Questions to Ask About Your Settlement Statement

Written by Laura - 8 Comments

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As many of you know, we’re in the process of buying a townhouse. We recently received the paperwork from our lender, including our truth in lending disclosure, a disclosure book, and our good faith estimate. The Real Estate Settlement Procedures Act (RESPA) requires that we receive these things within 3 business days of submitting our loan application.

As we get closer to closing, we’ll also receive a HUD-1 Settlement Statement, which is a form used in the United States for disclosure of fees that the lender or broker is charging. The purpose of the HUD-1 statement is to help borrowers understand the total costs of buying their home. These documents are a great resource to give you an idea of upcoming expenses and costs.

Always ask questions

I’ve heard from my friends and read from others that they wished they ad asked more questions when buying their home. Unfortunately, they usually come to this realization after they realize that they could’ve gotten a better loan. Instead of relying on what a lender tells you, check out these resources:

Remember, no broker or lender has to give you the best deal. They are trying to make a profit, and that might involve higher rates and/or fees than you would otherwise have to pay. Be sure to ask questions, and don’t be afraid to comparison shop. It’s your name on that loan, and you’ll be the one responsible for it.

Is your interest rate adjustable or fixed?

It’s in your best interest to understand the term of your loan, your interest rate, whether it is fixed or adjustable, and whether or not you will have any balloon payments in your future — you should generally avoid loans that require balloon payments.

Fixed-rate loans generally have repayment terms of 15, 20, or 30 years.

Adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates.

Source: Federal Reserve

Run all your numbers before agreeing settling on a lender and loan. Ask them to walk you through and show you how much your monthly payments could be a year from now, five years from now, and so forth. In the case of a fixed-rate loan, the principal and interest payments won’t change over the life of the loan.

How much are your settlement costs?

Besides your down payment, there are a number of costs associated with closing on your new house. Becoming familiar with the typical costs and fees will put you in a better position.

Loan origination fees: Borrowers might be asked to pay this fee in return for the brokers/lenders handling your loan. It typically ranges from 1- 1.5% of the house’s cost, though some lenders offer lower flat rates.

Hazard/homeowners insurance premiums: Lenders expect you to pay your first year’s premiums in advance. Going forward, they will also (most likely) collect a portion of your annual premium along with your monthly mortgage payment and place it in your escrow account.

Title insurance: The title insurance come into play if there’s ever a dispute of who really owns the property. While you have to find a company that meets your lender’s requirements, you can search to find a good deal on your title insurance premiums.

Just make sure the coverage you get is adequate. Some cheaper policies may have exclusions that can hurt you — e.g., they might only protect the lender’s interests.

Pest inspection: Depending on where you live, your new home might need to be inspected prior to closing for termites and other pests that might damage your house.

Credit report: Lenders will pull your credit report to make sure you’re a financially worthy candidate. The cost for doing this is typically passed on to the borrower.

Other settlement costs: You also have to consider processing fee, underwriting fee, document review (I’m not kidding!), tax service fee, commitment fee, wire transfer fees, overnight shipping fees, and a few more. There are a lot of fees involved, so review your Good Faith Estimate carefully to see what you should expect.

Closing thoughts

If you’re thinking of purchasing a new home, keep the settlement costs in mind when formulating an offer. Remember, you’ll have to bring enough cash to the closing table for both your down payment and your settlement costs.

Your settlement statement will also give you a pretty good idea of your complete cost of home ownership. Of course, this doesn’t include incidentals like new furniture and your monthly utility bills, but it gives you a pretty good baseline.

And remember… If you have any questions about fees, ask before you sign anything. Don’t be afraid to negotiate a better deal — if something doesn’t make sense to you, try to get it reduced or removed. Being an informed buyer is the best course of action.

If you’ve bought a home, what surprised you about the settlement costs and/or the closing process? Do you have any tips or tricks? Anything that we should be sure to do/avoid? Please share your thoughts in the comments.

Published on September 1st, 2009 - 8 Comments
Filed under: Mortgages, Real Estate
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About the author: Laura is a twenty-something woman working to improve her finances and reduce debt. She writes about personal finance for college students and grads at Green Panda Treehouse.

