Every real estate closing done at a law-abiding title company will include the settlement statement. This two page document is required by the Real Estate Settlement Procedures Act (RESPA), a program administered by the U.S. Department of Housing & Urban Development. It is a standard form that itemizes all charges for the parties involved.
I’ve had two closings in the past two business days, one as a seller and one as a buyer. As a seasoned investor, I am now quite familiar with the columns and numbers on the settlement statement, and it is easy for me to understand. But it hasn’t always been that way. I remember trying to follow along as the closing attorney would quickly flip between the two pages cross referencing different charges, pointing at real estate commissions, government recording fees, and the prorated county taxes. It is a lot of information to take in for the average buyer or seller. And when thousands of dollars are involved, it is important to know how to read and understand the settlement statement. (Warning: This is by far the nerdiest and potentially most boring thing I have ever written about. Proceed with caution.)
In my opinion the best way to be prepared for a real estate closing is to examine the HUD settlement statement before ever getting to the closing table. According to RESPA, “A preliminary copy of a HUD-1 Settlement Statement is required if the borrower requests it 24 hours before closing.” A buyer or seller can ask for an emailed copy from their real estate agent (if they are working with one), or from the title company handling the transaction. In the purchase that I completed earlier today, the title company had emailed me a copy of the HUD six days before closing. That was a cash deal, which made the numbers much simpler. Often times having a statement completed that early isn’t possible because of lenders being involved. Regardless, it is always advantageous to get the document as soon as possible. When you get it in advance, there is time to look through each line item and make sure there are no mistakes. I also like to take a paper copy or a photo stored on my phone of the “Preliminary HUD” along to the closing to make sure that no numbers have changed for the final signing.
Without further delay, let’s take an in-depth look at the HUD settlement statement (I blacked out anything private of the involved parties). The boxes in the top section (letters A-I) include basic information regarding the buyer, seller, title company, lender, and loan. (This deal didn’t involve a lender, that is why it is blank). Check to make sure your name and address are correct. Columns J and K are devoted to the buyer’s side and the seller’s side of the transaction. The expenses are listed on the appropriate side. Let’s start with the seller and go through each section.
The first item in column K is line 400, which lists Gross Amount Due To Seller. It begins with line 401, which is the contract sales price. This is simply the amount that the seller agreed to sell the house for in the purchase and sales agreement contract. In this case it was $88,000. That same dollar amount carries down to line 420. Next is line 500, Reductions In Amount Due To Seller. The first item in this category is line 502, which contains Settlement Charges To Seller (Line 1400). Line 1400 is at the bottom of the second page of the HUD document (see photo below). The entire second page is titled L. Settlement Charges. Once again the seller’s side is on the right, and the buyer’s side is on the left. Line 1400 has the total of all charges for the seller. In this transaction, they included line 1101 closing fee, line 1105 record release fee, and lines 1303 and 1304 which were delinquent county property taxes. This total is on line 1400, which is then transferred to line 502 on the first page. The next line in the 500’s section is 504, which is showing the payoff amount of the first mortgage on the property. Next are the current year’s property taxes on line 511. The taxes are prorated so that the seller is only paying for the duration that he owned it, until March 10th. All of these reductions are then reflected in a total on line 520. The 600 section shows the Cash At Settlement To / From Seller, arriving at the dollar amount by taking the Gross Amount Due To Seller (line 601 from line 420) and subtracting Reductions Due Seller (line 602 from line 520). The remaining figure is line 603, Cash To Seller. In this instance it resulted in check for $16,490.39. That concludes the seller’s side of the transaction.
The buyer’s side of the equation works in a very similar manner. It starts on the first page in section 100 Gross Amount Due From Buyer. Line 101 is the Contract Sales Price which is the same as on the buyer’s side, $88,000. Next is line 103 which has the Settlement Charges to Buyer (line 1400). Line 1400 is at the bottom of the second page, the total of all of the buyer’s settlement charges. Let’s look at the top of the second page and work our way down through the charges. There were no real estate agent commissions, so section 700 is blank. This were no loans involved, so there were no charges in sections 800, 900, and 1000. That leaves section 1100, where there is a $350 charge for a Settlement Fee on line 1101, and a $722 charge for title insurance on line 1108. Section 1200 has the typical fees for Government Recording And Transfer Charges on lines 1201 and 1202. The final buyer’s expense on this second page is line 1305, a $5,000 Assignment Fee which was the price that a local wholesaler charged to assign the contract to me. This deal was worth it to me, so I gladly paid the price. All of these charges are totaled on line 1400, which is then carried back over and inserted in line 103 on the first page. Then lines 101 and 103 are added together to get the Gross Amount Due From Buyer on line 120. Section 200 shows, Amounts Paid By Or In Behalf Of Buyer. Line 201 shows the earnest money that was paid at the time of binding contract, $1,000. That earnest money is typically held at the selling agent’s brokerage, but in this deal it was held with the closing title company. Line 211 is the credit of the county taxes for the current year. The buyer will end up paying the tax bill for the whole year, so this amount is paid toward the buyer at closing. Line 220 has the sum of the 200’s section titled Total Paid By / For Buyer. Section 300 is Cash At Settlement From Buyer. Line 301 takes the Gross Amount Due From Buyer (line 120) and deducts Amount Paid By/ For Buyer (line 220). The result is line 303 Cash From Buyer. This is the amount that the buyer needs to bring to the closing table. In this instance, the title company requested a bank wire transfer of funds. That concludes the buyer’s side of the transaction.
Each real estate transaction is unique. No two settlement statements will look exactly alike, so your closing documents may appear quite different than this example. I have discovered errors on settlement statements before. Even if you have a reputable agent and title company, mistakes can still happen. Make sure the fees are legitimate, the taxes are prorated correctly, and the final dollar figure is accurate. The important thing to remember is that your money is on the line. And nobody else should care about it more than you do.