I was teaching our online Professional Real Estate Investor class and I used the term HUD 1 without giving it a second thought. However, I then received an email from a student asking me to explain what a HUD 1 statement is and why they need to know about it. What a great topic for an article.
First, let’s start with the definition of a Good-Faith-Estimate: An estimate of the fees due at closing for a mortgage loan. This estimate must be provided by a lender to a borrower within three days of the lender taking a borrowers application. This estimate is required by RESPA (Real Estate Settlement Procedures Act). This is only an estimate and the final amount can sometimes be different. There is a standardized form that is used in the industry to allow borrowers to compare costs between lenders.
Next is the “HUD 1”: Also known as the settlement statement. It shows the final accounting of all the costs (we’ll explore those next) and credits associated with the successful completion of a real estate transaction that involves a mortgage. Now it is “Best Practice” for whoever the third party is doing the closing (whether it’s a title company, lawyer or escrow company) to use a HUD 1 for all the final accounting even if there isn’t a loan involved in the transaction.
If you’re the seller, the HUD 1 will tell you how much you will receive in cash from the sale of the property. If you’re a buyer it will tell you how much it’s going to cost. There is that word again, COST. So what are the costs?
Costs in a real estate transaction break down in large and small amounts:
Down Payment: This amount depends more on the price of the property and the loan requirements. The typical range is anywhere between 3% for a FHA/VA loan to a standard 20% down payment.
Loan Origination and Points: You may agree to pay “points” in order to get a lower interest rate. Think of this as pre-paid interest. For each point purchased, the loan rate is typically reduced by 1/8 of a percentage.
Sales/Brokers’ Commission: This is the total dollar amount of the real estate broker’s sales commission, which is usually paid by the seller. The commission is typically a percentage of the selling price of the home.
Appraisal Fee: This charge pays for an appraisal report made by an appraiser, required by the lender.
Credit Report and Score Fee: This charge is required by a lender. The cost is around $10-$20.
Mortgage Broker Fee: Fees paid to the broker who facilitated your loan, not a direct lender.
Interest: Lenders usually require borrowers to pay the interest that accrues from the date of settlement to the first monthly payment.
Mortgage Insurance Premium: Also known as PMI. This is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home’s value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI. PMI protects your lender if you default on a loan, something that weighs heavily on the minds of lenders in today’s economic climate.
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 pay the first year’s premium at settlement.
Title Insurance: Insurance that covers the loss of an interest in a property due to legal defects and is required if the property has a mortgage. This is most often paid by the borrower.
Settlement or Closing Fee: This fee is paid to the settlement agent or escrow holder. Who pays this fee is often negotiated between the seller and buyer.
Document Preparation Fee: This is a separate fee that some lenders or title companies use to cover their costs of preparation of the final legal papers such as the mortgage, deed of trust, note or deed. There will also likely be a notary fee when the documents are signed.
Inspection Fees: Such as Pest, Mold, Lead-Based Paint and so on.
Paid Outside of Closing (“POC”): Fees such as those for credit reports and appraisals are usually paid by the borrowers before closing/settlement.
Hope this was helpful; the HUD 1 is the most important document from your closing. You will need it for tax purposes and it should ALWAYS be kept as part of your permanent record.