Overview of Buying A Home
Table of Contents
I. Introduction
II. Buying & Financing A Home
A. Role of the Real Estate Broker
B. Selecting an Attorney
C. Terms of the Agreement of Sale
D. Shopping For a Loan
E. Selecting a Settlement Agent
F. Securing Title Services
G. RESPA Disclosures
H. Processing Your Loan Application
I. RESPA Protection Against Illegal Referral Fees
J. Your Right to File Complaints
III. Your Settlement Costs
A. Specific Settlement Costs
B. Calculating the Amount You Need At Settlement
C. Adjustments To Costs Shared By Buyer and Seller
IV. Appendix
I. Introduction
Congratulations! You have decided to buy a new home. This booklet will
help you take this big financial step by describing the home buying,
home financing, and settlement process. Lenders and mortgage brokers
are required by federal law, the Real Estate Settlement Procedures Act
(“RESPA”), to give you this booklet. You should receive it when applying
for a loan, or within three business days afterwards. Real estate brokers
frequently hand out this booklet as well.
You probably started the home buying process in one of two ways: you
saw a home you were interested in buying or you consulted a lender to
figure out how much money you could borrow before you found a home (sometimes
called pre-qualifying). The next step is to sign an agreement of sale
with the seller, followed by applying for a loan to purchase your new
home. The final step is called “settlement” or “closing,” where the
legal title to the property is transferred to you. At each of these
steps you often have the opportunity to negotiate the terms, conditions
and costs to your advantage. This booklet will highlight such opportunities.
You will also need to shop carefully to get the best value for your
money. There is no standard home buying process used in all localities.
Your actual experience may vary from those described here. This booklet
takes you through the general steps to buying a home, to eliminate,
as much as possible, the mysteries of the settlement process.
II. BUYING AND FINANCING A HOME A. Role of the Real Estate Broker
F requently, the first person you consult about buying a home is a real
estate agent or broker. Although real estate brokers provide helpful
advice on many aspects of home buying, they may serve the interests
of the seller, and not your interests as the buyer. The most common
practice is for the seller to hire the broker to find someone who will
be willing to buy the home on terms and conditions that are acceptable
to the seller. Therefore, the real estate broker you are dealing with
may also represent the seller. However, you can hire your own real estate
broker, known as a buyer’s broker, to represent your interests. Also,
in some states, agents and brokers are allowed to represent both buyer
and seller.
Even if the real estate broker represents the seller, state real estate
licensing laws usually require that the broker treat you fairly. If
you have any questions concerning the behavior of an agent or broker,
you should contact your State’s Real Estate Commission or licensing
department.
Sometimes, the real estate broker will offer to help you obtain a mortgage
loan. He or she may also recommend that you deal with a particular lender,
title company, attorney or settlement/closing agent. You are not required
to follow the real estate broker’s recommendation. You should compare
the costs and services offered by other providers with those recommended
by the real estate broker.
B. Selecting an Attorney
Before you sign an agreement of sale, you might consider asking an attorney
to look it over and tell you if it protects your interests. If you have
already signed your agreement of sale, you might still consider having
an attorney review it. An attorney can also help you prepare for the
settlement. In some areas attorneys act as settlement/closing agents
or as escrow agents to handle the settlement. An attorney who does this
will not solely represent your interests, since, as settlement/closing
agent, he or she may also be representing the seller, the lender and
others as well.
Please note, in many areas of the country attorneys are not normally
involved in the home sale. For example, escrow agents or escrow companies
in western states handle the paperwork to transfer title without any
attorney involvement. If choosing an attorney, you should shop around
and ask what services will be performed for what fee. Find out whether
the attorney is experienced in representing home buyers. You may wish
to ask the attorney questions such as:
What is the charge for negotiating the agreement of sale, reviewing
documents and giving advice concerning those documents, for being present
at the settlement, or for reviewing instructions to the escrow agent
or company?
Will the attorney represent anyone other than you in the transaction?
Will the attorney be paid by anyone other than you in the transaction?
C. Terms of the Agreement of Sale
I f you receive this Booklet before you sign an agreement of sale, here
are some important points to consider. The real estate broker probably
will give you a preprinted form of agreement of sale. You may make changes
or additions to the form agreement, but the seller must agree to every
change you make. You should also agree with the seller on when you will
move in and what appliances and personal property will be sold with
the home.
( Sales Price. For most home purchasers, the sales price is the most
important term. Recognize that other non-monetary terms of the agreement
are also important.
( Title. “Title” refers to the legal ownership of your new home. The
seller should provide title, free and clear of all claims by others
against your new home. Claims by others against your new home are sometimes
known as “liens” or “encumbrances.” You may negotiate who will pay for
the title search which will tell you whether the title is "clear."
( Mortgage Clause. The agreement of sale should provide that your deposit
will be refunded if the sale has to be canceled because you are unable
to get a mortgage loan. For example, your agreement of sale could allow
the purchase to be canceled if you cannot obtain mortgage financing
at an interest rate at or below a rate you specify in the agreement.
( Pests. Your lender will require a certificate from a qualified inspector
stating that the home is free from termites and other pests and pest
damage. You may want to reserve the right to cancel the agreement or
seek immediate treatment and repairs by the seller if pest damage is
found.
( Home Inspection. It is a good idea to have the home inspected. An
inspection should determine the condition of the plumbing, heating,
cooling and electrical systems. The structure should also be examined
to assure it is sound and to determine the condition of the roof, siding,
windows and doors. The lot should be graded away from the house so that
water does not drain toward the house and into the basement.
