Few documents baffle attorneys, closing agents and brokers more than the mysterious HUD-1 Settlement State or “HUD” as it is more casually known. The HUD is a federal document that is used to provide Purchasers and Sellers with an itemized breakdown of their closing and mortgage costs in a real estate transaction. The HUD provides the parties with costs at Closing as well as costs paid before or “outside” of Closing. The costs paid prior to Closing have “POC” written aside it to indicate the costs were paid outside of Closing.
The Real Estate Settlement Procedures Act (RESPA) mandates that the HUD be used at all transactions that involve federal mortgages. Thus, it is not required for all cash transactions. Although both the Seller, Purchaser and Settlement Agent (usually a bank attorney or bank agent of the Purchaser’s lender) are required to sign the HUD at Closing, the Seller has little to do with the HUD aside from providing Purchasers and the Lenders with broker costs or adjustment figures. In contrast, the HUD is an integral part of the Closing for the Purchaser as the very reason the HUD exists is for Borrowers (Purchasers at the Closing table) to understand the costs affiliated with executing their mortgage. The HUD assures Borrowers that there are no hidden fees and that the loan they are receiving is the loan they agreed upon with their mortgage brokers. For lenders, the HUD can be an intense source of dread as mortgage brokers are required to disclose every cost and fee to Borrowers. If the mortgage brokers fail to properly do this, the lenders will be penalized.
RESPA dictates that Borrowers should be given a copy of the HUD at least one day prior to Closing. However, in actuality, most Purchasers first see the HUD at the Closing table. This is because the HUD needs to be generated by the settlement agent, whom needs to wait for numbers from the Seller’s attorney, purchaser’s attorney and the bank. Then, the preliminary HUD is sent to the bank for approval. Only once it is approved by the bank is the HUD sent to the Purchaser’s attorney for review. In many cases, the settlement agent will not receive the numbers until 24 to 48 hours before Closing. In some rather frustrating instances, the settlement agent may not obtain HUD approval until after the Closing begins. I have been to a few closings as the bank attorney, where the numbers provided to my firm were incorrect and we had to send the HUD back to the bank to be approved. Needless to say, the Purchasers and Sellers were not happy that the Closing was basically complete but that we had to wait at least an hour simply for HUD approval.
On page one of the HUD, Sections B through H basically summarize the transaction. This is where the name and address of the Purchaser, Seller, Lender and Settlement Agent; the property address of the mortgages premises; and the closing date can be found. This section also contains the loan type (i.e. FHA {Federal Housing Administration-insured} or conventional). Section J contains the Purchaser/Borrower’s closing costs including the purchase price, adjustments, loan amount, etc. Section K displays the complete sum due to the Seller.
Page two contains a breakdown of the real estate brokerage fees; lender fees such as the origination fee, appraisal fee, flood certification fee, etc.; prepaid charges including any interest and/or mortgage insurance; escrow deposits (deposits set aside by the lender to pay the Purchaser’s property taxes or insurance premiums); title insurance fees; government recording fees and transfer taxes and any other miscellaneous expenses or settlement charges i.e. home inspection fees or pest control report fees.
In 2010, in order to increase transparency, the HUD was required to include a Good Faith Estimate “GFE”. Thus, the third page of the HUD contains a line by line comparison between the GFE column, which is the estimate of closing costs provided to the Borrower by their mortgage broker before Closing and the HUD charges column, which reflect the Borrower’s actual loan charges at Closing. If the difference between the fees in the GFE column and the actual cost/HUD column are more than what is federally allowed (either the HUD number cannot increase at all from the GFE number or it cannot increase by more than ten percent) or if the mortgage broker fails to properly disclose a fee, then the lender is penalized for deceptive lending. The Lender must pay that particular fee on behalf of the Borrower and might possibly have to provide the Borrower with credit or cash back at Closing.
The final section of the HUD details the terms of the loan, including the initial loan amount, interest rate, term and monthly payment. It also contains whether the loan is fixed or adjustable and whether there will be a prepayment penalty or a balloon payment.
Ultimately, although the HUD can be confusing and difficult to generate, it is an important part of Closings, if loans are involved. It is necessary for Lenders to provide Borrowers with an actual breakdown of their fees and important that Borrowers, in return, understand the commitment they are entering into when executing mortgages. The HUD ultimately encourages this and fosters much needed transparency that was not around before 2010.
Written By: Maria Cheung, Esq.
