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After a seller and buyer negotiate terms in the contract, all the financial requirements of that contract must eventually be performed. Money required of both the seller and buyer have to be dealt with: deposits paid; sales price confirmed; mortgages paid off; new mortgages taken; subsidies to the buyer/seller carried through; fees for lender, title, insurance, taxes and various other services accounted for.

The settlement company is the entity that determines from whom and to whom these moneys are paid -- entering them all onto a most important document needed for settlement -- the HUD-1 Form.

Your Realtor or attorney will get a first glance of this form early on -- or they should. Unfortunately, mistakes can be made on this form that can cost the consumer thousands of dollars. At my last refinance the form included an erroneous fee to be paid to the mortgage company in excess of $2,000 -- fortunately, the mortgage company representative caught it and had the form changed the day of settlement.

The HUD tracks all the costs related to the transaction and you need to be pretty familiar with your contract to make sure the right charges are flowed to the correct side of the form. The left side of the form (beginning in paragraph 'J') calculates the buyer's credits and debits; and the right side (beginning in paragraph 'K') tracks credits and debits for the seller. The amount for these two slots is the same -- the contract sales price.

Generally, the form will start with "Gross amount due to the buyer" and add on or deduct from that amount. Since most of the "gross amount" is in the form of a mortgage, how much a buyer must actually write out on a check will be determined from this point. With the right kind of contract or mortgage, a buyer could actually walk away with cash from the table -- but that's far and few between and would require a different column altogether.

Nevertheless, the buyer is going to face charges such as the following:

  • Settlement fees
  • Earnest money deposit
  • Taxes
  • Assessments
  • Loan origination fee
  • Loan discount
  • Appraisal fee
  • Credit report
  • Inspection fees
  • Mortgage insurance application fee
  • Interest for the month
  • Mortgage insurance premium
  • Hazard insurance premium

And the list continues…

Depending on how the contract was negotiated, the seller could face paying the same fees on some of the above items, except for items a particular loan program requires for the buyer to pay for from his or her own funds.

Many of the items may be marked "P.O.C." -- which means "paid outside of closing." This notates the items the buyer or seller paid for prior to settlement, such as home inspections, credit report, appraisal, etc.

A seller can sometimes postpone paying for fix-up fees, new carpeting and other incidentals in preparing the property if you can get the vendor to wait on getting paid until settlement. You need to notify the settlement agent that such funds need to be dispersed from the proceeds of the sale.

If you've used a particular vendor in the past and have a good relationship with him or her, they may be willing to postpone payment for services. As you begin investing in real estate and build your team of service providers, this is a good way to finance the "fix ups" on your property so you don't have to use your personal cash to finance fixing up the property. This would, of course, only work if your property has increased in value and you have not tapped the equity so much that there's not enough money to pay for such services at settlement.

A word of warning on reviewing the HUD-1 Form. Both buyers and sellers look at the settlement process as just the final hurdle to get out the door and into their new home. Be patient and take your time in looking over this document. This is the piece of paper that determines just how much money you're walking away with or how large the check will be that you're going to write before walking out the door. As demonstrated earlier, a clerical error on this form can cost you thousands of dollars. Review each line and have your settlement agent explain any charges you don't understand.

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