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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Now
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.
