage
broker may operate as an independent business and may not be operating
as your "agent" or representative. Your mortgage broker may be paid by
the lender, you as the borrower, or both. You may wish to ask about the
fees that the mortgage broker will receive for its
services.
Government Programs:
You may be eligible for a loan insured through the
Federal Housing Administration ("FHA") or guaranteed by the Department
of Veterans Affairs or similar programs operated by cities or states.
These programs usually require a smaller downpayment. Ask lenders about
these programs. You can get more information about these programs from
the agencies that run them. (See Appendix to this Booklet.)
CLOs:
Computer loan origination systems, or CLOs, are
computer terminals sometimes available in real estate offices or other
locations to help you sort through the various types of loans offered
by different lenders. The CLO operator may charge a fee for the
services the CLO offers. This fee may be paid by you or by the lender
that you select.
Types of Loans:
Loans can have a fixed interest rate or a variable
interest rate. Fixed rate loans have the same principal and interest
payments during the loan term. Variable rate loans can have any one of
a number of "indexes" and "margins" which determine how and when the
rate and payment amount change. If you apply for a variable rate loan,
also known as an adjustable rate mortgage ("ARM"), a disclosure and
booklet required by the Truth in Lending Act will further describe the
ARM. Most loans can be repaid over a term of 30 years or less. Most
loans have equal monthly payments. The amounts can change from time to
time on an ARM depending on changes in the interest rate. Some loans
have short terms and a large final payment called a "balloon." You
should shop for the type of home mortgage loan terms that best suit
your needs.
Interest Rates, "Points" & Other
Fees:
Often the price of a home mortgage loan is stated in
terms of an interest rate, points, and other fees. A "point" is a fee
that equals 1 percent of the loan amount. Points are usually paid to
the lender, mortgage broker, or both, at the settlement or upon the
completion of the escrow. Often, you can pay fewer points in exchange
for a higher interest rate or more points for a lower rate. Ask your
lender or mortgage broker about points and other fees.
A document called the Truth in Lending Disclosure
Statement will show you the "Annual Percentage Rate" ("APR") and other
payment information for the loan you have applied for. The APR takes
into account not only the interest rate, but also the points, mortgage
broker fees and certain other fees that you have to pay. Ask for the
APR before you apply to help you shop for the loan that is best for
you. Also ask if your loan will have a charge or a fee for paying all
or part of the loan before payment is due ("prepayment penalty"). You
may be able to negotiate the terms of the prepayment
penalty.
Lender-Required Settlement Costs:
Your lender may require you to obtain certain
settlement services, such as a new survey, mortgage insurance or title
insurance. It may also order and charge you for other
settlement-related services, such as the appraisal or credit report. A
lender may also charge other fees, such as fees for loan processing,
document preparation, underwriting, flood certification or an
application fee. You may wish to ask for an estimate of fees and
settlement costs before choosing a lender. Some lenders offer "no cost"
or "no point" loans but normally cover these fees or costs by charging
a higher interest rate.
Comparing Loan Costs:
Comparing APRs may be an effective way to shop for a
loan. However, you must compare similar loan products for the same loan
amount. For example, compare two 30-year fixed rate loans for $100,000.
Loan A with an APR of 8.35% is less costly than Loan B with an APR of
8.65% over the loan term. However, before you decide on a loan, you
should consider the up-front cash you will be required to pay for each
of the two loans as well.
Another effective shopping technique is to compare
identical loans with different up-front points and other fees. For
example, if you are offered two 30-year fixed rate loans for $100,000
and at 8%, the monthly payments are the same, but the up-front costs
are different:
Loan A - 2 points ($2,000) and lender required costs
of $1800 = $3800 in costs.
Loan B - 2 1/4 points ($2250) and lender required
costs of $1200 = $3450 in costs.
A comparison of the up-front costs shows Loan B
requires $350 less in up-front cash than Loan A. However, your
individual situation (how long you plan to stay in your house) and your
tax situation (points can usually be deducted for the tax year that you
purchase a house) may affect your choice of loans.
