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In the years following the Great Recession, the HUD-1 settlement agreement was used to ensure that buyers and sellers understood the fees that they were being charged at settlement. These days, we use a different form known as an ALTA settlement statement, or the closing disclosure form. However, in the event that you have one of these older forms in your records and you would like to know how it works, read on below for more information.
What is the HUD-1 settlement statement?
At its core, a HUD-1 settlement statement is a standardized form that was once used by settlement agents to itemize all of the charges in a real estate transaction. This form was originally required under the Real Estate Settlement Procedures Act (RESPA) to be used in all real estate transactions that involved federally-regulated mortgages. However, since the passage of the TILA RESPA Integrated Disclosures (TRID), which overhauled the way in which mortgages were processed, the form has only been used for reverse mortgage transactions.
Today, buyers -- who are often referred to as "borrowers" in mortgage contexts -- and sellers use a different form known as the "closing disclosure" to review their closing costs. That said, if you applied for a home loan before October 3, 2015, you would have received a HUD-1 settlement statement instead. Similarly, if you refinanced your home on or before that date, you likely received a HUD-1 A form, which was used in real estate transactions that did not involve a seller.
Understanding the HUD-1 Settlement Statement
Even though there's only a very slim chance that you will ever have to use a HUD-1 statement in today’s market, it's not a bad idea to understand how the basic components of this form work. That way, if you ever do have to read one, you can understand the information.
in general, the HUD-1 settlement statement breaks down into five separate sections:
Type of loan
As the name suggests, this section does include information on what type of loan you're getting. Namely, whether it's a VA loan, conventional loan, or FHA loan. Although you might expect that this section should also contain relevant information about your mortgage loan, such as the interest rate or the total loan amount, it does not. That information is located at the end of the form.
Instead, this is where you should go to find basic information about the property. Specifically, this section will tell you the name and address of the buyer, seller, lender, and settlement agent, as well as the property address and closing date.
Summary of the borrower's transaction
This section of the form details all of the costs that have to do with the borrower, whether something is debited or credited to their account. It's split into four subsections that are as follows:
- Gross amount due from the borrower: This subsection includes the purchase price of the property, the cost of any personal property being purchased by the borrower, and a total amount due from the borrower at settlement.
- Adjustment for items paid by the seller in advance: This subsection includes any prorated items that may have been paid by the seller in advance, including property tax payments or other assessments. It also includes the total amount that the borrower will be charged for these items.
- Amount paid by or on behalf of the borrower: This subsection includes information about the purchaser's earnest money deposit and about any credits that were promised to the buyer during negotiations.
- Adjustments for items unpaid by the seller: Here is where you would find the remainder of any prorated costs paid by the seller, as well as the fee for any settlement charge that was the responsibility of the purchaser, including inspections.
- Cash at settlement from/to borrower: As you might be able to guess, this section includes information about any fees for which the buyer decided to opt for a cash payment.
Summary of the seller's transaction
Similar to the borrower’s section above, this section of the form includes information about all of the seller's credits and costs in the transaction. Ideally, if there are no mistakes, this section should be a mirror image of the figures on the borrower's side.
- Gross amount due to the seller: In addition to accounting for the purchase price and the cost of any personal property, this section also leaves room for additional fees, like unpaid rent.
- Adjustment for items paid by the seller in advance: if the seller is due to receive any money back from the borrower for prorated tax payments or other fees that were paid in advance, this is where they would be recorded.
- Reductions in the amount due to the seller: This is where any fees charged to the seller are described. It should include a payoff amount for any mortgage loan and any existing settlement charges.
- Adjustments for items unpaid by the seller: This is where you would list any fee that the seller still owes to third parties, including unpaid tax bills.
- Cash at settlement from/to seller: This section includes any payments that the seller is accepting in cash.
The "settlement charges'' section is where you really get into a breakdown of the closing costs, are any fees associated with transferring the property from one party to another. It includes information on real estate agent commissions, a list of every fee paid to the mortgage lender, a list of the charges that are being held in escrow, and any title charges or recording fees.
Total settlement charges
Finally, the "total settlement charges" section is meant to help the buyer understand any differences between their good faith estimate that they received when they first filled out their loan application and the settlement statement. It highlights any charges that have changed between these two documents. However, notably, it also includes information about the borrower's loan terms.
What do investors need to know about the settlement statement?
Although this form has not been used for many years, it's still important to keep in your records, especially if you're a real estate investor. Put simply, when this form was in common use, many investors would use it for their tax filing in order to justify certain write-offs. With that in mind, if you think there's a chance you might get audited, you want to keep a copy somewhere where it can easily be found.
If you have any questions regarding an old HUD-1 statement, your best bet is to speak to a real estate agent, attorney, or tax professional. They can help you review the specifics of your situation and offer more individualized advice.
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