After all the looking at houses, measuring furniture, negotiating repairs and near constant nausea, the real estate buying process always ends up with a document called the HUD-1 Settlement Statement. HUD stands for Department of Housing & Urban Development. (Here’s a PDF) It is used for virtually all residential real estate closings and details the financial part of the transaction for both buyer and seller.
It is nothing to be feared. Although there are columns and rows and decimal points and subtotals, even those with math phobias can embrace that fact that this is where everything is made clear and specific.
By the time you are at the closing table you should know what your “bottom line” is. And it really is there, at the bottom of page 1. The buyer will have already been advised how much money to bring to closing and the seller will know how much they (hopefully) will net out from the proceedings. [note: Here in Greensboro, closing is customarily handled by an attorney. Other parts of the country may have 'escrow agents' or other 3rd parties.]
Where do the numbers come from?
They start with the Offer to Purchase and Contract which should spell out financial details of the agreement between the parties:
- sales price
- earnest money paid
- if the seller is paying for any of the buyer’s closing costs and how much
- if a home warranty is being purchased and for how much, etc.,
Added to this is any information not specifically addressed in the contract:
- Was there a home inspection?
- termite inspection?
- repairs made?
- If so, for how much, payable to whom and was it paid outside of closing (“POC”)
- hazard insurance premium
- sales commission
This information is generally provided by the Realtors representing the parties.
The real nitty-gritty information is provided by the lender. The closing attorney will be provided a ‘closing package’ or ‘closing instructions’ by the mortgage lender. The package will instruct the attorney how much money is to be collected and disbursed on the buyer’s side. Here is where the attorney will note how many months of taxes to collect up front and for the escrow account, what expenses have been incurred for the mortgage itself:
- appraisal
- origination fee
- discount points
- flood certification fee
- application fee, etc.,
The closing attorney will also do a deed and tax search to verify which party owes how much for real estate property taxes. The seller is responsible for taxes up to the day of closing and the buyer is responsible for the day of closing through the end of the year. Same thing for homeowners association dues.
After all this information is collected by the closing attorney, all the debits and credits are listed on the 2 pages of the HUD-1. There is a columns for the buyer (left hand side) and a column for the seller (right side).
There should be nothing left off the HUD-1 and nothing added that the lender hasn’t approved. Nothing ‘under the table’. That is a serious no-no.
It is on the HUD-1 where you’ll see a credit in the buyer’s column for the earnest money you paid when you made the offer. (The buyer’s agent will generally bring a check, made out to the attorney, written from the agency’s trust account). Also noted will be a credit for the mortgage itself. Again, funds are wired to the attorney from the bank.
Adding up all the various debits and credits for both sides leaves two bottom lines. One is the amount the buyer needs to bring to closing (certified check payable to the attorney), the other the amount due the seller.
All the funds from the earnest money to the mortgage to the buyer’s day-of-closing money go into the attorney’s trust account. It is from that account the attorney cuts all appropriate pay-outs: seller’s net, tax bill, homeowners insurance premium, termite inspector, etc., At the end of the day, the attorney’s trust account will balance out to $0. Every penny of money that comes in for that transaction goes out.
Both buyer and seller and the attorney will sign the HUD-1. It is the financial record of the deal. You’ll be given a copy.
There are MANY itemized expenses in a real estate transaction and I’ve noted just a few. The thing to remember is that there will be nothing on the statement that doesn’t have an explanation.
If things aren’t clear to you, ask the attorney. Line 1107 will show their fee, so get your money’s worth!
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The thoughts & opinions are mine. The quips that fall flat are someone else’s. Please feel free to shoot me an email with a question or a good joke.
And remember, real estate agents aren’t bad. We’re just drawn that way.
