A Lender’s Thoughts on the New Good Faith Estimate

The New HUD-1

January 28, 2010 | By Kelley Koehler | Filed Under Home Buying, Loans and Financing

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.

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