Buying Your Home: Settlement Costs and Helpful
Information
D. Shopping for a Loan
...CONTINUED
Lock-ins:
"Locking in" your rate or points at the time of
application or during the processing of your loan will keep the rate
and/or points from changing until settlement or closing of the escrow
process. Ask your lender if there is a fee to lock-in the rate and
whether the fee reduces the amount you have to pay for points. Find out
how long the lock-in is good, what happens if it expires, and whether
the lock-in fee is refundable if your application is
rejected.
Tax and Insurance Payments:
Your monthly mortgage payment will be used to repay
the money you borrowed plus interest. Part of your monthly payment may
be deposited into an "escrow account" (also known as a "reserve" or
"impound" account) so your lender or servicer can pay your real estate
taxes, property insurance, mortgage insurance and/or flood insurance.
Ask your lender or mortgage broker if you will be required to set up an
escrow or impound account for taxes and insurance payments.
Mortgage Insurance:
Private mortgage insurance and government mortgage
insurance protect the lender against default and enable the lender to
make a loan which the lender considers a higher risk. Lenders often
require mortgage insurance for loans where the downpayment is less than
20% of the sales price. You may be billed monthly, annually, by an
initial lump sum, or some combination of these practices for your
mortgage insurance premium. Ask your lender if mortgage insurance is
required and how much it will cost. Mortgage insurance should not be
confused with mortgage life, credit life or disability insurance, which
are designed to pay off a mortgage in the event of the borrower's death
or disability.
You may also be offered "lender paid" mortgage
insurance ("LPMI"). Under LPMI plans, the lender purchases the mortgage
insurance and pays the premiums to the insurer. The lender will
increase your interest rate to pay for the premiums -- but LPMI may
reduce your settlement costs. You cannot cancel LPMI or government
mortgage insurance during the life of your loan. However, it may be
possible to cancel private mortgage insurance at some point, such as
when your loan balance is reduced to a certain amount. Before you
commit to paying for mortgage insurance, find out the specific
requirements for cancellation.
Flood Hazard Areas:
Most lenders will not lend you money to buy a home
in a flood hazard area unless you pay for flood insurance. Some
government loan programs will not allow you to purchase a home that is
located in a flood hazard area. Your lender may charge you a fee to
check for flood hazards. You should be notified if flood insurance is
required. If a change in flood insurance maps brings your home within a
flood hazard area after your loan is made, your lender or servicer may
require you to buy flood insurance at that time.
E. Selecting a Settlement Agent
Settlement practices vary from locality to locality,
and even within the same county or city. Settlements may be conducted
by lenders, title insurance companies, escrow companies, real estate
brokers or attorneys for the buyer or seller. You may save money by
shopping for the settlement agent.
In some parts of the country (particularly western
states), settlement may be conducted by an escrow agent. The parties
sign an escrow agreement which requires them to provide certain
documents and funds to the agent. Unlike other types of settlement, the
parties do not meet around a table to sign documents. Ask how your
settlement will be handled.
F. Securing Title Services
Title insurance is usually required by the lender to
protect the lender against loss resulting from claims by others against
your new home. In some states, attorneys offer title insurance as
part of their services in examining title and providing a title
opinion. The attorney's fee may include the title insurance
premium. In other states, a title insurance company or title
agent directily provides the title insurance.
Owner's Policy:
A lender’s title insurance policy does not protect
you. Similarly, the prior owner’s policy does not protect you. If you
want to protect yourself from claims by others against your new home,
you will need an owner's policy. When a claim does occur, it can be
financially devastating to an owner who is uninsured. If you buy an
owner's policy, it is usually much less expensive if you buy it at the
same time and with the same insurer as the lender's policy.
Choice of Title Insurer:
Under RESPA, the seller may not require you, as a
condition of the sale, to purchase title insurance from any particular
title company. Generally, your lender will require title insurance from
a company that is acceptable to it. In most cases you can shop for and
choose a company that meets the lender’s standards.
Review Initial Title Report:
In many areas, a few days or weeks before the
settlement or closing of the escrow, the title insurance company will
issue a "Commitment to Insure" or preliminary report or "binder"
containing a summary of any defects in title which have been identified
by the title search, as well as any exceptions from the title insurance
policy’s coverage. The commitment is usually sent to the lender for use
until the title insurance policy is issued at or after the settlement.
