The following home-buying guide comes from the U.S. Department of Housing and Urban Development.
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.
Buying and Financing a Home
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.
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
HUD Home Buying Guide
page 3
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?
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.
HUD Home Buying Guide
page 4
Sales Price. For most home purchasers, the sales price is the most
important term. Recognize that other nonmonetary 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
HUD Home Buying Guide
page 5
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 leadbased
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
HUD Home Buying Guide
page 6
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.
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
HUD Home Buying Guide
page 7
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
HUD Home Buying Guide
page 8
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
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:
HUD Home Buying Guide
page 9
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
HUD Home Buying Guide
page 10
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
HUD Home Buying Guide
page 11
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.
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.
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.
HUD Home Buying Guide
page 12
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.
HUD Home Buying Guide
page 13
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.
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
HUD Home Buying Guide
page 14
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
HUD Home Buying Guide
page 15
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.
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
HUD Home Buying Guide
page 16
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
HUD Home Buying Guide
page 17
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.
RESPA PROTECTION AGAINST ILLEGAL REFERRAL FEES
RESPA was enacted because Congress felt that consumers needed
protection from “… unnecessarily high settlement charges caused by
certain abusive practices that have developed in some areas of the
country.” Some of the practices Congress was concerned about are
discussed below. Most professionals in the settlement business provide
good service and do not engage in these practices.
Prohibited Fees. It is illegal under RESPA for anyone to pay or receive
a fee, kickback or anything of value because they agree to refer
settlement service business to a particular person or organization. For
example, your mortgage lender may not pay your real estate broker
$250 for referring you to the lender. It is also illegal for anyone to
accept a fee or part of a fee for services if that person has not actually
HUD Home Buying Guide
page 18
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.
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
HUD Home Buying Guide
page 19
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.
YOUR SETTLEMENT COSTS
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.
HUD Home Buying Guide
page 20
L. Settlement Charges
700. TOTAL SALES/BROKER’S COMMISSION
based on price $ @ %=
Division of Commission (line 700) as
follows:
Paid From Borrower’s
Funds at Settlement
Paid From Seller’s
Funds
at Settlement
701: $
702: $
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 an $80,000
loan this amounts to a charge of $1,600.
HUD Home Buying Guide
page 21
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
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:
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:
1007:
months @$
months @$
per month
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.
HUD Home Buying Guide
page 24
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
(includes above items numbers)
to
1108: Title Insurance
(includes above items numbers)
to
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).
HUD Home Buying Guide
page 26
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
$
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
1400: 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.
Calculating the Amount You Need at Settlement
HUD Home Buying Guide
page 28
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) $4000.00
104:
105:
Adjustments for items paid by seller in advance
106: City/Town Taxes
107: County Taxes
108: Assessments 6/30 to
7/31
$40.00
109: Fuel Oil 25 gals. @ $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 Loans $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 $200/year $600.00
212: Assessments 1/1 to 6/30 $200/year $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 SETLEMENT 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.
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
511: County Taxes 1/1/97
to 6/30/97
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,
HUD Home Buying Guide
page 32
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.
HUD Settlement Statement
A. U.S. DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT SETTLEMENT STATEMENT
6. File Number 7. Loan
Number
B. TYPE OF LOAN
1. __FHA 2. __FmHA
3. __CONV. UNINS. 4. __VA 5. __CONV. INS
8. Mortgage Insurance Case
Number
C. NOTE: This form is furnished to give you a statement of actual settlement costs.
Amounts
paid to and by the settlement agent are shown. Items marked “(p.o.c.)” were paid outside
the closing; they are shown here for informational purposes and are not included in the
totals.
D. NAME AND ADDRESS
OF
BORROWER:
E. NAME AND ADDRESS
OF SELLER:
F. NAME AND ADDRESS
OF LENDER:
G. PROPERTY LOCATION: H. SETTLEMENT AGENT: NAME, AND ADDRESS
PLACE OF SETTLEMENT: I. SETTLEMENT DATE:
J. SUMMARY OF BORROWER’S
TRANSACTION
K. SUMMARY OF SELLER’S
TRANSACTION
100. GROSS AMOUNT DUE FROM
BORROWER:
400. GROSS AMOUNT DUE TO SELLER:
101. Contract sales price 401. Contract sales price
102. Personal property 402. Personal property
103. Settlement charges to
borrower(line 1400)
403.
104. 404.
105. 405.
Adjustments for items paid by seller in
advance
Adjustments for items paid by seller in
advance
106. City/town taxes to 406. City/town taxes to
107. County taxes to 407. County taxes to
108. Assessments to 408. Assessments to
109. 409.
110. 410.
111. 411.
112. 412.
120. GROSS AMOUNT DUE
FROM BORROWER
420. GROSS AMOUNT DUE
TO
SELLER
200. AMOUNTS PAID BY
OR IN BEHALF OF
BORROWER:
500. REDUCTIONS IN
AMOUNT DUE TO SELLER:
201. Deposit of earnest
money
501. Excess deposit (see
instructions)
202. Principal amount of new
loan(s)
502. Settlement charges to
seller
(line 1400)
203. Existing loan(s) taken subject
to
503. Existing loan(s) taken subject to
204. 504. Payoff of first mortgage
loan
205. 505. Payoff of second
mortgage
loan
206. 506.
207. 507.
208. 508.
209. 509.
Adjustments for items unpaid by seller Adjustments for items unpaid by seller
210. City/town taxes to 510. City/town taxes to
211. County taxes to 511. County taxes to
212. Assessments to 512. Assessments to
213. 513.
214. 514.
215. 515.
216. 516.
217. 517.
218. 518.
219. 519.
220. TOTAL PAID BY/FOR
BORROWER
520. TOTAL REDUCTION
AMOUNT DUE SELLER
300. CASH AT SETTLEMENT
FROM/TO BORROWER
600. CASH AT SETTLEMENT
TO/FROM SELLER
301. Gross amount due from
borrower(line 120)
601. Gross amount due to
seller
(line 420)
302. Less amounts paid by/for
borrower(line 220)
602. Less reductions in amount
due seller (line 520)
303. CASH (__FROM) (__TO)
BORROWER
603. CASH (__TO)
(__FROM)
SELLER
HUD Home Buying Guide
page 30
L. SETTLEMENT CHARGES
700. TOTAL SALES/BROKER’S COMMISSION
based on price $ @ %=
Division of Commission (line 700) as
follows:
Paid From Borrower’s
Funds at Settlement
Paid From Seller’s
Funds
at Settlement
701: $
702: $
703: Commission paid at Settlement
704:
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
807: Assumption Fee
808: Mortgage Broker Fee
809:
810:
811:
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:
905:
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
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
(includes above items numbers) to
1108: Title Insurance
(includes above items numbers) to
1109: Lender’s Coverage
1110: Owner’s Coverage
1111:
1112:
1113:
HUD Home Buying Guide
page 39
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 $
1204:
1205:
1300: ADDITIONAL SETTLEMENT CHARGES
1301: Survey to
1302: Pest Inspection to
1303:
1304:
1305:
1400: TOTAL SETTLEMENT CHARGES
1400: Enter on lines 103, Section J and 502, Section K
Appendix
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
Darin Weidauer
Realtor
702-582-7084
1601 Pacific Coast Hwy., Suite 265
Hermosa Beach, CA 90254
CA DRE License #01870184
3090 S. Durango #100
Las Vegas, NV 89117
www.weidauergroup.com