Most buyers prefer to pay for these inspections so that the inspector
is working for them, not the seller. You may wish to include in your
agreement of sale the right to cancel, if you are not satisfied with
the inspection results. In that case, you may want to re-negotiate for
a lower sale price or require the seller to make repairs.
( Lead-Based Paint Hazards in Housing Built Before 1978. If you buy
a home built before 1978, you have certain rights concerning lead-based
paint and lead poisoning hazards. The seller or sales agent must give
you the EPA pamphlet “Protect Your Family From Lead in Your Home” or
other EPA-approved lead hazard information. The seller or sales agent
must tell you what the seller actually knows about the home’s lead-based
paint or lead-based paint hazards and give you any relevant records
or reports.
You have at least ten (10) days to do an inspection or risk assessment
for lead-based paint or lead-based paint hazards. However, to have the
right to cancel the sale based on the results of an inspection or risk
assessment, you will need to negotiate this condition with the seller.
Finally, the seller must attach a disclosure form to the agreement of
sale which will include a Lead Warning Statement. You, the seller, and
the sales agent will sign an acknowledgment that these notification
requirements have been satisfied. ( Other Environmental Concerns. Your
city or state may have laws requiring buyers or sellers to test for
environmental hazards such as leaking underground oil tanks, the presence
of radon or asbestos, lead water pipes, and other such hazards, and
to take the steps to clean-up any such hazards. You may negotiate who
will pay for the costs of any required testing and/or clean-up.
( Sharing of Expenses. You need to agree with the seller about how expenses
related to the property such as taxes, water and sewer charges, condominium
fees, and utility bills, are to be divided on the date of settlement.
Unless you agree otherwise, you should only be responsible for the portion
of these expenses owed after the date of sale.
( Settlement Agent/Escrow Agent or Company. Depending on local practices,
you may have an option to select the settlement agent or escrow agent
or company. For states where an escrow agent or company will handle
the settlement, the buyer, seller and lender will provide instructions.
( Settlement Costs. You can negotiate which settlement costs you will
pay and which will be paid by the seller.
D. Shopping For a Loan
Y our choice of lender and type of loan will influence not only your
settlement costs, but also the monthly cost of your mortgage loan. There
are many types of lenders and types of loans you can choose. You may
be familiar with banks, savings associations, mortgage companies and
credit unions, many of which provide home mortgage loans. You may find
a listing of some mortgage lenders in the yellow pages or a listing
of rates in your local newspaper.
Mortgage Brokers. Some companies, known as “mortgage brokers” offer
to find you a mortgage lender willing to make you a loan. A mortgage
broker may operate as an independent business and may not be operating
as your “agent” or representative. Your mortgage broker may be paid
by the lender, you as the borrower, or both. You may wish to ask about
the fees that the mortgage broker will receive for its services.
Government Programs. You may be eligible for a loan insured through
the Federal Housing Administration (“FHA”) or guaranteed by the Department
of Veterans Affairs or similar programs operated by cities or states.
These programs usually require a smaller downpayment. Ask lenders about
these programs. You can get more information about these programs from
the agencies that run them. (See Appendix to this Booklet.)
CLOs. Computer loan origination systems, or CLOs, are computer terminals
sometimes available in real estate offices or other locations to help
you sort through the various types of loans offered by different lenders.
The CLO operator may charge a fee for the services the CLO offers. This
fee may be paid by you or by the lender that you select.
Types of Loans. Loans can have a fixed interest rate or a variable interest
rate. Fixed rate loans have the same principal and interest payments
during the loan term. Variable rate loans can have any one of a number
of “indexes” and “margins” which determine how and when the rate and
payment amount change. If you apply for a variable rate loan, also known
as an adjustable rate mortgage (“ARM”), a disclosure and booklet required
by the Truth in Lending Act will further describe the ARM. Most loans
can be repaid over a term of 30 years or less. Most loans have equal
monthly payments. The amounts can change from time to time on an ARM
depending on changes in the interest rate. Some loans have short terms
and a large final payment called a “balloon.” You should shop for the
type of home mortgage loan terms that best suit your needs.
Interest Rate, “Points” & Other Fees. Often the price of a home
mortgage loan is stated in terms of an interest rate, points, and other
fees. A “point” is a fee that equals 1 percent of the loan amount. Points
are usually paid to the lender, mortgage broker, or both, at the settlement
or upon the completion of the escrow. Often, you can pay fewer points
in exchange for a higher interest rate or more points for a lower rate.
Ask your lender or mortgage broker about points and other fees.
A document called the Truth in Lending Disclosure Statement will show
you the “Annual Percentage Rate” (“APR”) and other payment information
for the loan you have applied for. The APR takes into account not only
the interest rate, but also the points, mortgage broker fees and certain
other fees that you have to pay. Ask for the APR before you apply to
help you shop for the loan that is best for you. Also ask if your loan
will have a charge or a fee for paying all or part of the loan before
payment is due (“prepayment penalty”). You may be able to negotiate
the terms of the prepayment penalty.
Lender-Required Settlement Costs. Your lender may require you to obtain
certain settlement services, such as a new survey, mortgage insurance
or title insurance. It may also order and charge you for other settlement related
services, such as the appraisal or credit report. A lender may also
charge other fees, such as fees for loan processing, document preparation,
underwriting, flood certification or an application fee. You may wish
to ask for an estimate of fees and settlement costs before choosing
a lender. Some lenders offer “no cost” or “no point” loans but normally
cover these fees or costs by charging a higher interest rate. Comparing
Loan Costs. Comparing APRs may be an effective way to shop for a loan.
However, you must compare similar loan products for the same loan amount.