You can arrange to have a copy sent to you (or to your attorney) so
that you can object if there are matters affecting the title which you
did not agree to accept when you signed the agreement of
sale.
Buying Your Home: Settlement Costs and Helpful
Information
F. Securing Title Services
...CONTINUED
Coverage & Cost Savings:
To save money on title insurance, compare rates
among various title insurance companies. Ask what services and
limitations on coverage are provided under each policy so that you can
decide whether coverage purchased at a higher rate may be better for
your needs. However, in many states, title insurance premium rates are
established by the state and may not be negotiable. If you are buying a
home which has changed hands within the last several years, ask your
title company about a "reissue rate," which would be cheaper. If you
are buying a newly constructed home, make certain your title insurance
covers claims by contractors. These claims are known as "mechanics’
liens" in some parts of the country.
Survey:
Lenders or title insurance companies often require a
survey to mark the boundaries of the property. A survey is a drawing of
the property showing the perimeter boundaries and marking the location
of the house and other improvements. You may be able to avoid the cost
of a complete survey if you can locate the person who previously
surveyed the property and request an update. Check with your lender or
title insurance company on whether an updated survey is
acceptable.
G. RESPA Disclosures
One of the purposes of RESPA is to help consumers
become better shoppers for settlement services. RESPA requires that
borrowers receive disclosures at various times. Some disclosures spell
out the costs associated with the settlement, outline lender servicing
and escrow account practices and describe business relationships
between settlement service providers.
Good Faith Estimate of Settlement Costs:
RESPA requires that, when you apply for a loan, the
lender or mortgage broker give you a Good Faith Estimate of settlement
service charges you will likely have to pay. If you do not get this
Good Faith Estimate when you apply, the lender or mortgage broker must
mail or deliver it to you within the next three business
days.
Be aware that the amounts listed on the Good Faith
Estimate are only estimates. Actual costs may vary. Changing market
conditions can affect prices. Remember that the lender's estimate is
not a guarantee. Keep your Good Faith Estimate so you can compare it
with the final settlement costs and ask the lender questions about any
changes.
Servicing Disclosure Statement:
RESPA requires the lender or mortgage broker to tell
you in writing, when you apply for a loan or within the next three
business days, whether it expects that someone else will be servicing
your loan (collecting your payments).
Affiliated Business Arrangements:
Sometimes, several businesses that offer settlement
services are owned or controlled by a common corporate parent. These
businesses are known as "affiliates." When a lender, real estate
broker, or other participant in your settlement refers you to an
affiliate for a settlement service (such as when a real estate broker
refers you to a mortgage broker affiliate), RESPA requires the
referring party to give you an Affiliated Business Arrangement
Disclosure. This form will remind you that you are generally not
required, with certain exceptions, to use the affiliate and are free to
shop for other providers.
HUD-1 Settlement Statement:
One business day before the settlement, you have the
right to inspect the HUD-1 Settlement Statement. This statement
itemizes the services provided to you and the fees charged to you. This
form 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. The fully
completed HUD-1 Settlement Statement generally must be delivered or
mailed to you at or before the settlement. In cases where there is no
settlement meeting, the escrow agent will mail you the HUD-1 after
settlement, and you have no right to inspect it one day before
settlement.
Escrow Account Operation &
Disclosures:
Your lender may require you to establish an escrow
or impound account to insure that your taxes and insurance premiums are
paid on time. If so, you will probably have to pay an initial amount at
the settlement to start the account and an additional amount with each
month's regular payment. Your escrow account payments may include a
"cushion" or an extra amount to ensure that the lender has enough money
to make the payments when due. RESPA limits the amount of the cushion
to a maximum of two months of escrow payments.
At the settlement or within the next 45 days, the
person servicing your loan must give you an initial escrow account
statement. That form will show all of the payments which are expected
to be deposited into the escrow account and all of the disbursements
which are expected to be made from the escrow account during the year
ahead. Your lender or servicer will review the escrow account annually
and send you a disclosure each year which shows the prior year's
activity and any adjustments necessary in the escrow payments that you
will make in the forthcoming year.
