Settlement Statement - Explained
What is a Real Estate Settlement Statement?
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Table of ContentsSettlement Statement DefinitionA Little More on What is a Settlement StatementTypes of Settlement StatementHUD-1 Settlement StatementHow Settlement Statement WorksThe Three Page BreakdownCost for Preparing a Settlement StatementAcademic Research
What is a Settlement Statement?
A settlement statement refers to a document given to borrowers disclosing all the fees and costs to do with a home purchase. The details may include original fees, interest paid, closing costs, and any other incurred during the loan transactions settlement process. Another term for settlement statements is the closing statement.
How is a Settlement Statement Used?
When closing on a mortgage loan package, it is mandatory for the borrower to review and sign a settlement statement. With mortgage loan products, you require to have a settlement statement that is comprehensive. However, there are other types of loans whose statement settlement documentation is not extensive. A settlement statement consists of things such as:
- The price of the property in question
- The buyers mortgage loan size
- Any other deductions the buyer incurs during the mortgage transactions
The United States uses a standard lending mortgage form known as the HUD-1 settlement statement. HUD is a form name mostly used by the department of housing and Urban Development. In this form, all the charges imposed on creditors or agents are itemized during the mortgage transactions. The form is primarily used for mortgages refinance transactions as well as mortgages.
Types of Settlement Statement
The mortgage lending settlement statement exists in two types. They include HUD-1 settlement statements and closing disclosures. The two settlement statements contain a summary of the costs payable by the borrower.
Closing Disclosure - During the offering of the standard mortgage loan, there is the inclusion of a closing disclosure. The form consists of five pages, and it contains the costs, monthly payments as well as closing costs of the borrower. According to the regulations, a lender has to give a mortgage borrower a closing disclosure three days before the loan closing. The reason is that there are items in a closing disclosure form that may require three days to review. Some of these changes may include:
- Specific alterations of the annual percentage rate
- Adding a prepayment penalty
- Change from a fixed-rate to an adjustable-rate
HUD-1 Settlement Statement
Those who want to refinance a mortgage or reverse mortgages, usually use HUD-1 settlement statements. The documentation is a requirement per the Real Estate Settlement Procedures Act (RESPA). According to the RESPA regulations, the borrowers have the right to receive the document at least one day before the loan closing. Therefore, they should be given the document to review it before the closing.
How Settlement Statement Works
Typically, the borrower will receive a settlements statement copy three business days after the borrower applies for a mortgage loan. Note that the form has three pages containing the information which includes:
- Type of mortgage
- The loans total payment amount
- The amount the borrower
- The total amount the borrower is supposed to expect at the loan closing date
The Three Page Breakdown
Significance - According to RESPA, it is mandatory to use the HUD-1 settlement statement when closing real estate deals. It is on this page that all the mortgage loan terms are stated. The page consists of the following:
- Mortgage fees
- Mortgage fees
- Charges by the title company
Format - Still on page one, there are two columns. One column is for the seller, while the other one is for the buyer. In the columns, there is a grouping of fees according to who is charging the fee and what it covers. For instance, according to the California Land Title Association, the final figures should balance. It means that the credits and debits of the buyer should equal the total amount of the seller.
Types of Charges - Right at the top of the second payment of settlement statement, there are various sections of fees. The first section has the amount paid to the real estate firms as their commission, and it shows the breakdown of the payments. The second section has all the charges imposed on the buyers loan and the fee paid by the buyer before the loan closing. Note that any fee paid before or outside closing, are have the initials POC. Some of the charges in this section include the title policy, document preparation, title research, and attorneys fees. The third section highlights research, transfer, survey, and inspection fees.
Time Frame - Page two also highlights when the HUD-1 settlement statement should be ready. In most cases, agents usually prepare it before the closing. The preparation of the document should be done a day before the loan closing. However, most sellers and buyers are not able to receive one of this until right before closing due to the last minute charges. Note that most of the closing charges come from the title firm. However, charges for officers must also come from the mortgage loan lender.
Warning - On this page, there is a warning statement to both parties, including their real estate agents. The parties here are the buyers and the sellers. The Housing and Urban Development requires them to carefully read through the HUD-1 settlement statement to single out any errors. In case of any, they must correct them before the loan closing, to prevent them from incurring costly losses.
Cost for Preparing a Settlement Statement
In most cases, it is the third party in the transaction that prepares the settlement statement for closing. The third-party can be the officers that deal with this kind of documents and usually have a title. It could also be an escrow company presiding over the closing. The cost of preparing the document varies depending on the state. Note that states have different customary practices, and this includes fees charged for settlement services. In the state of California, both the seller and the buyer usually sign the document at closing.