For example, compare two 30-year fixed rate loans for $100,000. Loan
A with an APR of 8.35% is less costly than Loan B with an APR of 8.65%
over the loan term. However, before you decide on a loan, you should
consider the up-front cash you will be required to pay for each of the
two loans as well. Another effective shopping technique is to compare
identical loans with different up-front points and other fees. For example,
if you are offered two 30-year fixed rate loans for $100,000 and at
8%, the monthly payments are the same, but the up-front costs are different:
Loan A - 2 points ($2,000) and lender required costs of $1800 = $3800
in costs. Loan B - 2 1/4 points ($2250) and lender required costs of
$1200 = $3450 in costs.
A comparison of the up-front costs shows Loan B requires $350 less in
up-front cash than Loan A. However, your individual situation (how long
you plan to stay in your house) and your tax situation (points can usually
be deducted for the tax year that you purchase a house) may affect your
choice of loans. Lock-ins. “Locking in” your rate or points at the time
of application or during the processing of your loan will keep the rate
and/or points from changing until settlement or closing of the escrow
process. Ask your lender if there is a fee to lock-in the rate and whether
the fee reduces the amount you have to pay for points. Find out how
long the lock-in is good, what happens if it expires, and whether the
lock-in fee is refundable if your application is rejected.
Tax and Insurance Payments. Your monthly mortgage payment will be used
to repay the money you borrowed plus interest. Part of your monthly
payment may be deposited into an “escrow account” (also known as a “reserve”
or “impound” account) so your lender or servicer can pay your real estate
taxes, property insurance, mortgage insurance and/or flood insurance.
Ask your lender or mortgage broker if you will be required to set up
an escrow or impound account for taxes and insurance payments.
Transfer of Your Loan. While you may start the loan process with a lender
or mortgage broker, you could find that after settlement another company
may be collecting the payments on your loan. Collecting loan payments
is often known as “servicing” the loan. Your lender or broker will disclose
whether it expects to service your loan or to transfer the servicing
to someone else.
Mortgage Insurance. Private mortgage insurance and government mortgage
insurance protect the lender against default and enable the lender to
make a loan which the lender considers a higher risk. Lenders often
require mortgage insurance for loans where the downpayment is less than
20% of the sales price. You may be billed monthly, annually, by an initial
lump sum, or some combination of these practices for your mortgage insurance
premium. Ask your lender if mortgage insurance is required and how much
it will cost. Mortgage insurance should not be confused with mortgage
life, credit life or disability insurance, which are designed to pay
off a mortgage in the event of the borrower’s death or disability. You
may also be offered “lender paid” mortgage insurance (“LPMI”). Under
LPMI plans, the lender purchases the mortgage insurance and pays the
premiums to the insurer. The lender will increase your interest rate
to pay for the premiums -- but LPMI may reduce your settlement costs.
You cannot cancel LPMI or government mortgage insurance during the life
of your loan. However, it may be possible to cancel private mortgage
insurance at some point, such as when your loan balance is reduced to
a certain amount. Before you commit to paying for mortgage insurance,
find out the specific requirements for cancellation.
Flood Hazard Areas. Most lenders will not lend you money to buy a home
in a flood hazard area unless you pay for flood insurance. Some government
loan programs will not allow you to purchase a home that is located
in a flood hazard area. Your lender may charge you a fee to check for
flood hazards. You should be notified if flood insurance is required.
If a change in flood insurance maps brings your home within a flood
hazard area after your loan is made, your lender or servicer may require
you to buy flood insurance at that time.
E. Selecting a Settlement Agent
S ettlement practices vary from locality to locality, and even within
the same county or city. Settlements may be conducted by lenders, title
insurance companies, escrow companies, real estate brokers or attorneys
for the buyer or seller. You may save money by shopping for the settlement
agent.
In some parts of the country (particularly western states), settlement
may be conducted by an escrow agent. The parties sign an escrow agreement
which requires them to provide certain documents and funds to the agent.
Unlike other types of settlement, the parties do not meet around a table
to sign documents. Ask how your settlement will be handled.
F. Securing Title Services
Title insurance is usually required by the lender to protect the lender
against loss resulting from claims by others against your new home.
In some states, attorneys offer title insurance as part of their services
in examining title and providing a title opinion. The attorney's fee
may include the title insurance premium. In other states, a title insurance
company or title agent directly provides the title insurance.
Owner’s Policy. A lender’s title insurance policy does not protect you.
Similarly, the prior owner’s policy does not protect you. If you want
to protect yourself from claims by others against your new home, you
will need an owner's policy. When a claim does occur, it can be financially
devastating to an owner who is uninsured. If you buy an owner's policy,
it is usually much less expensive if you buy it at the same time and
with the same insurer as the lender's policy.
Choice of Title Insurer. Under RESPA, the seller may not require you,
as a condition of the sale, to purchase title insurance from any particular
title company. Generally, your lender will require title insurance from
a company that is acceptable to it. In most cases you can shop for and
choose a company that meets the lender’s standards.
Review Initial Title Report. In many areas, a few days or weeks before
the settlement or closing of the escrow, the title insurance company
will issue a “Commitment to Insure” or preliminary report or “binder”
containing a summary of any defects in title which have been identified
by the title search, as well as any exceptions from the title insurance
policy’s coverage. The commitment is usually sent to the lender for
use until the title insurance policy is issued at or after the settlement.
You can arrange to have a copy sent to you (or to your attorney) so
that you can object if there are matters affecting the title which you
did not agree to accept when you signed the agreement of sale.