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Comments (scroll down to add your own):

  1. Always ask to get a copy of you HUD-1 before your closing date to have time to review it. You’ll have to call your closing agent a few days before closing and ask to recurve a copy of all documents 24hrs in advance. This will give you additional time to review everything with the pressure of time.

    Comment by Ray — Sep 1st 2009 @ 9:08 am

  2. Assuming one is closing at a Title Company (e.g. a third party vendor who works with buyer/seller to handle the administrative side of Real Estate transaction), I’ve found you have 3 choices:
    1) Haggle every fee on the HUD-1. You may very well save $100 to $500.
    2) Pay sticker on all the fees. This gives you the right to say “Not my problem, I’ll see you at closing date”. I’ve found this useful when your schedule is full with working and trying to live life.
    3) Do nothing – pay fees, get run around by the seller, RE Agents, Title Company, Insurance guy, etc.. This is not a preferred choice, but still a valid outcome.

    Finally for your consideration, my experience has been. “He who won’t shush and go away – gets service”

    Comment by Bodark — Sep 1st 2009 @ 9:16 am

  3. Laura, good article!

    The basic problem with closing costs, good faith estimates (GFE), settlement statements and all things related to buying a house is that the whole process has gotten plain convoluted.

    I was in the mortgage business for many years, and there was a general trend toward complication. A college educated person without mortgage experience would have difficulty deciphering a good faith estimate and settlement statement; a lot of real estate agents can’t figure them out either.

    The numbers they contain don’t mean much unless you can measure them against those provided by several other lenders to see what normal even looks like. It would be worth paying a couple hundred extra to have your attorney review the GFE shortly after application and the settlement statement before closing.

    One other thing–on title insurance, you should get your own and not rely on the lenders coverage. The lenders title ultimately will protect you from title defects, but since it’s the lenders policy it could take months to clear up any liens, and you won’t be able to provide a clear title on sale or for a refinance until it’s resolved. If you have your own policy, you don’t need to worry even if a lien is discovered after closing.

    The closing attorney will recommend the coverage at closing, and it’s usually $200-400 extra, but it’s money well spent. This is one of those times when it won’t pay to be frugal!!!

    Comment by Kevin@OutOfYourRut — Sep 1st 2009 @ 3:41 pm

  4. I recently re-financed and had two questions about the closing cost I was paying.

    So I asked the questions the first one saved me $25 and the second one saved me $125! $150 in one 3 minute phone call – not life changing but it was still money saved.

    Comment by financia — Sep 1st 2009 @ 3:42 pm

  5. When arranging for closing time at the closing company, ask what the charges are for going through the closing process after normal business hours (9 to 5).

    We got burned by this! We signed off on a refi at a title company in the evening after we had gotten home from work. It might have been around 6pm or so. They really socked it to us for that little “convenience”.

    Furthermore, our mortgage broker never saw fit to mention this to us nor did he help us in any way to reduce, eliminate or reimburse us for the obnoxious fee.

    Comment by JamesR — Sep 1st 2009 @ 6:07 pm

  6. The two things I remember from buying my first home, a condo, in 2003, was that the closing costs were a LOT more than we expected when we initially budgeted. If I remember correctly we ended up paying close to $6,000 in closing costs, including a fee the state of NJ charged for the privilege of buying a home!

    The second thing was that I learned after the purchase that you can negotiate almost all the fees associated with the purchase. I wished I had read more about what every fee was for and had more leverage to negotiate. I have negotiated for many, many small purchases (small by comparison, any way) and it always helps to have information to back up your case, an alternative so the merchant knows you can walk away, and a positive attitude.

    Comment by Bargain babe — Sep 1st 2009 @ 9:52 pm

  7. Thanks guys for letting me know the 411! I’ll definitely ask about the fees, any money saved would be greatly appreciated.

    My husband was surprised about the amount of fees, so he’s definitely calling and emailing them to get some answers. I’ll update you guys on how it turns out!

    Comment by Laura — Sep 2nd 2009 @ 7:55 am

  8. 1. Always negotiate your fees. They are always higher then they need to be.

    2. Your appraisal fee in ca should be $350 unless you have a very high loan amount.

    3. Your notary fee should be around $150

    4. A $100 email doc fee is ridiculous!

    5. They have a fed ex accout and it costs them about $8-$12 to send a fex ex not $25

    Good Luck!

    Comment by Christine — Sep 24th 2009 @ 1:05 am

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