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Preparing for your closing
The Closing Table
Analyzing the HUD-1 Statement


Introduction:

There are several areas that need to be checked when preparing for a closing. Each party has a role to play; the agents, the buyer, the seller, the lender, loan officer, and the closing attorney. Each party adds a piece of the puzzle until at closing it all comes together. There are many pieces and if one is missing, it can adversely affect the closing.

Note: The closing statement will be referred to here as the "HUD", which stands for Housing and Urban Development Form #1.


Sales Price

Always check lines 101 and 401 of the HUD to see if the price is right. A sales price can often change for several reasons.

The price is changed after the contract is signed and before closing, by agreement, and an addendum is executed. This is often done when building costs of extras or closing costs into the sales price.
Sometimes the house will not appraise and the parties have to re-negotiate the sales price.

The parties re-negotiate who shall pay the closing costs. Items found by the purchaser's inspector can cause another look at costs.
Check to see if the price matches what you have, and, if not, ASK QUESTIONS. Never hesitate to ask questions. It could save time later.


Earnest Money

It is important that you account for the earnest money. The total amount paid by the purchaser should show on line 201. Make certain that this amount is correct.

Purchasers sometimes pay an amount at the signing of the contract (say $1000) and then agree to pay an additional amount later during the loan approval/house completion process. Sometimes additional amounts paid are applied to "overages", not earnest money.

Sometimes, the funds are supposed to be paid, but through mutual error, they are not collected.

Example: $1000 paid at contract, with a stipulation that an additional $500 to be paid at time of issuance of the Certification of Occupancy, and an additional $500 paid at time of loan approval. At closing, the earnest money is listed as $2000.00 per the contract. However, in reality, the last $500 was never actually collected since it was so close to closing and the earnest money should be shown on HUD as $1500.00.

Earnest money can be paid in two ways -- to the seller directly or to one of the agents. There is sometimes even a combination of the two ways. Funds paid directly to the seller will be shown on line 501, Excess Deposit. Funds paid to the agent will be deducted from the commission check and shown on lines 701 or 702.


Proration of Taxes

Sometimes the parties divide costs between them based on ownership or possession. A standard example of this is the tax proration which is on all HUD's. The parties divide the taxes based on the date of ownership.

The date of the closing dictates how the proration is handled. If the tax bill has not been issued yet for the calendar year, then there will be a credit to the purchaser for the time the seller has owned the property.

Example: For Gwinnett County property closing on June 30th, the purchaser will receive a credit on lines 210/211 for the seller's one-half share of the taxes. It is based on the date of Closing. A closing on March 30th will result in a credit to the purchaser of one-quarter of the taxes (the seller owing for 1/1 to 3/30 or about 1/4 of the year). The purchaser receives the credit and the sellers proceeds are debited by subtracting the same amount on lines 510/511.

The proration is based on the attorney's best estimate of what the tax bill will be for the current year. On existing homes, that would be the last year's taxes. On new homes it is based on the condition of the property as of January 1. All property taxes in Georgia are based on the status of the property as of January 1. If it is a vacant lot on January 1, but the house is built, completed and sold on August 28th, the taxes are still based on the vacant lot.

If the tax bill has been issued for the current year, the attorney will collect the tax bill (the FULL amount) from the seller and the purchaser's share (say 8/28 through 12/31) will appear as a credit to the seller on lines 406/407 and a debit to the purchaser on lines 106/107, which adds to the amount owed by the purchaser. With a new home, it is always essential that the attorney and the parties have some idea of the status of the property as of January 1. This will aid everyone in estimating the prorations. A partially completed house will be taxed on its January 1st percentage of completion.

The date when taxes are issued varies from county to county. Ask your agent, loan officer or attorney for the tax due date for the county in which your property is located.


Closing costs

Closing costs are fees charged by the lender in order to pay the costs of processing the loan application. The interest charged by lenders on the loan does not cover these cost incurred by the lender.