H. Processing Your Loan Application
There are several federal laws which provide you
with protection during the processing of your loan. The Equal Credit
Opportunity Act ("ECOA"), the Fair Housing Act, and the Fair Credit
Reporting Act ("FCRA") prohibit discrimination and provide you with the
right to certain credit information.
Buying Your Home: Settlement Costs and Helpful
Information
H. Processing Your Loan Application
...CONTINUED
No Discrimination:
ECOA prohibits lenders from discriminating against
credit applicants on the basis of race, color, religion, national
origin, sex, marital status, age, the fact that all or part of the
applicant's income comes from any public assistance program, or the
fact that the applicant has exercised any right under any federal
consumer credit protection law. To help government agencies monitor
ECOA compliance, your lender or mortgage broker must request certain
information regarding your race, sex, marital status and age when
taking your loan application.
The Fair Housing Act also prohibits discrimination
in residential real estate transactions on the basis of race, color,
religion, sex, handicap, familial status or national origin. This
prohibition applies to both the sale of a home to you and the decision
by a lender to give you a loan to help pay for that home. Finally, your
locality or state may also have a law which prohibits
discrimination.
Frequently, there are differences in the types and
amounts of settlement costs charged to the borrower -- for example,
some borrowers are charged greater fees for mortgages depending on
their credit worthiness. These differences may be justified or they may
be unlawfully discriminatory. It is important that you examine your
settlement documents closely, especially lines 808-811 on the HUD-1
settlement statement, and do not hesitate to compare your settlement
costs with those of your friends and neighbors.
If you feel you have been discriminated against by a
lender or anyone else in the home buying process, you may file a
private legal action against that person or complain to a state, local
or federal administrative agency. You may want to talk to an attorney;
or you may want to ask the federal agency that enforces ECOA (the Board
of Governors of the Federal Reserve System) or the Fair Housing Act
(HUD) about your rights under these laws.
Prompt Action/Notification of Action
Taken:
Your lender or mortgage broker must act on your
application and inform you of the action taken no later than 30 days
after it receives your completed application. Your application will not
be considered complete, and the 30 day period will not begin, until you
provide to your lender or mortgage broker all of the material and
information requested.
Statement of Reasons for Denial:
If your application is denied, ECOA requires your
lender or mortgage broker to give you a statement of the specific
reasons why it denied your application or tell you how you can obtain
such a statement. The notice will also tell you which federal agency to
contact if you think the lender or mortgage broker has illegally
discriminated against you.
Obtaining Your Credit Report:
The Fair Credit Reporting Act ("FCRA") requires a
lender or mortgage broker that denies your loan application to tell you
whether it based its decision on information contained in your credit
report. If that information was a reason for the denial, the notice
will tell you where you can get a free copy of the credit report. You
have the right to dispute the accuracy or completeness of any
information in your credit report. If you dispute any information, the
credit reporting agency that prepared the report must investigate free
of charge and notify you of the results of the
investigation.
Obtaining Your Appraisal:
The lender needs to know if the value of your home
is enough to secure the loan. To get this information, the lender
typically hires an appraiser, who gives a professional opinion about
the value of your home. ECOA requires your lender or mortgage broker to
tell you that you have a right to get a copy of the appraisal report.
The notice will also tell you how and when you can ask for a
copy.
I. RESPA Protection Against Illegal Referral
Fees
RESPA was enacted because Congress felt that
consumers needed protection from "... unnecessarily high settlement
charges caused by certain abusive practices that have developed in some
areas of the country." Some of the practices Congress was concerned
about are discussed below. Most professionals in the settlement
business provide good service and do not engage in these
practices.
Prohibited Fees:
It is illegal under RESPA for anyone to pay or
receive a fee, kickback or anything of value because they agree to
refer settlement service business to a particular person or
organization. For example, your mortgage lender may not pay your real
estate broker $250 for referring you to the lender. It is also illegal
for anyone to accept a fee or part of a fee for services if that person
has not actually performed settlement services for the fee. For
example, a lender may not add to a third party's fee, such as an
appraisal fee, and keep the difference.