Coverage & Cost Savings. To save money on title insurance, compare
rates among various title insurance companies. Ask what services and
limitations on coverage are provided under each policy so that you can
decide whether coverage purchased at a higher rate may be better for
your needs. However, in many states, title insurance premium rates are
established by the state and may not be negotiable. If you are buying
a home which has changed hands within the last several years, ask your
title company about a "reissue rate," which would be cheaper.
If you are buying a newly constructed home, make certain your title
insurance covers claims by contractors. These claims are known as “mechanics’
liens” in some parts of the country.
Survey. Lenders or title insurance companies often require a survey
to mark the boundaries of the property. A survey is a drawing of the
property showing the perimeter boundaries and marking the location of
the house and other improvements. You may be able to avoid the cost
of a complete survey if you can locate the person who previously surveyed
the property and request an update. Check with your lender or title
insurance company on whether an updated survey is acceptable.
G. RESPA Disclosures
One of the purposes of RESPA is to help consumers become better shoppers
for settlement services. RESPA requires that borrowers receive disclosures
at various times. Some disclosures spell out the costs associated with
the settlement, outline lender servicing and escrow account practices
and describe business relationships between settlement service providers.
Good Faith Estimate of Settlement Costs. RESPA requires that, when you
apply for a loan, the lender or mortgage broker give you a Good Faith
Estimate of settlement service charges you will likely have to pay.
If you do not get this Good Faith Estimate when you apply, the lender
or mortgage broker must mail or deliver it to you within the next three
business days.
Be aware that the amounts listed on the Good Faith Estimate are only
estimates. Actual costs may vary. Changing market conditions can affect
prices. Remember that the lender's estimate is not a guarantee. Keep
your Good Faith Estimate so you can compare it with the final settlement
costs and ask the lender questions about any changes.
Servicing Disclosure Statement. RESPA requires the lender or mortgage
broker to tell you in writing, when you apply for a loan or within the
next three business days, whether it expects that someone else will
be servicing your loan (collecting your payments). Affiliated Business
Arrangements. Sometimes, several businesses that offer settlement services
are owned or controlled by a common corporate parent. These businesses
are known as “affiliates.” When a lender, real estate broker, or other
participant in your settlement refers you to an affiliate for a settlement
service (such as when a real estate broker refers you to a mortgage
broker affiliate), RESPA requires the referring party to give you an
Affiliated Business Arrangement Disclosure. This form will remind you
that you are generally not required, with certain exceptions, to use
the affiliate and are free to shop for other providers.
HUD-1 Settlement Statement. One business day before the settlement,
you have the right to inspect the HUD 1 Settlement Statement. This statement
itemizes the services provided to you and the fees charged to you. This
form is filled out by the settlement agent who will conduct the settlement.
Be sure you have the name, address, and telephone number of the settlement
agent if you wish to inspect this form. The fully completed HUD-1 Settlement
Statement generally must be delivered or mailed to you at or before
the settlement. In cases where there is no settlement meeting, the escrow
agent will mail you the HUD-1 after settlement, and you have no right
to inspect it one day before settlement.
Escrow Account Operation & Disclosures. Your lender may require
you to establish an escrow or impound account to insure that your taxes
and insurance premiums are paid on time. If so, you will probably have
to pay an initial amount at the settlement to start the account and
an additional amount with each month’s regular payment. Your escrow
account payments may include a “cushion” or an extra amount to ensure
that the lender has enough money to make the payments when due. RESPA
limits the amount of the cushion to a maximum of two months of escrow
payments.
At the settlement or within the next 45 days, the person servicing your
loan must give you an initial escrow account statement. That form will
show all of the payments which are expected to be deposited into the
escrow account and all of the disbursements which are expected to be
made from the escrow account during the year ahead. Your lender or servicer
will review the escrow account annually and send you a disclosure each
year which shows the prior year’s activity and any adjustments necessary
in the escrow payments that you will make in the forthcoming year.
H. Processing Your Loan Application
There are several federal laws which provide you with protection during
the processing of your loan. The Equal Credit Opportunity Act (“ECOA”),
the Fair Housing Act, and the Fair Credit Reporting Act (“FCRA”) prohibit
discrimination and provide you with the right to certain credit information.
No Discrimination. ECOA prohibits lenders from discriminating against
credit applicants on the basis of race, color, religion, national origin,
sex, marital status, age, the fact that all or part of the applicant's
income comes from any public assistance program, or the fact that the
applicant has exercised any right under any federal consumer credit
protection law. To help government agencies monitor ECOA compliance,
your lender or mortgage broker must request certain information regarding
your race, sex, marital status and age when taking your loan application.
The Fair Housing Act also prohibits discrimination in residential real
estate transactions on the basis of race, color, religion, sex, handicap,
familial status or national origin. This prohibition applies to both
the sale of a home to you and the decision by a lender to give you a
loan to help pay for that home. Finally, your locality or state may
also have a law which prohibits discrimination.
Frequently, there are differences in the types and amounts of settlement
costs charged to the borrower -- for example, some borrowers are charged
greater fees for mortgages depending on their credit worthiness. These
differences may be justified or they may be unlawfully discriminatory.
It is important that you examine your settlement documents closely,
especially lines 808-811 on the HUD-1 settlement statement, and do not
hesitate to compare your settlement costs with those of your friends
and neighbors.
If you feel you have been discriminated against by a lender or anyone
else in the home buying process, you may file a private legal action
against that person or complain to a state, local or federal administrative
agency. You may want to talk to an attorney; or you may want to ask
the federal agency that enforces ECOA (the Board of Governors of the
Federal Reserve System) or the Fair Housing Act (HUD) about your rights
under these laws.
Prompt Action/Notification of Action Taken. Your lender or mortgage
broker must act on your application and inform you of the action taken
no later than 30 days after it receives your completed application.