Costs, just like interest rates and discount points, vary from lender to lender. The loan officer furnishes the borrower with a "Good Faith Estimate" at time of loan application. This will itemize the charges on the closing.

Note: Closing costs are specific items on the HUD. Some borrowers/ purchasers may think that "closing costs" cover every "cost" needed to be paid at closing. This is not the case and does not include prepaid items, escrows, homeowners association dues or tax prorations.

Closing Costs are in three sections of the HUD. Lines numbered 800 (except for 802, which are discount points) are closing costs charged by the lender. Sometimes, if there are additional costs which do not fit into lines 800, they will be itemized on lines 1303, 1304 and 1305.

Closing costs charged by the attorney will be shown in lines numbered 1100. Attorney fees are paid to the attorney for handling the closing. There may also be fees for the title examination (which often are included in attorney fees and not itemized separately), the title insurance company and tax reporting service.

Closing costs charged by the State of Georgia will be shown in section 1200 of the HUD. Note: this is a bit tricky since the total costs in lines 1201 and 1203 are shown in the columns on the right but the total will also include charges by the state which are not considered closing costs.

There may be a "Release" fee charged. This is a charge by the clerk for marking the outstanding mortgage, which is being paid off by the seller at closing, "Paid and Satisfied of Record". This charge is not a closing cost but is a cost to the seller to satisfy his mortgage.

On line 1203, the first fee is a "State tax/stamp" fee that says "Deed". This is a transfer tax that is charged by the state and is paid by the seller per the standard sales contract.


Title Insurance

Some of the costs quoted as part of the closing costs will be for title insurance. The amount quoted will be for the Lender's Title Insurance Policy to cover the title for losses up to the balance of the loan. If you wish Owner's Title Insurance to cover the owner of the property up to the value of the property, the cost will be in addition to the cost of the Lender's Policy. The closing attorney will handle this transaction and can give you more information about this coverage.


Negotiating payment of closing costs

Part of the sale process involves determining who is going to pay the closing costs. When buyer and seller negotiate the sales price and the seller reduces the price, the seller will expect the purchaser to pay the closing costs. Sometimes the sales price will be negotiated and then raised to allow the seller to have the funds to pay the closing costs for the purchaser.

Whoever is paying the costs, they will appear in their respective column on the right side of the second page. The amount of the costs can also be negotiated when the seller is paying.

Example: The seller may agree to pay all the costs, or just a certain amount. It is not unusual for the seller in the negotiating process to agree to pay part of the costs. This will appear in your contract as "Seller will pay $1825.00 toward closing costs." When the seller's contribution is limited, the attorney will charge the seller up to that amount, and then all other costs will be charged to the purchaser.

Sometimes the seller will agree to pay costs based on a percentage of the loan amount.

Example: "Seller to pay closing costs not to exceed 2.5% ". The attorney charges the seller until the costs reach 2.5% of the loan and the balance of the charges will be in the purchaser's column. Note: the percentage is based on the LOAN AMOUNT, and NOT the sales price.

As a practical matter, if the parties expect the seller to pay for specific items rather than just having the seller's contribution applied at random by the closing attorney, the contract should address that matter directly and specifically, or contact the attorney's office prior to closing to direct how the seller's contribution is to be applied.


Frequent Problems

1. Difference in Costs

If the costs are different from what was expected, the borrower is entitled to expect an explanation. Compare the costs to what is shown on the Good Faith Estimate. It is an estimate, and costs will sometimes change for valid reasons.

Example: Borrower/purchaser decides during loan application process to only put down 15%, not 20% down payment. At closing, there will be private mortgage insurance fees due that were not on the Good Faith Estimate because the borrower/purchaser changed his loan program in mid-stream.


2. POC (Paid Outside Closing) Items

Borrowers are usually required to pay an application fee at time of application to the lender. These funds are usually applied to pay costs incurred by the lender and are shown on the HUD as POC-Paid Outside Closing.