Permitted Payments:
RESPA does not prevent title companies, mortgage
brokers, appraisers, attorneys, settlement/closing agents and others,
who actually perform a service in connection with the mortgage loan or
the settlement, from being paid for the reasonable value of their work.
If a participant in your settlement appears to be taking a fee without
having done any work, you should advise that person or company of the
RESPA referral fee prohibitions. You may also speak with your attorney
or complain to a regulator listed in the Appendix to this
Booklet.
Penalties:
It is a crime for someone to pay or receive an
illegal referral fee. The penalty can be a fine, imprisonment or both.
You may be entitled to recover three times the amount of the charge for
any settlement service by bringing a private lawsuit. If you are
successful, the court may also award you court costs and your
attorney's fees.
Buying Your Home: Settlement Costs and Helpful
Information
J. Your Right to File Complaints
Private Lawsuits:
If you have a problem, the best place to have it
fixed is at its source (the lender, settlement agent, broker, etc.). If
that approach fails and you think you have suffered because of a
violation of RESPA, ECOA or any other law, you may be entitled to sue
in a federal or state court. This is a matter you should discuss with
your attorney.
Government Agencies:
Most settlement service providers are supervised by
a governmental agency at the local, state and/or federal level, some of
which are listed in the Appendix to this Booklet. Your state's Attorney
General may have a consumer affairs division. If you feel that a
provider of settlement services has violated RESPA or any other law,
you can complain to that agency or association. You may also send a
copy of your complaint to the HUD Office of Consumer & Regulatory
Affairs. The address is listed in the Appendix.
Servicing Errors:
If you have a question any time during the life of
your loan, RESPA requires the company collecting your loan payments
(your "servicer") to respond to you. Write to your servicer and call it
a "qualified written request under Section 6 of RESPA." A "qualified
written request" should be a separate letter and not mailed with the
payment coupon. Describe the problem and include your name and account
number. The servicer must investigate and make appropriate corrections
within 60 business days.
III. YOUR SETTLEMENT COSTS
A. Specific Settlement Costs
This part of the Booklet discusses the settlement
services which you may be required to get and pay for and which are
itemized in Section L of the HUD-1 Settlement Statement. You also will
find a sample of the HUD-1 form to help you to understand the
settlement transaction.
When shopping for settlement services, you can use
this section as a guide, noting on it the possible services required by
various lenders and the different fees quoted by service providers.
Settlement costs can increase the cost of your loan, so compare
carefully.
700. Sales/Broker's Commission:
This is the total dollar amount of the real estate
broker's sales commission: This is the total dollar amount of the real
estate broker's sales commission, which is usually paid by the seller.
This commission is typically a percentage of the selling price of the
home.
L. SETTLEMENT CHARGES
Paid From Borrower's
Paid From Seller's
700. TOTAL SALES/BROKER'S
COMMISSION Based on price
$
@ % =
Funds At
Settlement Funds At
Settlement
Division of Commission (line 700)
as follows:
701. $
to
702. $
to
703. Commission Paid at
Settlement
704.
800. Items Payable in Connection with Loan:
These are the fees that lenders charge to process,
approve and make the mortgage loan:
801. Loan Origination:
This fee is usually known as a loan origination fee
but sometimes is called a "point" or "points." It covers the lender's
administrative costs in processing the loan. Often expressed as a
percentage of the loan, the fee will vary among lenders. Generally, the
buyer pays the fee, unless otherwise negotiated.
802. Loan Discount:
Also often called "points" or "discount points," a
loan discount is a one-time charge imposed by the lender or broker to
lower the rate at which the lender or broker would otherwise offer the
loan to you. Each "point" is equal to one percent of the mortgage
amount. For example, if a lender charges two points on a $80,000 loan
this amounts to a charge of $1,600.
803. Appraisal Fee:
This charge pays for an appraisal report made by an
appraiser.
804. Credit Report Fee:
This fee covers the cost of a credit report, which
shows your credit history. The lender uses the information in a credit
report to help decide whether or not to approve your loan and how much
money to lend you.
805. Lender's Inspection Fee:
This charge covers inspections, often of newly
constructed housing, made by employees of your lender or by an outside
inspector. (Pest or other inspections made by companies other than the
lender are discussed in line 1302.)