Your application will not be considered complete, and the 30 day period
will not begin, until you provide to your lender or mortgage broker
all of the material and information requested.
Statement of Reasons for Denial. If your application is denied, ECOA
requires your lender or mortgage broker to give you a statement of the
specific reasons why it denied your application or tell you how you
can obtain such a statement. The notice will also tell you which federal
agency to contact if you think the lender or mortgage broker has illegally
discriminated against you.
Obtaining Your Credit Report. The Fair Credit Reporting Act (“FCRA”)
requires a lender or mortgage broker that denies your loan application
to tell you whether it based its decision on information contained in
your credit report. If that information was a reason for the denial,
the notice will tell you where you can get a free copy of the credit
report. You have the right to dispute the accuracy or completeness of
any information in your credit report. If you dispute any information,
the credit reporting agency that prepared the report must investigate
free of charge and notify you of the results of the investigation.
Obtaining Your Appraisal. The lender needs to know if the value of your
home is enough to secure the loan. To get this information, the lender
typically hires an appraiser, who gives a professional opinion about
the value of your home. ECOA requires your lender or mortgage broker
to tell you that you have a right to get a copy of the appraisal report.
The notice will also tell you how and when you can ask for a copy.
I. RESPA Protection Against Illegal Referral Fees
R ESPA was enacted because Congress felt that consumers needed protection
from "... unnecessarily high settlement charges caused by certain
abusive practices that have developed in some areas of the country."
Some of the practices Congress was concerned about are discussed below.
Most professionals in the settlement business provide good service and
do not engage in these practices.
Prohibited Fees. It is illegal under RESPA for anyone to pay or receive
a fee, kickback or anything of value because they agree to refer settlement
service business to a particular person or organization. For example,
your mortgage lender may not pay your real estate broker $250 for referring
you to the lender. It is also illegal for anyone to accept a fee or
part of a fee for services if that person has not actually performed
settlement services for the fee. For example, a lender may not add to
a third party’s fee, such as an appraisal fee, and keep the difference.
Permitted Payments. RESPA does not prevent title companies, mortgage
brokers, appraisers, attorneys, settlement/closing agents and others,
who actually perform a service in connection with the mortgage loan
or the settlement, from being paid for the reasonable value of their
work. If a participant in your settlement appears to be taking a fee
without having done any work, you should advise that person or company
of the RESPA referral fee prohibitions. You may also speak with your
attorney or complain to a regulator listed in the Appendix to this Booklet.
Penalties. It is a crime for someone to pay or receive an illegal referral
fee. The penalty can be a fine, imprisonment or both. You may be entitled
to recover three times the amount of the charge for any settlement service
by bringing a private lawsuit. If you are successful, the court may
also award you court costs and your attorney’s fees.
J. Your Right to File Complaints
Private Lawsuits. If you have a problem, the best place to have it fixed
is at its source (the lender, settlement agent, broker, etc.). If that
approach fails and you think you have suffered because of a violation
of RESPA, ECOA or any other law, you may be entitled to sue in a federal
or state court. This is a matter you should discuss with your attorney.
Government Agencies. Most settlement service providers are supervised
by a governmental agency at the local, state and/or federal level, some
of which are listed in the Appendix to this Booklet. Your state’s Attorney
General may have a consumer affairs division. If you feel that a provider
of settlement services has violated RESPA or any other law, you can
complain to that agency or association. You may also send a copy of
your complaint to the HUD Office of Consumer & Regulatory Affairs.
The address is listed in the Appendix.
Servicing Errors. If you have a question any time during the life of
your loan, RESPA requires the company collecting your loan payments
(your “servicer”) to respond to you. Write to your servicer and call
it a “qualified written request under Section 6 of RESPA.” A “qualified
written request” should be a separate letter and not mailed with the
payment coupon. Describe the problem and include your name and account
number. The servicer must investigate and make appropriate corrections
within 60 business days.
III. YOUR SETTLEMENT COSTS
A. Specific Settlement Costs
T his part of the Booklet discusses the settlement services which you
may be required to get and pay for and which are itemized in Section
L of the HUD-1 Settlement Statement. You also will find a sample of
the HUD-1 form to help you to understand the settlement transaction.
When shopping for settlement services, you can use this section as a
guide, noting on it the possible services required by various lenders
and the different fees quoted by service providers. Settlement costs
can increase the cost of your loan, so compare carefully.
700. Sales/Broker's Commission: This is the total dollar amount of the
real estate broker’s sales commission, which is usually paid by the
seller. This commission is typically a percentage of the selling price
of the home.
L. SETTLEMENT CHARGES
700. TOTAL SALES/BROKER’S COMMISSION based on price $ @ %= PAID FROM
BORROWER’S FUNDS AT PAID FROM SELLER’S FUNDS AT Division of Commission
(line 700) as follows: SETTLEMENT SETTLEMENT
701. $ to
702. $ to
703. Commission paid at Settlement
704.
800. Items Payable in Connection with Loan: These are the fees that
lenders charge to process, approve and make the mortgage loan:
801. Loan Origination: This fee is usually known as a loan origination
fee but sometimes is called a “point” or “points.” It covers the lender's
administrative costs in processing the loan. Often expressed as a percentage
of the loan, the fee will vary among lenders. Generally, the buyer pays
the fee, unless otherwise negotiated.
802. Loan Discount: Also often called "points" or “discount
points,” a loan discount is a one time charge imposed by the lender
or broker to lower the rate at which the lender or broker would otherwise
offer the loan to you. Each "point" is equal to one percent
of the mortgage amount. For example, if a lender charges two points
on a $80,000 loan this amounts to a charge of $1,600.
