Seller-Paid Closing Costs Shown on Settlement Statements
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 such since the TILA-RESPA Integrated Disclosures (TRID) rule was exacted. The TRID was established to integrate federal mortgage forms, but this has had unintended negative consequences because of how credits show up on closing statements.
Homebuyers and bank employees alike are having 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 the parties involved in the transaction can figure out what's going on.
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 those types of fees include:
- Owner's title insurance policy, or CLTA/ALTA Homeowner's Policy
- Settlement fee, or escrow fee
- County Transfer Taxes, or Documentary Transfer Tax
The above fees—if shown in the purchase contract as a seller-paid fee—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 then shown as a debit to the buyer, which zeros them out.
Good Faith Estimate
The problem with seller credits to buyers at closing started with the revised Good Faith Estimate. The Good Faith Estimate is meant to give you an estimate of all settlement charges and terms for approved mortgage loans, and it includes important dates, such as when the interest rate is available through, when other settle charges are available through, 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, and while the origination charge, interest rate charge, and transfer taxes cannot increase at settlement, the following can change:
- Daily interest charges
- Initial deposit for your escrow account
- Homeowner's 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, then 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 that the fee is removed.
It may be difficult to get some people to understand that the fee is already removed as a debit. They know only that the seller cannot 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.