Up until now, if you have ever purchased or financed a home, chances are you have also completed a HUD-1 Settlement Statement. This settlement statement is mandatory in any Real Estate transaction involving financing, which was put into place to protect consumers. This protection to consumers is regulated under The Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) which was originally administered by the Housing and Urban Development (HUD) and is now administered by the Consumer Financial Protection Bureau (CFPB).
WHAT IS A HUD-1 SETTLEMENT STATEMENT?
According to RESPA, the HUD-1 Settlement form is to be used by all lenders of loans providing funds for real estate purchases and refinances of real estate loans and must be given to the borrower at least one day prior to the date of settlement. Along with the HUD-1 form, there is also a Good Faith Estimate (GFE) provided by the lender and a Truth-in-Lending Disclosure. Normally, these documents are used when there is financing involved, however, the forms can also be used when there is an all cash sale but is not mandatory.
The HUD-1 Settlement Statement along with the Good Faith Estimate and the Truth-in-Lending Disclosure are all documents that are prepared by a settlement agent, also known as a closing agent at the closing of a real estate loan. The final version will provide the buyer and seller of a transaction a breakdown of all costs individually and to whom each charge or fee is paid to.
WHAT DOES A HUD-1 CONSIST OF?
A HUD-1 Settlement Statement is a 3 page document which consists of details of all involved parties such as the buyer, seller, lender, property, settlement agent, and a breakdown of all figures. Below, you will find the different parts of a HUD-1 form.
The gross amount due from the buyer and the seller (lines 301 and 601). This includes the contract sales price, value of any personal property and the total amount of the settlement charges and fees extracted from the final total on page 2 (line 1400).
Adjustments for items paid in advance by the seller primarily calculated from taxes paid (lines 406-408).
Amounts paid for by or in behalf of the borrower (line 220), and reductions in the amount due to the seller (line 520).
Cash at settlement due from or to the buyer and seller
Fees related to the loan
Items required to be paid in advance by the lender
Deposits reserved with the lender
Government recording and transfer charges
Any additional settlement charges
Page three consist of figures related to the Good Faith Estimate and the details of the terms of the loan. The loan terms include the originating loan amount, interest rate, interest rate details, and 0ther payment details.
WHAT IS THE PURPOSE OF A HUD-1?
These docuemts are given to the buyer of the property or borrower of the loan at least 1 day prior to the actual closing date. The Good Faith Estimate is generated by the lender and given to the Settlement Agent at least 3 days prior to close and the buyer/borrower will usually get it the day before. These documents can be complicated to review and that is why a settlement lawyer is recommended to explain the documents to the buyer agent and buyer client.
The main purpose of these forms is to generally breakdown the entire transaction, fee by fee and for each party to be sure that all terms are agreed upon before the closing date. There are many times when at closing, the terms will be changed (even though they are not supposed to be) and this will prolong the settlement process. The Good Faith Estimate produced by the lender is a precise estimate of all charges and fees, however, the actual amount at closing may differ from the estimate. The actual settlement fees cannot exceed more than 10% of the estimated fees located on the Good Faith Estimate.
Recently, the Consumer Financial Protection Bureau stated that the current 3-page HUD-1 Settlement Statement is “replete with…technical and legal jargon… that may be more confusing than helpful. Complicated and lengthy disclosures can make it hard to answer or even ask the right questions.”
Because of what the CFPB believes, they have decided to do away with the HUD-1 settlement forms including the Good Faith Estimate and the Truth-in-Lending disclosure and replace them with forms entitled “Loan Estimate” and “Settlement Disclosure Form” also known as “Closing Disclosure form”. This change was effective October 3rd, 2015. The National Association of Realtors (NAR) is hosting a series of webinars on the topic. To learn when the next one is, go to Realtor.org/respa. Below are examples of the new forms:
Along with these new forms comes along new rules for closing procedures. One major rule requires that all forms are to be ready “three” days prior to closing. With the current HUD-1 documents, the requirement is “one” day before closing, and the new rule makes it mandatory to allow “three” days. The National Association of Realtors (NAR) is recommending that documents are ready “seven” days prior to closing, so that when you go into the three-day period, changes will not have to be made before closing. If an individual would wait until the 3 day period to get everything ready for closing, but decides that changes have to be made, there may not be enough time to make the appropriate changes and therefore, the 3 day period would then restart.
Take a look at this video from Ken Trepeta of NAR Government Affairs as he explains what to expect with the new forms.
WILL THE CHANGES BE BETTER?
These changes were made to accommodate the consumer when purchasing a house. When you are investing in real estate and you purchase houses several times per year, the HUD-1 form could be a pain to deal with, but will the changes not only make home buying easy for consumers but for us investors as well? There are still some things that need working out with these new forms and of course, Lenders, title companies, lawyers, agents all alike will have to change or update their current systems to accommodate the change. The biggest drawback is that the forms must be complete and correct and presented to the buyers three days before closing. Any major changes and it resets the clock another three days before you can close. This will undoubtedly delay closings as most closings I have been a part of involve last minute changes.
To learn more about the new closing documents, you can go to Realtor.org/respa to view a few seminars and also check out the Consumer Financial Protection Bureau’s website at CFPB.gov.
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