803. Appraisal Fee: This charge pays for an appraisal report made by
an appraiser.
804. Credit Report Fee: This fee covers the cost of a credit report,
which shows your credit history. The lender uses the information in
a credit report to help decide whether or not to approve your loan and
how much money to lend you.
805. Lender's Inspection Fee: This charge covers inspections, often
of newly constructed housing, made by employees of your lender or by
an outside inspector. (Pest or other inspections made by companies other
than the lender are discussed in line 1302.)
806. Mortgage Insurance Application Fee: This fee covers the processing
of an application for mortgage insurance.
807. Assumption Fee: This is a fee which is charged when a buyer “assumes”
or takes over the duty to pay the seller’s existing mortgage loan.
808. Mortgage Broker Fee: Fees paid to mortgage brokers would be listed
here. A CLO fee would also be listed here.
800. ITEMS PAYABLE IN CONNECTION WITH LOAN
801. Loan Origination Fee %
802. Loan Discount %
803. Appraisal Fee to
804. Credit Report to
805. Lender’s Inspection Fee
806. Mortgage Insurance Application Fee to
807. Assumption Fee
808. Mortgage Broker Fee
900. Items Required by Lender to Be Paid in Advance: You may be required
to prepay certain items at the time of settlement, such as accrued interest,
mortgage insurance premiums and hazard insurance premiums.
901. Interest: Lenders usually require borrowers to pay the interest
that accrues from the date of settlement to the first monthly payment.
902. Mortgage Insurance Premium: The lender may require you to pay your
first year’s mortgage insurance premium or a lump sum premium that covers
the life of the loan, in advance, at the settlement.
903. Hazard Insurance Premium: Hazard insurance protects you and the
lender against loss due to fire, windstorm, and natural hazards. Lenders
often require the borrower to bring to the settlement a paid-up first
year’s policy or to pay for the first year's premium at settlement.
904. Flood Insurance: If the lender requires flood insurance, it is
usually listed here.
900. ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE
901. Interest from to @$ /day
902. Mortgage Insurance Premium for months to
903. Hazard Insurance Premium for years to
904. years to
1000 - 1008. Escrow Account Deposits: These lines identify the payment
of taxes and/or insurance and other items that must be made at settlement
to set up an escrow account. The lender is not allowed to collect more
than a certain amount. The individual item deposits may overstate the
amount that can be collected. The aggregate adjustment makes the correction
in the amount on line 1008. It will be zero or a negative amount.
1000. RESERVES DEPOSITED WITH LENDER
1001. Hazard Insurance months @ $ per month
1002. Mortgage insurance months @ $ per month
1003. City property taxes months @ $ per month
1004. County property taxes months @ $ per month
1005. Annual assessments months @ $ per month
1006. months @ $ per month
1007. months @ $ per month
1008. Aggregate Adjustment
1100. Title Charges: Title charges may cover a variety of services performed
by title companies and others. Your particular settlement may not include
all of the items below or may include others not listed.
1101. Settlement or Closing Fee: This fee is paid to the settlement
agent or escrow holder. Responsibility for payment of this fee should
be negotiated between the seller and the buyer.
1102-1104. Abstract of Title Search, Title Examination, Title Insurance
Binder: The charges on these lines cover the costs of the title search
and examination.
1105. Document Preparation: This is a separate fee that some lenders
or title companies charge to cover their costs of preparation of final
legal papers, such as a mortgage, deed of trust, note or deed.
1106. Notary Fee: This fee is charged for the cost of having a person
who is licensed as a notary public swear to the fact that the persons
named in the documents did, in fact, sign them.
1107. Attorney's Fees: You may be required to pay for legal services
provided to the lender, such as an examination of the title binder.
Occasionally, the seller will agree in the agreement of sale to pay
part of this fee. The cost of your attorney and/or the seller’s attorney
may also appear here. If an attorney's involvement is required by the
lender, the fee will appear on this part of the form, or on lines 1111,
1112 or 1113.
1108. Title Insurance: The total cost of owner's and lender's title
insurance is shown here.
1109. Lender's Title Insurance: The cost of the lender’s policy is shown
here.
1110. Owner's (Buyer’s) Title Insurance: The cost of the owner's policy
is shown here.
1100. TITLE CHARGES
1101. Settlement or closing fee to
1102. Abstract or title search to
1103. Title examination to
1104. Title insurance binder to
1105. Document preparation to
1106. Notary fees to
1107. Attorney’s fees to
(includes above items numbers; )
1108. Title Insurance to
(includes above items numbers; )
1109. Lender’s coverage $
1110. Owner’s coverage $
1200. Government Recording and Transfer Charges: These fees may be paid
by you or by the seller, depending upon your agreement of sale with
the seller. The buyer usually pays the fees for legally recording the
new deed and mortgage (line 1201). Transfer taxes, which in some localities
are collected whenever property changes hands or a mortgage loan is
made, can be quite large and are set by state and/or local governments.
City, county and/or state tax stamps may have to be purchased as well
(lines 1202 and 1203).
1200. GOVERNMENT RECORDING AND TRANSFER CHARGES
1201. Recording fees: Deed $ ; Mortgage $ ; Releases $
1202. City/county tax/stamps: Deed $ ; Mortgage $
1203. State tax/stamps: Deed $ ; Mortgage $
1300. Additional Settlement Charges:
1301. Survey: The lender may require that a surveyor conduct a property
survey. This is a protection to the buyer as well. Usually the buyer
pays the surveyor's fee, but sometimes this may be paid by the seller.
