let’s talk : UNDERSTANDING THE HUD STATEMENT

Good morning!

Recently, I have spent a good amount of time reviewing HUD-1 statements. At first, reading and understanding a HUD can be super overwhelming. I think my partners can attest that I am very type A when it comes to reading through these and have spent a ton of time on google and on the phone, trying to learn exactly what each line item and number meant. Thought I would try and save you some of the pain and talk about that today! (Sorry if this comes off as super simple but I have learned how critical it can be- you’ll see why below!)

So, as we do, let’s talk Real Estate, let’s talk UNDERSTANDING THE HUD-1 STATEMENT …

Shall we start super basic – WHAT IS A HUD-1 STATEMENT?

“The HUD-1 Settlement Statement is a form prepared by closing agents itemizing all charges imposed on a buyer and a seller in real estate transactions.” – thanks Investopedia!

This document essentially shows you exactly who owes who what money as you go to close on your property.

WHAT OTHER TYPES OF INFORMATION MIGHT I FIND ON THE HUD-1?

You can expect to see the following;

Name & address of the buyer
Address of the property that is being purchased
Type of loan used to finance the purchase of the property(if applicable)
Loan number (if applicable)
Name & address of lender (if applicable)
Place of settlement
Settlement agent
Settlement date
Disbursement date
Summary of buyer’s transaction
Summary of seller’s transaction
 
 
WHAT CAN I EXPECT TO SEE ON THE BUYER’S (BORROWER’S) TRANSACTION SUMMARY?

Gross amount due from borrower
Contract sales price – aka what you agreed to purchase the property for.
Settlement charges to borrower – aka the total fee amount that the borrower needs to pay to close on the property. A full list of settlement charges to the borrower can typically be found on the second page of the HUD and include items such as; assignment fees, lender origination charges, appraisal fees, property taxes, title insurance, deed recording charges, transfer taxes. If you are doing a remote close you may incur extra fees such as a mobile notary fee, wiring fee, or a courier fee. 

Adjustments for items paid by seller in advance
City / town taxes (settlement date – end of year) – these are any expenses the current owner had already paid for the property ahead of time. In the event the seller had paid the taxes on the property for the remainder of the year, the buyer will need to pay them back to the seller.
County taxes (settlement date – end of year) – same story as above, they buyer is reimbursing the seller for any future expenses they have already paid.
School taxes (settlement date – end of year) – same story as above, they buyer is reimbursing the seller for any future expenses they have already paid.
Annual trash proration(settlement date – end of year) – same story as above, they buyer is reimbursing the seller for any future expenses they have already paid.

Gross amount due from borrower
+ Adjustments for items paid by seller in advance
 =  (actual) Gross amount due from borrower

 
Amounts paid by or on behalf of borrower
Deposit or earnest money – often times when a buyer signs an agreement of sale they will offer a deposit as a form of “proof” that they are serious about buying this property. 
Principal amount of new loan – aka the amount of loan you are taking out to purchase the property.
Other credits – aka any fee you may have paid upfront. For example, we paid our lender a $1,000 deposit at the beginning of underwriting that would be applied towards the settlement costs once we closed.

Adjustments for items unpaid by seller
City / town taxes (beginning of year – settlement date) – these are any expenses the current owner had already incurred but NOT YET paid for on the property. The seller will have to pay for / credit the buyer for taxes already incurred but not yet paid for.  
County taxes (beginning of year – settlement date) – same story as above, the seller is  crediting the buyer for any unpaid incurred expenses.
School taxes (beginning of year – settlement date) – same story as above, the seller is  crediting the buyer for any unpaid incurred expenses.
Annual trash proration (beginning of year – settlement date) – same story as above, the seller is  crediting the buyer for any unpaid incurred expenses.

All of this is summed up and = Total amount paid by / for borrower

So then to figure out exactly how much cash the buyer needs to bring to the table in order to close on the property you calculate the following…
Gross amount due from borrower [this was the first set of numbers we put together]
–             Amount paid by / for borrower [aka the amount we just went through above]
 = Cash from / paid to borrower at close

 
WHAT COSTS CAN I EXPECT TO SEE ON THE SELLER’S TRANSACTION SUMMARY?

