Roy Weddleton
  Concord, NH 03301
(603) 228-1360 • roy@granitelaw.com

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RESPA -- In Plain English
What is a HUD-1 Settlement Statement?

The Real Estate Settlement Procedures Act of 1974 (RESPA), a Federal statute, helps to protect you when buying a home. RESPA covers most residential mortgage loans used to finance the purchase of one-to-four family properties including condominiums. At the closing you will be presented with a standard form. This article is an item-by-item explanation of settlement services and costs. Remember that terminology varies by locality so that terminology used here may not exactly match that used in your area. For example, settlement is sometimes called closing, and settlement charges are frequently referred to as closing costs. Before walking into your closing and seeing this form for the first time, it might be helpful to review exactly what you are paying for.

Specific Settlement Services

The following defines and discusses each specific settlement service. The numbers correspond to the items listed in Section L of the HUD-1 Settlement Statement form.

700. Sales/Broker's Commission. This is the total dollar amount of sales commission, usually paid by the seller. Fees are usually a percentage of the selling price of the home, and are intended to compensate brokers or sales agents for their services. Custom and/or the negotiated agreement between the seller and the broker determine the amount of the commission.

701-702. Division of Commission. If several brokers or sales agents work together to sell the home, the commission may be split among them. If they are paid from funds collected for settlement, this is shown on these lines.

703. Commissions Paid at Settlement. Sometimes the broker will retain the deposit against the sales price (earnest money) to apply towards the commission. In this case, line 703 will show only the remainder of the commission which will be paid at settlement.

800. Items Payable In Connection with Loan. These are the fees which lenders charge to process, approve and make the mortgage loan.

801. Loan Origination. This fee covers the lender's administrative costs in processing the loan. Often expressed as a percentage of the loan, the fee will vary among lenders and from locality to locality. Generally the buyer pays the fee unless another arrangement has been made with the seller and written into the sales contract.

802. Loan Discount. Often called "points," a loan discount is a one-time charge used to adjust the yield on the loan to what market conditions demand. It is used to offset constraints placed on the yield by State or Federal regulations. Each "point" is equal to one percent of the mortgage amount. For example, if a lender charges four points on a $60,000 loan, this amounts to a charge of $2,400.

803. Appraisal Fee. This charge, which may vary significantly from transaction to transaction, pays for a statement of property value for the lender, made by an independent appraiser or by a member of the lender's staff. The lender needs to know if the value of the property is sufficient to secure the loan if you fail to repay the loan according to the provision of your mortgage contract, and the lender must foreclose and take title to the house. The appraiser inspects the house and the neighborhood, and considers sales prices of comparable houses and other factors in determining the value. The appraisal report may contain photos and other information of value to you. It will provide the factual data upon which the appraiser based the appraised value. The appraisal does not, however, give rights to the purchaser nor necessarily detect or discuss defects in the property or title to the property. While most reasonable lenders will furnish you a copy of the appraisal upon request, they are not required to do so unless State law covers this situation. Therefore, it is important that you reach an understanding with your lender if you wish to see the appraisal, preferably at the time of payment of the appraisal fee.

The appraisal fee may be paid by either the buyer or the seller, as agreed in the sales contract. In some cases this fee is included in the Mortgage Insurance Application Fee. See line 806.

804. Credit Report Fee. This fee covers the cost of the credit report, which shows how you have handled other credit transactions. The lender uses this report in conjunction with information you submitted with the application regarding your income, outstanding bills, and employment, to determine whether you are an acceptable credit risk and to help determine how much money to lend you. Where you encounter credit reporting problems, you have protections under the Fair Credit laws.

805. Lender Inspection Fee. This charge covers inspections, often of newly constructed housing, made by personnel of the lending institution or an outside inspector. Pest or other inspections made by companies other than the lender are discussed in connection with line 1302.

806. Mortgage Insurance Application Fee. This fee covers processing the application for private mortgage insurance which may be required on certain loans. It may cover both the appraisal and application fee.

807. Assumption Fee. This fee is charged for processing papers for cases in which the buyer takes over the payments on the prior loan of the seller.

900. Items Required by Lender to Be Paid In Advance. You may be required to prepay certain items, such as interest, mortgage insurance premium and hazard insurance premium, at the time of settlement.

901. Interest. Lenders usually require that borrowers pay at settlement the interest that accrues on the mortgage from the date of settlement to the beginning of the period covered by the first monthly payment. For example, suppose your settlement takes place on April 16th, and your first regular monthly payment will be due June 1st, to cover interest charges for the month of May. On the settlement, date the lender will collect interest for the period from April 16th to May 1st. If you borrowed $60,000 at 12 percent interest, the interest item would be $303.30. This amount and per diem charges will be entered on this line.

902. Mortgage Insurance Premium. Mortgage insurance protects the lender from loss due to payment default by the borrower. The lender may require you to pay your first premium or a lump sum premium covering the life of the loan in advance, on the day of settlement. The premium may cover a specific number of months, a year in advance or the total amount. With this insurance protection, the lender is willing to make a larger loan, thus reducing your down payment requirements. This type of insurance should not be confused with mortgage life, credit life, or disability insurance designed to pay off a mortgage in the event of physical disability or death of the borrower.

903. Hazard Insurance Premium. This premium prepayment is for insurance protection for you and the lender against loss due to fire, windstorm, and natural hazards. This coverage may be included in a Homeowner's Policy which insures against additional risks which may include personal liability and theft. Lenders often require payment of the first year's premium at settlement.

A hazard insurance or homeowner's policy may not protect you against loss caused by flooding. If your mortgage is Federally insured and your property is within a special flood hazard area identified by FEMA, you may be required by Federal law to carry flood insurance on your home. Such insurance may be purchased in participating communities under the National Flood Insurance Act.

