The New HUD-1
January 28, 2010
Yesterday, we talked about the new Good Faith Estimate. One of the biggest changes there was the introduction of tolerances – what fees can vary from estimate to closing, and by what amount. We’ll see that concept again in this, the HUD-1 Settlement Statement.
The HUD-1 is a document you get when you go to sign your loan and closing documents at the escrow office. It details out settlement costs and credits. And now, it calculates the difference between costs in your estimate and actual costs.
Since every transaction is different, going through each section of the HUD-1 would be fairly difficult, since who pays for what and how much varies widely. Your escrow officer will review yours with you at closing. In light of that, we’re going to make a quick review of some of the changes you’ll see, and then look closely at the tolerance section. That’s the section where they look at the difference between estimated and actual costs.
There’s a sample copy of a HUD-1 here.
Page 1 is largely the same, so we won’t review it other than to point out one thing. In Arizona, using the AAR purchase contract, it is typical for a seller to provide a title insurance policy to the buyer, called an Owner’s Title policy. It is default in our contract language here. However, these were charges estimated by the lender in the Good Faith Estimate, and the escrow officer has to account for that.
In order to meet with the new disclosure rules, the Owner’s Title policy is shown as a charge to the buyer, here in the 1100 section of page 2. Those two columns at the end? The one on the left is the Buyer’s side, the one on the right is the Seller’s side. So here we see a charge to the buyer of $1285 on line 1103:
And then on the first page, that gets reconciled. The 200 section on the left hand side below lists credits given to the buyer. So on line 204 there is a $1285 credit to the buyer – the buyer has been charged and credited, so that’s a sum of zero to the buyer. But now the seller has to pay for it, so you see a charge on line 506 to the seller for that policy.
(For those of you counting at home, that’s 3 times the owner’s title policy gets listed on the HUD, in order to charge it to the proper person…)
With the new HUD-1, there’s a concept called “inside” and “outside” the column that – quite honestly – is more detail than is worth getting into here. On that very first screen shot, lines 1107 and 1008, the agent and underwriter portions of the insurance premiums? Those are “outside” the column. Sometimes, you’ll see charges outside the column that are just disclosure items, like those two lines. Sometimes those items are added up and put “inside” the column – placed on either the buyer or seller’s side columns. Because those things vary so much by section, we’re just going to leave that be. It’s too much for this kind of format.
Let’s skip to page 3, which is completely new to the HUD-1.
This is the tolerances section. Remember from the good faith estimate that some charges cannot increase, some can change by 10%, and some can change completely? This is where they compare the estimated charges to the actual charges.
This first section are the charges that were not allowed to increase. You see the description of the charge on the left, the value from the Good Faith Estimate, and then the actual value as listed on the previous pages of the HUD-1. In the example below, the origination charge actually went down a little bit. That’s okay. These costs can decrease, they just can’t increase.
The next bucket of charges can’t increase more than 10%. Below, you see some of the costs changed a little, and the title cost was rather poorly estimated! Each of the columns is added, and then the percent change is calculated. In the example below, you see there was a 9% change – within tolerance.
So what would happen if that 10% tolerance was exceeded? Or if those costs in the previous section went up instead of down? Well, the lender is held responsible for that, and has to fix all tolerance violations by reimbursing the Buyer. They’ve got up to 30 days to send that refund.
Beware that tolerance violations will not delay closing. You will pay the higher amount and get a refund sent to you within 30 days.
The last section of charges are those that can change – these are mostly third party services that the buyer selected, or costs related to the interest rate. These items are basically impossible for a lender to predict accurately on the GFE.
Lastly, the HUD-1 reviews the terms of the loan, similarly to the GFE. Please note that your escrow officer fills out this section but is not required to fact check it against the GFE.
So there you have it! The new HUD-1.
The New Good Faith Estimate – GFE
January 27, 2010
Yesterday, we talked about the RESPA reform that took effect January 2010. That change means you’ll be seeing a new Good Faith Estimate when you apply for a home loan.
A Good Faith Estimate – or GFE – is a disclosure document. It gives you an estimate of the charges and loan terms specific to the loan for which you’re applying. Basically, it details out the costs of a loan, as well as the interest rate and applicable dates.
Here’s a sample Good Faith Estimate.
A lender must provide a GFE within 3 business days of application, and the terms there are good for at least 10 days, unless otherwise specified. Oh – except for the interest rate and rate related charges, because those can change daily (if not more frequently).
We’ll go section by section. Which means this post will be a little long, but – i hope – comprehensive.
Page 1:
The GFE starts with some basic contact information. There’s a couple of important dates here. At the upper right, the “Date of GFE” – the terms in this estimate are good for 10 days from that date, unless otherwise stated in #2 of the “Important Dates” section. #1 in “Important Dates” tells you how long that lender will honor that interest rate quote – remember that interest rates can change very frequently. #3 tells you the duration of your rate lock, if you were to lock in that rate. The duration of your rate lock needs to be coordinated with the closing of your purchase.
This section is a summary of your loan. This section is fairly self-explanatory: loan amount, terms, and disclosures about variable rates, prepayment penalties, and balloon payments.
This A+B section is the end of page one – and all these costs come from the next page. We’ll go through where they come from, but that final number is an estimate of what you’d need to pay at closing.
Page 2:
This section is all about paying your lender for their services. These are – more or less – the only charges the lender is in complete control over. Lenders collect their fees in two ways – either up front with an origination fee, or by giving you a higher rate and being paid for that when they sell the loan to someone else. It’s called a yield spread premium (YSP). Or a combination thereof. You also have the option of paying more money up front to buy down your rate – we call it paying discount points. So if you want a really low rate and have extra cash, you could elect to do that.
