In the realm of real estate transactions, the once-familiar "settlement statement" has evolved into what is now referred to as a "closing disclosure." However, the older term is still used in some circles, so it is essential to be acquainted with both as you navigate your mortgage loan closing. A settlement statement plays a critical role in providing a comprehensive breakdown of all the closing costs and credits associated with a real estate deal or a refinance. This knowledge empowers buyers to manage their finances effectively. Here is everything you need to know.
What is a Settlement Statement?
A settlement statement is a comprehensive document that outlines all costs owed by or credits due to the homebuyer and seller, or the borrower in the case of a refinance. It also includes key details like the property's purchase price, loan amount, and other financial specifics. The purpose of this document is to inform the buyer (or refinancer) about the amount of money due at the time of closing and to whom these payments are directed. Simultaneously, it informs the seller about their proceeds from the transaction.
Various parties may provide the settlement statement, including mortgage lenders, settlement agents, title companies, or real estate attorneys.
Settlement Statement vs. Closing Disclosure
For those who obtained their mortgages before October 2015, they received a HUD-1 settlement statement (HUD refers to the U.S. Department of Housing and Urban Development). Today, most borrowers receive a document remarkably like the HUD-1, commonly referred to as a closing disclosure, though the older terms may still be informally used.
What changed in October 2015? This is when Congress passed consumer protection laws commonly known as TRID, or "Know Before You Owe." In response, the Consumer Financial Protection Bureau mandated the replacement of HUD-1 with the more straightforward and less confusing closing disclosure. Despite the name change, both documents serve the same purpose: ensuring borrowers have a clear understanding of their financial commitments.
How Does a Settlement Statement Work?
Every real estate transaction necessitates some form of a settlement statement. Residential purchases and sales typically employ the closing disclosure, while the HUD-1 or HUD-1A settlement statement may still be used in certain transactions.
• Closing Disclosure: This five-page document is widely used today and serves as the finalized version of the loan estimate (formerly known as the good faith estimate), which buyers receive when applying for a mortgage. It offers an overview of expected fees and must be provided by your mortgage lender at least three business days before closing. (This three-day rule does not apply to sellers.)
• Settlement Statement: The HUD-1, a somewhat outdated form like the closing disclosure, itemizes costs and credits. However, it is typically delivered at least one day before the closing. The figures on this form can be adjusted, added, or removed at the last minute, with both parties present during the closing. The HUD-1A may still be used in transactions without a seller, such as refinances or reverse mortgages.
Upon receiving your settlement statement, it is vital to review it in comparison to your loan estimate to ensure there are no unexpected surprises. Thoroughly examining this document is crucial to verify the accuracy of all expenses.
Mark Hamrick, Bankrate's senior economic analyst, emphasizes the importance of this diligence: "While homebuyers might tend to focus on the final price of the property they’re buying, their due diligence should extend to disclosures, including those found in settlement statements."
What to Expect on Your Settlement Statement?
A settlement statement provides a comprehensive breakdown of expenses and credits associated with the real estate transaction, to be paid by the homebuyer and seller, or the borrower in a refinance. Common items featured on a settlement statement include:
• Loan amount, interest rate, and loan terms
• Property's contract price
• Allocation of real estate taxes and assessments
• Real estate agent commissions
• Escrow fees
• Lender fees, including those for loan origination, underwriting, and discount points
• Home inspection fee
• Appraisal fee
• Private mortgage insurance premium (if applicable)
• Homeowners insurance premium
• Title administration fees
• Title insurance policy premium
• Notary fee
• Deed preparation and recording fees
• Transfer taxes or conveyance fees
• Homeowners’ association fees (if applicable)
In summary, understanding the settlement statement, whether you encounter the traditional HUD-1 or the modern closing disclosure, is pivotal when engaging in real estate transactions. It allows you to make informed financial decisions and ensures transparency throughout the process.