III. YOUR SETTLEMENT COSTS
A. Specific Settlement Costs
...CONTINUED
807. Assumption Fee:
This is a fee which is charged when a buyer
"assumes" or takes over the duty to pay the seller's existing mortgage
loan.
808. Mortgage Broker Fee:
Fees paid to mortgage brokers would be listed here.
A CLO fee would also be listed here.
800. ITEMS PAYABLE IN
CONNECTION WITH LOAN
801. Loan Origination
Fee
%
802. Loan Discount
%
803. Appraisal Fee
to
804. Credit Report
to
805. Lender's Inspection
Fee
806. Mortgage Insurance
Application Fee to
807. Assumption Fee
808. Mortgage Broker
Fee
809.
810.
811.
900. Items Required by Lender to Be Paid in Advance:
You may be required to prepay certain items at the
time of settlement, such as accrued interest, mortgage insurance
premiums and hazard insurance premiums.
901. Interest:
Lenders usually require borrowers to pay the
interest that accrues from the date of settlement to the first monthly
payment.
902. Mortgage Insurance Premium:
The lender may require you to pay your first year's
mortgage insurance premium or a lump sum premium that covers the life
of the loan, in advance, at the settlement.
903. Hazard Insurance Premium:
Hazard insurance protects you and the lender against
loss due to fire, windstorm, and natural hazards. Lenders often require
the borrower to bring to the settlement a paid-up first year's policy
or to pay for the first year's premium at settlement.
904. Flood Insurance:
If the lender requires flood insurance, it is
usually listed here.
900. ITEMS REQUIRED BY
LENDER TO BE PAID IN ADVANCE
901. Interest from
to
@% /day
902. Mortgage Insurance Premium
for
months to
903. Hazard Insurance Premium
for
years to
904.
years to
905.
1000 - 1008. Escrow Account Deposits:
These lines identify the payment of taxes and/or
insurance and other items that must be made at settlement to set up an
escrow account. The lender is not allowed to collect more than a
certain amount. The individual item deposits may overstate the amount
that can be collected. The aggregate adjustment makes the correction in
the amount on line 1008. It will be zero or a negative
amount.
1000. RESERVES
DEPOSITED WITH LENDER
1001. Hazard Insurance
Premiums
months @ $
per month
1002. Mortgage
Insurance
months @ $
per month
1003. City Property
Taxes
months @ $
per month
1004. County Property
Taxes
months @ $
per month
1005. Annual
Assessments
months @ $
per month
1006.
months @ $
per month
1007.
months @ $
per month
1008. Aggregate
Adjustment
1100. Title Charges:
Title charges may cover a variety of services
performed by title companies and others. Your particular settlement may
not include all of the items below or may include others not
listed.
III. YOUR SETTLEMENT COSTS
A. Specific Settlement Costs
...CONTINUED
1101. Settlement or Closing Fee:
This fee is paid to the settlement agent or escrow
holder. Responsibility for payment of this fee should be negotiated
between the seller and the buyer.
1102-1104. Abstract of Title Search, Title
Examination, Title Insurance Binder:
The charges on these lines cover the costs of the
title search and examination.
1105. Document Preparation:
This is a separate fee that some lenders or title
companies charge to cover their costs of preparation of final legal
papers, such as a mortgage, deed of trust, note or deed.
1106. Notary Fee:
This fee is charged for the cost of having a person
who is licensed as a notary public swear to the fact that the persons
named in the documents did, in fact, sign them.
1107. Attorney's Fees:
You may be required to pay for legal services
provided to the lender, such as an examination of the title binder.
Occasionally, the seller will agree in the agreement of sale to pay
part of this fee. The cost of your attorney and/or the seller's
attorney may also appear here. If an attorney's involvement is
required by the lender, the fee will appear on this part of the form,
or on lines 1111, 1112 or 1113.
1108. Title Insurance:
The total cost of owner's and lender's title
insurance is shown here.
1109. Lender's Title Insurance:
The cost of the lender's policy is shown
here.
1110. Owner's (Buyer's) Title Insurance:
The cost of the owner's policy is shown
here.
