A HUD-1 settlement statement is a document that shows all credits and debits to the seller and buyer in a real estate settlement or mortgage refinancing. If a HUD-1 wasn't complicated before, it has become that way since the TILA-RESPA integrated disclosures (TRID) rule was exacted. The TRID was established to integrate federal mortgage forms, but there are unintended negative consequences because of how credits show up on closing statements.
Homebuyers and bank employees can have a hard time understanding the closing statements with credits—especially a short sale bank, which needs to approve the closing statement. The complexity of the form has led many escrow officers to take it upon themselves to supply a net worksheet so all of the parties involved in the transaction can figure out what's going on.
- Many fees that are traditionally paid by a seller are misrepresented on HUD closing statements as credits to the buyer by default.
- Good-faith estimates are provided as a way to predict overall cost, and closing statements use these figures even though they are imprecise and may change.
- Short-sale banks often look to remove credits that they perceive as fees, unaware of the more complex accounting as prescribed by law.
Although in many parts of the country, certain closing cost fees are typically paid for by the seller, it is customary in some areas to split these fees. The problem arises when it is a local custom for the seller to pay a particular fee, but that fee is listed on the buyer's loan estimate. Examples of these types of fees include:
- Owner's title insurance policy, or CLTA/ALTA homeowners policy
- Settlement fee or escrow fee
- County transfer taxes, or documentary transfer tax
The above fees—if shown in the purchase contract as seller-paid fees—would be reflected on the closing statement as a credit from the seller to the buyer. Since these fees are not actually credited to the buyer from the seller, they are shown as a debit to the buyer, which zeros them out.
The problem with seller credits to buyers at closing started with the revised good-faith estimate, which is meant to give you an estimate of all settlement charges and terms for approved mortgage loans. It includes important dates, such as how long the interest rate is available, how long other settlement charges are available, and your rate-lock period.
The loan summary on the good-faith estimate includes the initial loan amount, the loan term, the initial interest rate, and the initial monthly amount due for principal, interest, and mortgage insurance. The good-faith estimate form will hold you over until you receive a HUD-1 at settlement; while the origination charge, interest rate charge, and transfer taxes can't increase at settlement, the following can change:
- Daily interest charges
- Initial deposit for your escrow account
- Homeowners insurance
- Owner's title insurance
- Title services and title insurance
The problem is that the Real Estate Settlement Procedures Act (RESPA)—which provides sellers and buyers with settlement cost disclosures—decided that if a fee is shown on the good-faith estimate but is typically paid by the seller, it must be reflected on the HUD-1 at settlement. To make the HUD balance, if a fee is shown as a credit, even if it's not really a credit, it must also be shown as a debit, which makes it a wash.
Problems for Short-Sale Banks
Short-sale banks have guidelines set by investors that spell out how a bank can handle approval of fees on a short sale. Some guidelines prohibit credits to the buyer, and some guidelines have a limit on the percentage paid to the buyer. When a negotiator who is unfamiliar with a closing statement sees a credit noted to the buyer, they will often demand the fee be removed.
It may be difficult to get some people to understand that the fee is already removed as a debit. They only know that the seller can't give the buyer a credit. An escrow officer or closing agent is not allowed to alter a closing statement. The fees must be shown as prescribed by federal law, and they can't be shuffled around to suit the whim of a short-sale negotiator.