Gross amount due to seller
Contract sales price – aka the agreed upon purchase price of the house.

Adjustments for items paid by seller in advance
This section will be identical to the “Adjustments for items paid by seller in advance”  used in the “Cash from / paid to borrower at close” figure calculation.

City / town taxes (settlement date – end of year) – these are any expenses the current owner / seller had already paid for the property ahead of time. In the event the seller has paid the taxes on the property for the remainder of the year, the buyer will need to reimburse the seller.
County taxes (settlement date – end of year) – same story as above, the buyer is reimbursing the seller for any future expenses they have already paid.
School taxes (settlement date – end of year) – same story as above, the buyer is reimbursing the seller for any future expenses they have already paid.
Annual trash proration(settlement date – end of year) – same story as above, the buyer is reimbursing the seller for any future expenses they have already paid.

Gross amount due to seller
+ Adjustments for items paid by seller in advance
 =  (actual) Gross amount due to seller
Reductions in amount due to seller
Settlement charges to seller – aka total amount the seller needs to pay to close on the property. A full list of settlement charges to the seller can typically be found on the second page of the HUD and include items such as; commission paid at settlement, transfer taxes, outstanding taxes, outstanding judgements, outstanding water bill, notary fees, etc.
Payoff mortgage loans – the purchase price will be used to pay off any existing mortgages on the property.

Adjustments for items unpaid by seller
City / town taxes (beginning of year – settlement date) – these are any expenses the current owner had already incurred but NOT YET paid for on the property. The seller will have to pay for / credit the buyer for taxes already incurred but not yet paid for.  
County taxes (beginning of year – settlement date) – same story as above, the seller is  crediting the buyer for any unpaid incurred expenses.
School taxes (beginning of year – settlement date) – same story as above, the seller is  crediting the buyer for any unpaid incurred expenses.
Annual trash proration (beginning of year – settlement date) – same story as above, the seller is  crediting the buyer for any unpaid incurred expenses.

All of this is summed up and = Total reduction amount due seller

Cash at settlement from /to seller

Gross amount due to seller
–             Reductions in amount due seller [aka the amount we just went through above]
 = Cash from / paid to seller at close

 
The two bottom line numbers everyone focuses on a the end of the day are;
 
Cash from/ to borrower
Cash from/ to seller
 
These two numbers will tell you as the buyer and seller exactly what you will be paid or will pay at settlement.

LET’S TALK ABOUT THE FINAL PAGE OF THE HUD-1 STATEMENT 
The first two pages will walk you through what the buyer owes, and what the seller will receive at settlement. The final page will relate to the Good Faith Estimate and the actual charges that appear on the HUD. The Good Faith Estimate is made up of the estimated charges originally supplied by the lender at the time of loan application. These figures are compared to the actual figures used in the final version of the HUD. This is done to spot any wide discrepancies in expected vs actual charges. 
 
WHY IS ALL OF THIS IMPORTANT TO UNDERSTAND?
First of all, it tells you exactly what you owe or are owed. It is important to make sure, that from both perspectives, you are paid or are paying the fair, agreed upon price. Second of all, it can literally make or break (or at least delay) a deal. I have recently dealt with a seller who, at the very last second, decided to not show up to closing because he did not like or understand what he saw on the HUD-1. HE DID THIS TWICE. We had put a month’s worth of work, thousands of dollars into preparation, and wasted not only our time, but our agent’s time, the insurance agent’s time, the contractor’s time, the lender’s time, the title company’s time, and the list goes on. All of this could have been avoided had the seller understood exactly what needed to be paid in order to settle on this property.

I know this week’s LTRE may have seemed SUPER SIMPLE but I think it is super important to understand the numbers, and what is expected on both sides of the deal when entering into a purchase / sale agreement.

Are we missing anything on the HUD-1 talk this week? Do YOU have any HUD-1 horror stories?!

Feel free to comment on the blog post HERE and let us know what YOU think!

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Happy Wednesday!
Erin

 

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ME  – this week’s post is based on my personal experience and findings