1100. TITLE
CHARGES
1101. Settlement or Closing
Fee
to
1102. Abstract or Title
Search
to
1103. Title
Examination
to
1104. Title Insurance
Binder
to
1105. Document
Preparation
to
1106. Notary Fees
to
1107. Attorney's Fees
to
(includes above items
numbers;
)
1108. Title Insurance
(includes above items
numbers;
)
1109. Owner's Coverage
$
1110. Lender's
Coverage
$
1111.
1112.
1113.
1200. Government Recording and Transfer Charges:
These fees may be paid by you or by the seller,
depending upon your agreement of sale with the seller. The buyer
usually pays the fees for legally recording the new deed and mortgage
(line 1201). Transfer taxes, which in some localities are collected
whenever property changes hands or a mortgage loan is made, can 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).
1200. GOVERNMENT
RECORDING & TRANSFER CHARGES
1201. Recording
Fees:
Deed:
Mortgage$
Releases$
1202. City/County
Tax/Stamps:
Deed$
Mortgage$
1203. State Tax /
Stamps:
Deed$
Mortgage$
1204.
1205.
1300. Additional Settlement Charges:
1301. Survey:
The lender may require that a surveyor conduct a
property survey. This is a protection to the buyer as well. Usually the
buyer pays the surveyor's fee, but sometimes this may be paid by the
seller.
III. YOUR SETTLEMENT COSTS
A. Specific Settlement Costs
...CONTINUED
1302. Pest and Other Inspections:
This fee is to cover inspections for termites or
other pest infestation of your home.
1303-1305. Lead-Based Paint Inspections:
This fee is to cover inspections or evaluations for
lead-based paint hazard risk assessments and may be on any blank line
in the 1300 series.
1300. ADDITIONAL
SETTLEMENT CHARGES
1301. Survey
to
1302. Pest Inspection
to
to
1303.
1304.
1305.
1400. Total Settlement Charges:
The sum of all fees in the borrower's column
entitled "Paid from Borrower's Funds at Settlement" is placed here.
This figure is then 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 and added to the purchase price. The
sum of all of 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.
1400. TOTAL ESTIMATED SETTLEMENT
CHARGES
(enter on lines 103, Section J
and 502, Section K)
Paid Outside Of Closing ("POC"):
Some fees may be listed on the HUD-1 to the left of
the borrower's column and marked "P.O.C." Fees such as those for credit
reports and appraisals are usually paid by the borrower before
closing/settlement. They are additional costs to you. Other
fees such as those paid by the lender to a mortgage broker or other
settlement service providers may be paid after
closing/settlement. These fees are usually included in the
interest rate or other settlement charge. They are not an
additional cost to you. These types of fees will not be added
into the total on Line 1400.
B. Calculating The Amount You Need At
Settlement
The first page of the HUD-1 Settlement Statement
summarizes all the costs and adjustments for the borrower and seller.
Section J is the summary of the borrowerâ costs and adjustments
for the borrower and seller. Section J is the summary of the borrower's
transaction and Section K is the summary of the seller's side of the
transaction. You may receive a copy of the seller's side, but it is not
required.
Section 100 summarizes the borrower's costs, such as
the contract cost of the house, any personal property being purchased,
and the total settlement charges owed by the borrower from Section
L.
Beginning at line 106, adjustments are made for
items (such as taxes, assessments, fuel) that the seller has previously
paid. If you will benefit from these items after settlement, you will
usually repay the seller for that portion of the cost.
Here is an example for you to use in making your own
calculations:
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
107. County taxes
108. Assessments
6/30
to 6/30
(owner's assn)
40.00
109. Fuel oil 25
gal @ $1.00/gal
25.00
110.
111.
112.
120. GROSS AMOUNT DUE FROM
BORROWER
104,065.00
III. YOUR SETTLEMENT COSTS
B. Calculating The Amount You Need At
Settlement
...CONTINUED
Assume in this example, the cost of the house is
$100,000 and the borrower's total settlement charges brought from Line
1400 of Section L are $4,000. Assume that the settlement date is July
1. Here the borrower has agreed to pay the seller for the $40 Home
Owners Association dues that have been paid for the month of July and
for the 25 gallons of fuel oil left in the tank. This is added for a
gross amount due from the borrower of $104,065.