There can be several problems at closing with POC fees. Sometimes the lender forgets to credit the borrower with all of the funds that have been paid. The HUD will show $250 POC when the borrower paid $275. This will require a phone call from the closing table to set the matter right.

In negotiating closing costs, the borrower and the loan officer will calculate the total costs to be a certain amount or percentage. The borrower needs to know if the closing costs collected and paid at closing includes the POC items.

Example: Borrower pays $300 for application fee. Borrower is seeking to limit closing costs to 2.5% At closing, the closing costs actually come to exactly 2.5% but there is no reimbursement of the $300 application fee because the $300 is over and above the 2.5%. In other words, the total closing costs are 2.5% plus $300, but the closing costs paid at closing are 2.5%. Whichever way it is being handled needs to be disclosed so that the borrower knows what to expect.

Finally, when the seller is paying the closing costs, the purchaser/borrower will often expect to be reimbursed for the funds the purchaser Paid Outside Closing since they are usually applied toward the Appraisal Fee and the Credit Report. If the seller is paying a set amount or percentage and the costs exceed what the seller has agreed to pay, there may not be enough funds remaining after the costs are charged to refund the purchaser for the POC items.

Example: Seller is paying $2500 for closing costs and the purchaser paid $250 POC. If costs charged at the closing come to $2500, nothing is left over to reimburse to purchaser. If costs come to $2400, then purchaser can be reimbursed but only up to $100 (to bring the total charged to seller to $2500). If costs come to $2600, then seller will pay $2500 and the purchaser will be charged the additional $100 since the seller cannot be charged more than he negotiated to pay ($2500).


3. Surveys

Surveys have gone through a "transition" over the last few years. The standard contract calls for the parties to agree and designate who is paying the cost of the survey.

Some lenders today are not requiring surveys. Obviously, there will be no charge if there's no survey but there's also no survey for the purchaser. It is always a good idea if the lender does not require a survey to discuss the right of the purchaser to order and pay for a survey on his/her own. Not only is this a good idea for every property, but it protects everyone from possible liability in the future should survey questions or problems later arise.

One other area of concern occurs when the builder is supplying his own survey. The contract will call for the builder to be reimbursed by the purchaser for the costs of the survey. The attorney needs to know that the builder is supplying the survey so a duplicate survey is not ordered, and the funds to be charged for the survey are on the closing statement. The agent needs to inform the builder if no survey is required by the lender because the builder will come to closing expecting to be reimbursed, but the purchaser might not be willing to pay for a survey that the lender does not require.


Escrow

All escrow items are set forth in section number 1000 of the HUD. Many purchasers want to have their escrows waived but this is a matter for them to discuss, (before closing), with their loan officer. It is very, very rare for a lender in Georgia to waive escrows. When it is done, it must be approved beforehand by the lender, and it often will cost the purchaser/borrower something. Sometime the cost is a quarter discount point, or a flat fee, or even an eighth (1/8) increase in the interest rate. Any fees required to waive escrows should be disclosed and discussed prior to closing.

Escrows are established by the closing attorney. The insurance is based on the policy provided by the purchaser but the taxes and the upfront costs are established by the attorney. The number of months set aside to pay the tax bill is determined by the due date of the taxes in the county. In the metro area, tax bill due dates vary greatly from county to county. If you have questions, feel free to call the attorney's office to determine how much upfront escrow costs will be due from the purchaser.

Aggregate Accounting Credit: As part of your escrow deposit, the purchaser will receive an aggregate credit. This is determine by the lender or the attorney to insure that the escrow account does not create an "overage"; that is, a surplus of too much money in the escrow account. This method is used to insure the minimum will be collected and deposited into the escrow account while still having enough funds to pay the tax and insurance statements as they come due.


Prepaid Items

1. Pre-paid Interest

Interest must be paid on the new loan for the month in which the purchaser is closing. If the closing is on the 30th of March, there will be two (2) days of interest due. If it closes on the 5th, then twenty-seven (27) are due.