1302. Pest and Other Inspections: This fee is to cover inspections for
termites or other pest infestation of your home.
1303-1305. Lead-Based Paint Inspections: This fee is to cover inspections
or evaluations for lead-based paint hazard risk assessments and may
be on any blank line in the 1300 series.
1300. ADDITIONAL SETTLEMENT CHARGES
1301. Survey to
1302. Pest inspection to
1400. Total Settlement Charges: The sum of all fees in the borrower's
column entitled "Paid from Borrower's Funds at Settlement"
is placed here. This figure is then transferred to line 103 of Section
J, "Settlement charges to borrower" in the Summary of Borrower's
Transaction on page 1 of the HUD-1 Settlement Statement and added to
the purchase price. The sum of all of the settlement fees paid by the
seller are transferred to line 502 of Section K, Summary of Seller's
Transaction on page 1 of the HUD-1 Settlement Statement.
1400. TOTAL SETTLEMENT CHARGES (enter on lines 103, Section J and 502,
Section K)
Paid Outside Of Closing (“POC”): Some fees may be listed on the HUD-1
to the left of the borrower’s column and marked “P.O.C.” Fees such as
those for credit reports and appraisals are usually paid by the borrower
before closing/settlement. They are additional costs to you. Other fees
such as those paid by the lender to a mortgage broker or other settlement
service providers may be paid after closing/settlement. These fees are
usually included in the interest rate or other settlement charge. They
are not an additional cost to you. These types of fees will not be added
into the total on Line 1400.
B. Calculating the Amount You Need At Settlement
The first page of the HUD-1 Settlement Statement summarizes all the
costs and adjustments for the borrower and seller. Section J is the
summary of the borrower’s transaction and Section K is the summary of
the seller’s side of the transaction. You may receive a copy of the
seller’s side, but it is not required.
Section 100 summarizes the borrower’s costs, such as the contract cost
of the house, any personal property being purchased, and the total settlement
charges owed by the borrower from Section L.
Beginning at line 106, adjustments are made for items (such as taxes,
assessments, fuel) that the seller has previously paid. If you will
benefit from these items after settlement, you will usually repay the
seller for that portion of the cost.
Here is an example for you to use in making your own calculations:
J. SUMMARY OF BORROWER'S TRANSACTION
100. GROSS AMOUNT DUE FROM BORROWER:
101. Contract sales price 100,000.00
102. Personal Property
103. Settlement charges to borrower (line 1400) 4,000.00
104.
105. Adjustments for items paid by seller in advance
106. City/town taxes to
107. County taxes to
108. Assessments 6/30 to 7/31 (owners assn.) 40.00 109. Fuel Oil 25
gals. @ $1.00/gal. 25.00
120. GROSS AMOUNT DUE FROM BORROWER 104,065.00
Assume in this example, the cost of the house is $100,000 and the borrower’s
total settlement charges brought from Line 1400 of Section L are $4,000.
Assume that the settlement date is July 1. Here the borrower has agreed
to pay the seller for the $40 Home Owners Association dues that have
been paid for the month of July and for the 25 gallons of fuel oil left
in the tank. This is added for a gross amount due from the borrower
of $104,065.
Section 200 lists the amount paid by the borrower or on behalf of the
borrower. This will include the deposit of earnest money you put down
with the agreement of sale, the loan(s) you are getting and any loan
you may be assuming.
Beginning at Line 210, adjustments are made for items that the seller
owes (such as taxes, assessments) but for which you as the borrower
will pay after settlement. The seller will usually pay you or credit
you this portion at settlement.
200. AMOUNTS PAID BY OR IN BEHALF OF BORROWER:
201. Deposit of earnest money 2,000.00
202. Principal amount of new loan(s) 80,000.00
203. Existing loan(s) taken subject to
209. Adjustments for items unpaid by seller
210. City/town taxes to
211. County taxes 1/1 to 6/30 $1,200/ year 600.00
212. Assessments 1/1 to 6/30 $200/yr. 100.00
220. TOTAL PAID BY/FOR BORROWER 82,700.00
In this example, assume the borrower paid an earnest deposit of $2,000
and is getting a loan for $80,000. A tax of $1200 and an assessment
of $200 are due at the end of the year. The seller will pay the borrower
for six months or one-half of this amount. Line 220 shows the total
$82,700 to be paid by or for the borrower.
Section 300 reflects the difference between the gross amount due from
the borrower and the total amount paid by/for the borrower. Generally,
line 303 will show the amount of cash the borrower must bring to settlement.
300. CASH AT SETTLEMENT FROM/TO BORROWER
301. Gross Amount due from borrower (line 120) 104,065.00
302. Less amounts paid by/for borrower (line 220) (82,700.00)
303. CASH (? FROM) ( ( TO) BORROWER 21,365.00
In this example, the borrower must bring $21,365.00 to settlement.
C. Adjustments To Costs Shared By Buyer and Seller t settlement it is
usually necessary to make an adjustment between buyer and seller for
property taxes and other expenses. The adjustments between buyer and
seller are shown in Sections J and K of the HUD 1 Settlement Statement.
In the example given above, the taxes, which are payable annually, had
not yet been paid when the settlement occurs on July 1. The borrower
will have to pay a whole year's taxes on the following December 1. However,
the seller lived in the house for the first six months of the year.
Thus, one half of the year's taxes are to be paid by the seller. Accordingly,
lines 211 and 511 on the HUD 1 Settlement Statement would read as follows:
211. County taxes 1/1/97 to 6/30/97 $600.00
511. County taxes 1/1/97 to 6/30/97 $600.00 The borrower is given credit
for this amount at the settlement and the seller will pay this amount
or count it as a deduction from sums payable to the seller.
