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Overview of Buying A Home
Table of Contents
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
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 (“RESPA”), 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
F requently, 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
I f 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
Y our 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
S ettlement 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
R 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
T his 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 COMMISSION based on price $ @ %= PAID
FROM BORROWER’S FUNDS AT PAID FROM SELLER’S FUNDS AT Division of
Commission (line 700) as follows: SETTLEMENT SETTLEMENT
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 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
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
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
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 to
(includes above items numbers; )
1109. Lender’s coverage $
1110. Owner’s coverage $
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 CHARGES
1201. Recording fees: Deed $ ; Mortgage $ ; Releases $
1202. City/county tax/stamps: Deed $ ; Mortgage $
1203. State tax/stamps: Deed $ ; Mortgage $
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
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) 4,000.00
104.
105. Adjustments for items paid by seller in advance
106. City/town taxes to
107. County taxes to
108. Assessments 6/30 to 7/31 (owners assn.) 40.00 109. Fuel Oil
25 gals. @ $1.00/gal. 25.00
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
209. Adjustments for items unpaid by seller
210. City/town taxes to
211. County taxes 1/1 to 6/30 $1,200/ year 600.00
212. Assessments 1/1 to 6/30 $200/yr. 100.00
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 (? 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 t 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.
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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