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…
Think You’ll Never Pay Full Price in this Market?
January 22, 2010
“Well, in this market, I’d never pay full price.”
Not so fast there. There’s a big difference between paying full price and paying full value for a home. There’s absolutely nothing wrong with paying full price – or more – for a house if the value is supported.
Consider the list price to be a general relative indicator of value – we’ll assume when we first see a home that the list price is somewhere in the ballpark of true value. Sometimes the list price is too high and sometimes it is too low. Not every seller is overpricing their home. Some are serious, ready to sell, and price their homes very well.
Be more concerned with value, and not hung up on price. To find value, we’ll look at what other homes are selling for in the area, make adjustments for condition and location and amenities, make adjustments for the effects of the market in general over time.
If we think a home’s value is greater than the price, well, you just might need to offer something over the list price in order to get it. And you’ll very likely find yourself in competition for that home.
Think it doesn’t happen? Fourth quarter of 2009, in Central Tucson – of the 267 sales, 127 were at or above list price. That’s means 48% of the sales were AT or OVER the list price.
If you find yourself a great deal, priced under value, then move on that – and quickly.
Think You’ll Never Pay Full Price in this Market?
January 22, 2010
“Well, in this market, I’d never pay full price.”
Not so fast there. There’s a big difference between paying full price and paying full value for a home. There’s absolutely nothing wrong with paying full price – or more – for a house if the value is supported.
Consider the list price to be a general relative indicator of value – we’ll assume when we first see a home that the list price is somewhere in the ballpark of true value. Sometimes the list price is too high and sometimes it is too low. Not every seller is overpricing their home. Some are serious, ready to sell, and price their homes very well.
Be more concerned with value, and not hung up on price. To find value, we’ll look at what other homes are selling for in the area, make adjustments for condition and location and amenities, make adjustments for the effects of the market in general over time.
If we think a home’s value is greater than the price, well, you just might need to offer something over the list price in order to get it. And you’ll very likely find yourself in competition for that home.
Think it doesn’t happen? Fourth quarter of 2009, in Central Tucson – of the 267 sales, 127 were at or above list price. That’s means 48% of the sales were AT or OVER the list price.
If you find yourself a great deal, priced under value, then move on that – and quickly.
How Long After A Short Sale Until I Can Buy A House?
January 21, 2010
Short sales can get you out from under an unmanageable mortgage, but they don’t come without repercussions. Depending on how the short sale goes down, it can lower your credit score greatly, and you may owe taxes on the amount forgiven, as examples.
Eventually, some people want to buy another house. But with a short sale on your record, you may have to wait a couple of years before anyone will give you a home loan. My agent friend in Oakland County, Michigan, Maureen Francis has an article on her blog that explains the different rules. An excerpt:
FHA has recently changed their rule so that if a short sale occurred and all of the borrowers payments were made on time (no late payments) then they may be eligible for a new mortgage as long as the short sale was due to extenuating circumstances and not to simply take advantage of market conditions (see below). As you can imagine, this may be difficult to demonstrate. Otherwise, if any payments were made late or you cannot demonstrate extenuating circumstances, then it is a 3 year period before new FHA financing can be considered.
Fannie Mae policy is pretty straight forward – It is a minimum of 2 years to re-establish credit after a short sale.
The article is written by a lender that works with Maureen. Go check out the rest of the article here. Thanks Maureen!
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?
Is Cash Really King?
January 4, 2010
How much negotiating power do you get from buying a home with cash?
Not as much as you might imagine. Surely, when it comes to buying homes in need of repairs, cash is the preferred way to pay. Many fix-up homes can’t be easily financed. Also, when you buy a home with cash, the Seller isn’t worried about an appraisal or that a loan approval will fall through, making cash offers more attractive overall.
But do cash buyers really pay less?
Turns out, yup. Just not an incredibly large amount less.
The biggest three purchasing vehicles in the Tucson market are cash, conventional financing, and FHA financing.
- FHA buyers pay on average 98.8% of list price and purchase less expensive homes, at an average of $159k.
- Conventional buyers pay 96.5% of list price, and buy homes priced at $287k on average.
- Cash buyers pay 95.5% of list price and buy $220k homes on average.
34% of cash purchases are fix-up homes. Unsurprisingly, only 8% of both FHA and Conventional buyers select fix-up properties.
So yes, on average, cash home buyers pay less in Tucson, by about a percentage point. Conventional financing is by far the most common way to purchase. And FHA buyers often have closing cost assistance from the Sellers, which usually means they pay a little closer to the listed price to get those closing costs.
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