"Overview of the HUD-1 Document and Closing Costs"
If closing costs are a necessary evil, then the HUD-1 (or HUD settlement statement) is your closing cost bible. It is the most important of all the mortgage closing documents because it shows who pays what and how much, and requires your scrutiny to ensure that you are not paying a dime more than you're supposed to.
Here is a high-level list of items you'll find summarized on the HUD settlement document:
- Name & address of the title company /
buyer, seller, and settlement agent
- Property address
- Sales price
- Loan amount
- Down payment amount, even if the loan offered zero down
- Borrower's closing costs
- Borrower's reserve / escrow items, if applicable
- Seller's closing costs (sales commission, transfer tax, etc.)
- Seller's loan payoff details
- Intra-month allocation of
real property taxes,
sewer expenses, and
income from property
TYPICAL CLOSING COSTS
You will always encounter closing / settlement costs when
investment properties, even when using private lenders. The typical ones include:
- Title fees (insurance to ensure that the title can be transferred to the new owner unencumbered, settlement fee, recording fee, notary fees, etc.).
- Bank-specific fees, which could include things like an application fee, origination fee, points,
fee, overnight mail fee, credit report fee, commitment fee, etc.
- Prepaid mortgage interest
- Prepaid reserves for escrow items
Private lenders will typically only charge for some of the title fees, but of course their interest rates will be higher so you'll have to consider the total cost of these types of loans when making comparisons.
DISCLOSURE OF CLOSING COSTS
Your closing / settlement costs will be disclosed on 2 separate documents – the GFE and the HUD-1 / HUD settlement statement.
When shopping for a traditional bank mortgage, each lender will provide you with a "Good Faith Estimate" or GFE. This document shows interest rate info as well as estimated settlement costs, and is designed to allow you to do apples-to-apples comparisons. It's a good idea to get quotes and GFE's from at least 3 different lenders when shopping for a loan.
The HUD settlement statement is where the actual costs are documented. See the difference? The GFE shows estimated closing costs whereas the HUD-1 shows the actual costs. This is why it's the most important of all the mortgage closing documents.
You’ll want to carefully review the HUD-1 in advance of the
real estate closing
because it is easier to make corrections before you get to the table. In my experience, you can count on errors at least 25% of the time.
Pay particular attention to the allocation of sewer expenses on the HUD settlement statement, because they are typically paid quarterly and must be allocated between the buyer and seller if the transaction closes in the middle of the quarter. More often than not, you will find that this allocation will not be correct.
REDUCING COSTS VIA SELLER'S CONCESSION
Also remember that, much like the down payment, these costs do not necessarily have to come out of your own pocket. They can often be financed via a "seller's concession," which essentially means that the seller will give you back some percentage of the total loan amount in cash at the closing table.
Simplistically, your mortgage amount will increase by the amount of the seller's concession, so the bank stays whole either way. The allowable percentage depends on the specific bank but usually cannot exceed 3% of the sales price.
The seller's concession, if any, won't impact closing costs but will be documented on the HUD-1.
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