The first payment is not due until the first of the following month. In the example above, regardless of whether it is closing on the 5th or the 30th, the first payment will be due on May 1. This is because interest is always paid in arrears. The amount that one owes stays the same, but it can make a difference in cash flow and the cash available to the purchaser.


2. Mortgage Insurance

Mortgage insurance is a type of insurance to insure the lender against default by the purchaser. Most purchasers view this insurance as money from which they derive no benefit except that it does allow them to be approved for the loan. This insurance is required on loans that are considered riskier than your standard loans.

Mortgage insurance is required on all FHA loans and all conventional loans which have a loan to value ratio of more than eighty per cent (80%).

Example: On a $100,000.00 purchase, any loan of $80,000.00 or less will not require mortgage insurance. Any loan above $80,00.00 will require mortgage insurance. This is a mathematical computation and cannot be waived.

The cost of mortgage insurance varies with the loan program and the wishes of the borrowers. Choices are usually available and the borrowers can choose a program based on their particular situation. Only the lender can apply for this insurance, and the loan cannot be approved until the mortgage insurance company has agreed to insure the loan.

The loan officer needs to be certain that the costs of the mortgage insurance has been disclosed on the Good Faith Estimate. The loan officer will endeavor to hold these in line, but sometimes the mortgage insurance companies will change their charges in order to approve the loan. If there are any changes in the costs of mortgage insurance, the borrower should be notified, with an explanation, as soon as possible.


3. Insurance

All purchasers need to have insurance on their home before closing. Generally, most lenders will require the coverage to be for at least the loan amount. Sometimes lenders will accept less coverage if there is a guaranteed replacement rider.

The borrower needs to notify the attorney of the amount of the annual premium in order for the escrow account and the monthly payment to be established. he borrower can pay the premium when he/she picks up the policy or it can be collected at closing. Notify the Attorney (or have the agent call the attorney) efore closing with this information.

The insurance policy must be at the closing. The lender must be certain that the property is protected as of closing. Without proof of insurance the closing will be halted.


Miscellaneous Matters

1. Termite letters

It is the seller's responsibility to provide a clear "termite letter" at closing. It is the attorney's responsibility to insure that the termite letter meets the lender's requirements.

Example: It must have NO active infestation, no damage from a previous infestation, and must be dated within the last 30 days. Due to lender concerns, it is a good idea to fax the termite letter to the attorney prior to closing for the attorney to review.

It is NOT the seller's responsibility to provide a warranty or guaranty against termites unless the standard contract has been modified to require this. An inspection by a termite company within 30 days usually satisfies the seller's contractual obligations. If there is a warranty/guaranty on the property already, then it is usually transferable to the purchaser. An inquiry should be made of the seller if the purchaser is interested.

Note: on new construction, the termite documents provided by the builder usually DO include a guaranty.

Note: on FHA loans: There may be certain conditions on the termite letter on an FHA loans which HAVE to be corrected, which would not be corrected for conventional loans. If you are getting an FHA loan, ALWAYS have the seller fax a copy of the termite letter to the lender and the closing attorney for pproval PRIOR to closing.


2. Homeowners Association

It needs to be ascertained before closing if the property is in a Planned Unit Development (referred to as a PUD). If it is, then it is required that the purchaser join the homeowners association. That fact should be disclosed, probably even before writing the contract, as well as the amount of the costs. All theses fees need to be given to the attorney so they can be charged on the HUD, or a credit given, as the case may be.


3. Allowances

Years ago, parties would contract for allowances to be given to one another for repairs to the property or to pay for personal items, like the refrigerator or microwave. Lenders view the allowances as reductions in the sale price and therefore it affects the loan to value ratio. Large allowances could turn an 80% loan into an 82% loan and the nature of the transaction is changed considerably. Therefore, Lenders will normally disallow such allowances.


IN CLOSING, remember that your best friend is the telephone. Feel free to call the attorney or other parties/agents if you have questions. It is always better to get too much information than too little. The attorney, the loan officer and the agents would prefer to have questions addressed before the closing, not later.

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