Section 200 lists the amount paid by the borrower or
on behalf of the borrower. This will include the deposit of earnest
money you put down with the agreement of sale, the loan(s) you are
getting and any loan you may be assuming.
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
211. County taxes
1/1
to 6/30
$1200/yr
600.00
212. Assessments
1/1
to 6/30
$200/yr
100.00
213.
214.
215.
216.
217.
218.
219.
220.
82,700.00
Beginning at Line 210, adjustments are made for
items that the seller owes (such as taxes, assessments) but for which
you as the borrower will pay after settlement. The seller will usually
pay you or credit you this portion at settlement.
In this example, assume the borrower paid an earnest
deposit of $2,000 and is getting a loan for $80,000. A tax of $1200 and
an assessment of $200 are due at the end of the year. The seller will
pay the borrower for six months or one-half of this amount. Line 220
shows the total $82,700 to be paid by or for the borrower.
Section 300 reflects the difference between the
gross amount due from the borrower and the total amount paid by/for the
borrower. Generally, line 303 will show the amount of cash the borrower
must bring to settlement.
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 ( [X] FROM ) ( [ ]
TO) BORROWER
21,365.00
In this example, the borrower must bring $21,365.00
to settlement.
C. Adjustments To Costs Shared By Buyer and
Seller
At settlement it is usually necessary to make an
adjustment between buyer and seller for property taxes and other
expenses. The adjustments between buyer and seller are shown in
Sections J and K of the HUD-1 Settlement Statement. In the example
given above, the taxes, which are payable annually, had not yet been
paid when the settlement occurs on July 1. 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 six months of the year. Thus,
one half 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:
211. County taxes
01/01/97
to 06/30/97
$1200/yr
600.00
511. County taxes
01/01/97
to 06/30/97
$1200/yr
600.00
The borrower is given credit for this amount at the
settlement and the seller will pay this amount or count it as a
deduction from sums payable to the seller.
III. YOUR SETTLEMENT COSTS
C. Adjustments To Costs Shared By Buyer and
Seller
...CONTINUED
Similar adjustments are made for homeowner
association dues, special assessments, and fuel and other utilities,
although the billing periods for these may not always be on an annual
basis. Be sure you work out these cost sharing arrangements or
"prorations" with the seller before the settlement. You may wish to
notify utility companies of the change in ownership and ask for a
special reading on the day of settlement, with the bill for
pre-settlement charges to be mailed to the seller at his or her new
address or to the settlement agent. This will eliminate much confusion
that can result if you are billed for utilities used when the seller
owned the property.
IV. APPENDIX
A. Appendix
Consumer Information on Home Purchasing and Related
Topics
U.S. Department of Housing and Urban
Development
451 7th Street, SW
Washington, DC 20410
For information about FHA-insured home mortgage
loans on one-to-four family dwellings call:
1-800 CALL FHA (800-225-5342)
For information about buying a HUD home
call:
1-800-767-4HUD (800-767-4483)
For consumer counseling referrals call:
1-888-HOME4US (1-888-466-3487)
For information regarding housing discrimination
issues contact:
Office of Fair Housing and Equal
Opportunity
(see above HUD address)
1-800-669-9777
For information about RESPA contact:
Office of Consumer and Regulatory
Affairs
(see above HUD address)
Other Agencies
For information about programs and pamphlets offered
by the Department of Veterans Affairs, contact your nearest VA Regional
Office.
Web Site: http://www.va.gov/vas/loan
For information about rural housing loan programs
contact:
Department of Agriculture
Rural Development/Rural Housing Services
Stop 0783
Washington, DC 20250
Web Site: http://www.rurdev.usda.gov
For information about the Truth in Lending Act and
the Equal Credit Opportunity Act contact:
Federal Reserve Board
20th Street and Constitution Avenue, NW
Washington, DC 20551
Web Site: http://www.bog.frb.fed.us
DISCLAIMER
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 June 11, 1997 this publication has been
revised and updated.
FOR MORE INFORMATION CONTACT:
U.S. Department of Housing and Urban
Development
451 7th Street, SW
Washington, DC 20410