This information was obtained from a
government web site at:
this address.
I. Introduction
II. Buying & Financing A Home
A. Role of the Real Estate Broker
B. Selecting an Attorney
C. Terms of the Agreement of Sale
D. Shopping For a Loan
E. Selecting a Settlement Agent
F. Securing Title Services
G. RESPA Disclosures
H. Processing Your Loan Application
I. RESPA Protection Against Illegal Referral Fees
J. Your Right to File Complaints
III. Your Settlement Costs
A. Specific Settlement Costs
B. Calculating the Amount You Need At Settlement
C. Adjustments To Costs Shared By Buyer and Seller
D. HUD-1 Settlement Statement
IV. Appendix
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 settlement process. Lenders and mortgage brokers
are required by federal law, the Real Estate Settlement Procedures Act
to give you this booklet. You should receive it when applying for a loan, or
within three business days afterwards. Real estate brokers frequently hand
out this booklet as well.
You probably started the home buying process in one of two ways: you
saw a home you were interested in buying or you consulted a lender to
figure out how much money you could borrow before you found a home
(sometimes called pre-qualifying). The next step is to sign an
agreement of sale with the seller, followed by applying for a loan to
purchase your new home. The final step is called "settlement" or
"closing"", where the legal title to the property is transferred to you.
At each of these steps you often have the opportunity to negotiate the
terms, 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 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 buying a home, to eliminate, as much as possible, the mysteries of
the settlement process.
II. BUYING AND FINANCING A HOME
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.
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.
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?
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.
Sales 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 or Company. 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.
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 Brokers. 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 Rate, "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.
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.
Transfer of Your Loan. While you may start the loan process with a
lender or mortgage broker, you could find that after settlement another
company may be collecting the payments on your loan. Collecting loan
payments is often known as "servicing" the loan. Your lender or broker
will disclose whether it expects to service your loan or to transfer the
servicing to someone else.
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 directly 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.
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.
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
ESPA 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.
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, which is usually paid by the
seller. This commission is typically a percentage of the selling price
of the home.
L. Settlement Charges
700. Total Sales/broker's Paid from borrowers Paid from seller's
Commission based on funds at settlement funds at settlement
price $ @ %=
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.)
806. Mortgage Insurance Application Fee: This fee covers the
processing of an application for mortgage insurance.
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 Orination 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 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.
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
1001. Settlement or closing fee to
1002. Abstract or title search to
1003. Title examination to
1004. Title insurance binder to
1005. Document preparation to
1006. Notary fees to
1007. Attorney's fees to
(includes above item numbers )
1008. Title Insurance to
(includes above items number )
1109. Lender's coverage $
1110. Owner'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 AND TRANSFER CHARGE
1201. Recording fees: Deed $ Mortgage Release $
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.
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
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 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 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)
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 gal. @ $1,00/gal 25.00
110.
111.
112.
120. Gross Amount Due From Borrower 104,065.00
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.
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.
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/yr 600.00
212. Assessments 1/1 to 6/30 $200/yr. 100.00
213.
214.
215.
216.
217.
218.
219.
220. TOTAL PAID BY/FOR BORROWER 82,700.00
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) ( r 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 1/1/97 to 6/30/97 $600.00
511. County taxes 1/1/97 to 6/30/97 $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.
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.
[Graphic Ommitted]
Consumer Information on Home Purchasing and Related Topics
U.S. Department of Housing and Urban Development
451 7th Street, SW
Washington, DC 20410
Web site: http://www.hud.gov
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
Web site: http://www.hud.gov/fhe/fheo.html
For information about RESPA contact:
Office of Consumer and Regulatory Affairs (see above HUD address)
Web Site: http://www.hud.gov/fha/res/respa_hm.html
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
http://www.bog.frb.fed.us
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