Similar adjustments are made for homeowner association dues, special
assessments, and fuel and other utilities, although the billing periods
for these may not always be on an annual basis. Be sure you work out
these cost sharing arrangements or “prorations” with the seller before
the settlement. You may wish to notify utility companies of the change
in ownership and ask for a special reading on the day of settlement,
with the bill for pre-settlement charges to be mailed to the seller
at his or her new address or to the settlement agent. This will eliminate
much confusion that can result if you are billed for utilities used
when the seller owned the property.
Consumer Information on Home Purchasing and Related Topics
U.S. Department of Housing and Urban Development 451 7th Street, SW
Washington, DC 20410 Web site: http://www.hud.gov
For information about FHA insured home mortgage loans on one to four
family dwellings call:
1-800 CALL FHA (800-225-5342)
For information about buying a HUD home call:
1-800-767-4HUD (800-767-4483)
For consumer counseling referrals call: 1-888-HOME4US (1-888-466-3487)
For information regarding housing discrimination issues contact:
Office of Fair Housing and Equal Opportunity (see above HUD address)
1-800-669-9777 Web site: http://www.hud.gov/fhe/fheo.html
For information about RESPA contact:
Office of Consumer and Regulatory Affairs (see above HUD address) Web
Site: http://www.hud.gov/fha/res/respa_hm.html
Other Agencies
For information about programs and pamphlets offered by the Department
of Veterans Affairs, contact your nearest VA Regional Office. Web Site:
http://www.va.gov/vas/loan
For information about rural housing loan programs contact:
Department of Agriculture Rural Development/Rural Housing Services Stop
0783 Washington, DC 20250 Web Site: http://www.rurdev.usda.gov
For information about the Truth in Lending Act and the Equal Credit
Opportunity Act contact:
Federal Reserve Board 20th Street and Constitution Avenue, NW Washington,
DC 20551 http://www.bog.frb.fed.us
About Three Palms Real Estate – Your Professional
Guides to Paradise
With so many choices it’s hard to navigate the volume of information
available to you. Three Palms Professional Realtors will do the work
for you. From beachfront Gulf Shores Condos to secluded family homes
in Orange Beach, we know the best properties and we know the market.
It’s important to us to educate our clients about the activities and
amenities available in the area, as well as the types of properties
we have to offer and financing options to help you make an informed
decision that is right for you. Our mission is to determine your specific
needs, desires and goals and to find the property and investment that
is right for you.
Whether your dream is living on the water or just minutes from it, our
Professional Guides to Paradise can get you here!
Call us at 1.866.980.PALM (7256) or Email Us to discuss the possibilities. Check out our favorite picks, or perform a custom search for Gulf Shores real estate or Orange Beach Real Estate.
Licensed in Alabama and Florida.
Gulf Shores and Orange Beach Area Info
Climate
The Gulf Coast Area has a mild climate with an average annual temperature
of 67.4 degrees. The average temperature in January is 51.4 degrees.
The average temperature in July is 81.8 degrees. The average annual
precipitation is 67 inches, and the growing season is 292 days.
Education
Education is a fundamental block in building a bright future. The Gulf
Coast Area opened a brand new high school during 1999 in Gulf Shores
(ph. 251.968.4747). The area has two elementary schools; they are Gulf
Shores Elementary (ph. 251.968.7375) and Orange Beach Elementary (ph.
251.981.5662). Gulf Shores Middle School (ph. 251.968.8719) offers an
excellent curriculum in preparation for high school. All public schools
are part of the Baldwin County school system. If you are interested
in private education, you also have the option of Bayside Academy (ph.
251.955.5211), which includes age 3yrs – Grade 4.
Healthcare
The nearest hospital is South Baldwin Regional Medical Center (ph. 800.580.3627)
located in Foley. South Baldwin Medical Center offers 24-hour emergency
services (ph. 251.952.3400). Numerous medical professionals practice
in the area providing both family practice and specialized care.
Airports
Corporate and Private air service is available in Gulf Shores from the
Jack Edwards Municipal Airport, with a full Instrument Landing System
and the longest paved runway being 7000 feet. The closest commercial
air service is available in Pensacola, roughly 30 miles away, at the
Pensacola Regional Airport (ph. 850.435.1746). Major carriers serving
the airport are Continental, US Airways, Delta, Northwest, and American.
Other commercial airports are located in Mobile (ph. 251.633.0313) and
Gulf Port, Mississippi (ph. 228.863.5951).
Shopping
The area offers many shops ranging from casual apparel and beachwear
to upscale fashion and specialty boutiques. If you are a bargain hunter,
you can find 120 factory outlet stores in Foley.
Parks and Recreation
The nearest state park is the Gulf State Park (ph. 251.948.7275). The
6,000-acre park area offers campsites, picnic areas, 18-hole golf course,
825 foot fishing pier, 144 room hotel and convention center. Other parks
in the area include Bon Secour Wildlife Refuge (ph. 251.540.7720), Meyer
Park (ph. 251.968.4420), Johnnie Sims Park and Kids Park (ph. 251.968.4420),
and Wade Ward Nature Park (ph. 251.968.4420).
State/Local Income Tax
For detailed information about Alabama income tax, contact the Alabama
Department of Revenue, Individual and Corporate Tax Division (ph. 251.242.1000).
In most instances, local governments in Alabama do not levy city, town,
or county income taxes.
Property Taxes
Property (Ad Valorem) taxes are taxes on real business and/or personal
property. “Ad Valorem” means “according to value”.
For details, call the Revenue Commissioner’s office (ph. 251.943.5061,
ext. 2840).
