RESPA, the Good Faith Estimate, and the HUD-1 Form
Compared to the price of a home, the closing costs (also known as “settlement costs") may seem minor. However, these costs can add up to around 5% of the total cost of the house. With a home costing hundreds of thousands of dollars, even a small percentage is significant. It is important for borrowers to make sure that they are receiving a competitive price for the settlement costs, particularly when borrowers are looking at taking out the highest expenditure loan available to finance the purchase of a new house.
Fortunately, there are laws and regulations that require lenders to disclose certain information about closing costs, including a loan estimate and the closing statement. These documents, estimates, and statements can help borrowers verify that they are getting the deal they bargained for.
The consumer protection law that provides the rules surrounding settlement costs is known as the Real Estate Settlement Procedures Act or RESPA. This article will briefly explain a few of RESPA's provisions and how they relate to settlement costs and procedures.
What Are Settlement Costs?
The terms settlement costs and closing costs are interchangeable and refer to the fees, taxes, and payments required to settle a real estate transaction. Since real estate transactions are quite complex, there can be a long list of associated costs. Typical items that make up the settlement costs include:
- Title searches and examinations
- Title insurance
- Recording fees
- Notary services
- Pest and house inspections
- Document preparation services
How Does RESPA Affect the Settlement Process?
RESPA is a very important consumer protection statute. It does not govern the amount of the closing costs but it does ensure that consumers receive accurate information about what costs they can expect for their real estate deal. While RESPA has many provisions, the two of particular interest here concern disclosures to borrowers and prohibitions on lenders.
The specific disclosure that relates to settlement costs involves a lender's loan estimate of the total amount of the settlement costs. New rules issued under RESPA require lenders to issue a loan estimate within 3 days of receiving a loan application. Additionally, lenders are required to provide a borrower with the disclosure forms at least 3 business days before the closing of the loan.
RESPA also prohibits certain practices by lenders that can drive up closing costs, such as accepting kickbacks for referring mortgage settlement business, or requiring borrowers to purchase title insurance from a certain provider.
What Is the Loan Estimate?
Before 2015, lenders were required to provide a "good faith estimate," or GFE, and a truth-in-lending statement. Since 2015, these documents were consolidated into the Loan Estimate. Borrowers will receive a loan estimate from the lender when applying for a mortgage.
There is a difference between an informal worksheet estimate and the Loan Estimate. Mortgage providers may use a worksheet to provide a borrower with a rough estimate of the likely closing costs, which the borrower can use as they are comparing lenders. These worksheets can be helpful but they are not guaranteed by RESPA.
The loan estimate and closing disclosure forms are standardized and include:
- Loan Terms
- Projected Payments
- Costs at Closing ,(including itemized loan costs, loan origination fees, appraisal costs, application fee, cost of credit checks, document prep, and express shipment)
- Cash to Close
- Transaction Summaries
- Loan Disclosures, including escrow accounting
- Loan Calculations
- Contact Information.
A formal loan estimate is guaranteed and subject to certain requirements. For most single-family home loans, the loan estimate must not underestimate the closing costs by more than a specified amount, known as the “tolerance level." If the estimate is too low, the lender may have to provide a refund to the borrower to cover the discrepancy.
What Are Real Estate Disclosure Statements
Before 2015, prospective homebuyers who applied for a mortgage would receive a HUD-1 form. The form sets out expenses, disbursements, and adjustments relating to the purchase of real property. However, after 2015, mortgages now use a Closing Statement. A purchase for cash may still provide for a HUD-1 Settlement Statement and a Truth in Lending Disclosure.
The closing disclosure is a form that provides information about the loan, including the terms of the mortgage, projected monthly payments, fees, and closing costs. Lenders are required to provide a borrower with the disclosure forms at least 3 business days before the loan is closed. This time period is intended to allow the borrower to consider the terms of the loan before committing to a large financial transaction.
It is important to carefully review the closing statement to make sure it is equal to or less than the loan estimate, and note any differences. A careful review is necessary to make sure the form properly covers the terms of the loan before you close on the house. This includes information about:
- Seller credits
- Partial payment options
- Service fees
- Estimated taxes
- Other important terms
If you have questions about the terms in the closing disclosures, ask your lender or talk to your attorney.
Is Your Lender Following the Law? Talk to an Attorney Today
When you buy a home, you'll spend plenty of time signing documents and filling out forms and may not fully understand everything to which you're signing. If you have questions or concerns about RESPA, loan disclosure forms, or alternatives to signing the lender's forms, you can speak with an experienced real estate attorney near you.
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