Disclosure of those fees is in this section. In this example, the origination fee is $6,750. The buyer is paying a slightly higher rate, so they’re going to get a credit of $3000 because the lender will make that money when they sell the loan and therefore won’t collect it from the buyer. We subtract the two, and the lender origination fees are $3,750. This figure gets carried over onto the front page in that A+B section.
If a buyer was paying discount points to buy down the rate, you’d have seen the third box checked and a charge instead of a credit.
Here’s where things get a little more complex. These are charges for everyone else involved in the home purchase. The lender, most often, does not control these costs, and some of these service providers the buyer gets to pick. So the lender has to estimate these charges, but may not know the exact figures for the service providers you select.
Which puts the lender in a bit of a pickle. Because at closing, the cost estimates provided here can only vary by a certain amount. And the lender bears the burden of responsibility. Which hopefully should make charge estimates much more accurate.
Couple items to watch for:
#3 – the estimate here is not allowed to go up at closing. The price for those services quoted here should be accurate. If anything, that figure can only go down.
#4 & #5 – these two items have a 10% tolerance. These are estimates for the title insurance, escrow services, any endorsements, that sort of thing. At closing, the sum of these items can’t be more than 10% different than what was estimated.
#6 – these are services that a Buyer can select. Because the buyer gets to pick, the estimate of these charges can change completely at closing.
So you add all those things up – line item “B” – add it to the origination (item A) and that’s the estimate of what you’ll need to close the deal.
Still with me?
Page 3:
In that last section, we talked about how some costs can’t increase, some can change by 10%, and some can change completely. This section at the start of page 3 breaks down which costs belong to which bucket.
Remember at the start of page 2 we looked at the origination fees? And how you can pay more up front for a lower rate or pay less up front for a higher rate? This tradeoff table shows you how that works in a little more detail.
The first column is the description of the loan as quoted. But – if you were to decide you needed to hold on to more of your cash, you could elect to take a higher rate and hold on to more money. That’s the option in column 2. If you’ve got plenty of cash and are going to hold on to the loan for long enough, you might choose to pay more up front for the lower rate. That’s column 3.
Finally, they give you a handy-dandy table to compare loans, so you can get other estimates and compare them.
And voila! That’s the new Good Faith Estimate.
Tomorrow – the new HUD-1 Settlement Statement…
Welcome to Acronym Week! RESPA, HUD, and the GFE – Oh My!
January 26, 2010
There are some changes afoot in the way loan disclosure and closing cost statements are made.
The Department of Housing and Urban Development decided to try to make understanding your loan costs a little bit easier for the average consumer. Tried to make it easier to shop for a loan. Tried to make it easier to understand when the costs you were charged don’t match what was told to you up front.
Whether they succeeded or not, well, you be the judge. Either way, these new rules are in effect and you should understand what is going on.
This week, we’ll dive into these new documents and the new rules, so that you’ll understand what you see when you get a Good Faith Estimate from a lender (or GFE, in industry lingo), and so that your closing cost statement makes sense – that’s the “HUD-1″ you get from the escrow officer at the end that breaks down all the charges and credits to everyone. We’ll gather the loan officer’s viewpoint and the escrow officer’s opinion as well, so that we understand how these changes impact just about everyone in the transaction.
But first – some background.
RESPA – the Real Estate Settlement and Procedures Act – is a law regulated by HUD (the department of Housing and Urban Development). RESPA was created in 1974 to regulate, among other things, the disclosures you get when you get a residential mortgage loan, and has rules about economic relationships between entities involved in getting that loan – potentially relationships between a title insurance company and a lender, or appraisal bureau, or credit reporting service.
So HUD created an update to RESPA that took effect at the start of 2010. The objective was to encourage consumers to shop for the best loan, to disclose loan information in an easy-to-understand format, to make comparisons easier from up front cost estimates and actual costs, and to limit cost variances on certain items from the up front estimate to the final figure.
All lovely goals.
The big disclosure documents affected by the RESPA update are the Good Faith Estimate and the HUD-1 Settlement Statement. I’ll show you examples of both during the week, but generally a Good Faith Estimate, or GFE, is what your lender gives you when you apply for a loan that explains the interest rate and costs associated with that home loan. The HUD-1 Settlement Statement is an itemization of closing costs for both a buyer and seller that you see at the end of a transaction, produced by the Escrow Officer. These list the final costs for the home sale, and should more or less match the costs that were quoted to you at the beginning.
Still with me? Good. Tomorrow we’ll look at the new Good Faith Estimate…
Do You Trust Me?
January 7, 2010
I was talking to a friend the other day – a former mortgage guy and a general disruptive force in the industry. He’s got a small obsession with bringing transparency and openness to the mortgage industry, especially as it relates to interest rates and the various ways mortgage brokers are paid: origination fees, other up front fees, yield spread premiums, etcetera.
Now, in both the real estate and mortgage industries, there’s a decent amount of distrust between consumers and lenders, between clients and real estate agents. Historically, there’s been some amazingly dishonest people who have generally brought down the overall reputation of agents and lenders. Also, agents and lenders have a reputation for the hard sell, for pestering and annoying and pushing a sales message beyond what is appropriate.
(We’re not all like that. I promise.)
Anyway. We were talking about people shopping for agents and lenders online. I’d say 90% of my home buyers contact me without having talked to a lender first, or even really thought much about talking to a lender and getting pre-approved for a home loan. In my experience, that’s because people don’t know they need a pre-approval that early on in the game. He contests that people don’t get the pre-approval because they don’t trust the lenders either.
I say people don’t get the pre-approval because of a lack of knowledge about this process that most only go through very few times in their lives. He says it’s a trust issue.
What say you?
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