1000. Reserves Deposited With Lenders. Reserves (sometimes called "escrow" or "impound" accounts) are funds held in an account by the lender to assure future payment for such recurring items as real estate taxes and hazard insurance.

You will probably have to pay an initial amount for each of these items to start the reserve account at the time of settlement. A portion of your regular monthly payments will be added to the reserve account. RESPA places limitations on the amount of reserve funds which may be required by the lender. Do not hesitate to ask the lender to explain any variance between your own calculations and the figure presented to you.

1001. Hazard Insurance. The lender determines the amount of money that must be placed in the reserve in order to pay the next insurance premium when due.

1002. Mortgage Insurance. The lender may require that part of the total annual premium be placed in the reserve account at settlement. The portion to be placed in reserve may be negotiable.

1003-1004. City/County Property Taxes. The lender may require a regular monthly payment to the reserve account for property taxes.

1005. Annual Assessments. This reserve item covers assessments that may be imposed by subdivisions or municipalities for special improvements (such as sidewalks, sewers or paving) or fees (such as homeowners' association fees).

1100. Title Charges. Title charges may cover a variety of services performed by title companies and others and include fees directly related to the transfer of title (title examination, title search, document preparation) and fees for title insurance, legal charges, which include fees for lender's, seller's or buyer's attorney or the attorney, preparing title work and fees for settlement, agents and notaries. The specific charges discussed in connection with lines 1101 through 1109 are those most frequently incurred at settlement. Due to the great diversity in practice from area to area, your particular settlement, may not include all of these items or may include others not listed. Ask your settlement agent to explain how these fees relate to services performed on your behalf.

1101. Settlement, or Closing Fee. This fee is paid to the settlement agent. Responsibility for payment of this fee should be negotiated between the seller and buyer at the time the sales contract is signed.

1102-1104. Abstract or Title Search, Title Examination, Title Insurance Binder. These charges cover the costs of the search and examination of records of previous ownership, transfers, etc., to determine whether the seller can convey clear title to the property, and to disclose any matters on record that could adversely affect the buyer or the lender. Examples of title problems are unpaid mortgages, judgment or tax liens, conveyances of mineral rights, leases, and power line easements or road right-of-ways that could limit use and enjoyment of the real estate. In some areas, a title insurance binder is called a commitment to insure.

1105. Document Preparation. There may be a separate document fee that covers preparation of final legal papers, such as a mortgage, deed of trust, note, or deed. You should check with the settlement agent to see that these services, if charged for, are not also covered under some other service fees.

1106. Notary Fee. This fee is charged for the cost of having a licensed person affix his or her name and seal to various documents authenticating the execution of these documents by the parties.

1107. Attorney's Fees. You may be required to pay for legal services provided to the lender in connection with the settlement, such as examination of the title binder or sales contract. Occasionally, this fee can be shared with the seller, if so stipulated in the sales contract. If the lender requires a lawyer’s involvement, the fee will appear on this part of the form. The buyer and seller may each retain an attorney, to check the various documents and to represent them at all stages of the transaction including settlement. Where this service is not required and is paid for outside of closing, the person conducting settlement is not obligated to record the fee on the settlement form.

1108. Title Insurance. The total cost of owner's and lender's title insurance is shown here. The borrower may pay all, a part or none of this cost depending on the terms of the sales contract or local custom.

1109. Lenders Title Insurance. A one-time premium may be charged at settlement for a lender's title policy, which protects the lender against loss due to problems or defects in connection with the title. The insurance is usually written for the amount of the mortgage loan and covers losses due to defects or problems not identified by title search and examination. The borrower may pay all, a part or none of this cost depending on the terms of the sales contract or local custom.

1110. Owners Title Insurance. This charge is for owner's title insurance protection and protects you against losses due to title defects. In some areas it is customary for the seller to provide the buyer with an owner's policy and for the seller to pay for this policy. In other areas, if the buyer desires an owner's policy, he or she must pay for it.

1200. Government Recording and Transfer Charges. These fees may be paid either by borrower or seller, depending upon your contract when you buy the home or accept the loan commitment. The borrower usually pays the fees for legally recording the new deed and mortgage (line 1201). These fees, collected when property changes hands or when a mortgage loan is made, may 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).

1300. Additional Settlement Charges

1301. Survey. The lender or the title insurance company may require that a surveyor conduct a property survey to determine the exact location of the home and the lot line, as well as easements and rights of way. This is a protection to the buyer as well. Usually the buyer pays the surveyor's fees, but sometimes this may be handled by the seller (line 1301).

1302. Pest and Other Inspections. This fee is to cover inspections for termite or other pest infestation of the home. This may be important if the sales contract included a promise by the seller to transfer the property free from pests or pest-caused damage. Be sure that the inspection shows that the property complies with the sales contract before you complete the settlement. If it does not you may wish to require a bond or other financial assurance that the work will be completed. This fee can be paid either by the borrower or seller depending upon the terms of the sales contract. Lenders vary in their requirements as to such an inspection. Fees for other inspections, such as for structural soundness, are entered on line 1303.

1400. Total Settlement Charges. All the fees in the borrower's column entitled "Paid from Borrower's Funds at Settlement" are totaled here and transferred to line 103 of Section J, which is entitled "Settlement Charges to Borrower" in the Summary of Borrower's Transaction on the first page of the HUD-1 Settlement Statement. All the settlement fees paid by the seller are transferred to line 502 of Section K, which is entitled "Summary of Sellers Transaction" on the first page of the HUD-1 Settlement Statement.

If you have questions or want additional information,
call Attorney Weddleton at 603-228-1360 or e-mail him roy@granitelaw.com.
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