RESPA, the Good Faith Estimate, and the HUD-1 Form

Compared to the price of a home, the closing costs (settlement costs) may seem minor. However, settlement costs can equal about 5% of the total cost of the house. Borrowers must ensure they receive a competitive price for the settlement costs when financing a new home.

Lenders must disclose certain information about closing costs, including a loan estimate and the closing statement. These estimates and statements help borrowers select the right mortgage loan for them.

This FindLaw article looks at the Real Estate Settlement Procedures Act, the Good Faith Estimate, and the HUD-1 Form.

What is the Real Estate Settlement Procedures Act?

The Real Estate Settlement Procedures Act (RESPA) is a federal consumer protection statute. It does not govern the amount of your closing costs, but it does ensure that consumers receive accurate information about their home loan costs. While RESPA has many provisions, the two of particular interest here concern disclosures for borrowers.

The specific disclosure related to settlement costs involves a lender's loan estimate of the total settlement costs. New rules issued under RESPA require lenders to give a loan estimate within three business days of receiving a loan application. Lenders must provide a borrower with the closing disclosure forms at least three business days before closing the loan.

RESPA Prohibitions on Lending Practices

RESPA prohibits certain lending practices that can drive up closing costs. These practices include kickbacks for mortgage settlement referrals or requiring that borrowers purchase title insurance from certain title companies.

RESPA Enforcement

The U.S. Department of Housing and Urban Development (HUD) enforced RESPA until 2011 when the Consumer Finance Protection Bureau took over enforcement.

Federally Related Mortgage Loans

RESPA applies to all federally related mortgage loans and aims to ensure consumers understand their settlement costs.

Federally related mortgage loans must meet the following criteria:

• Loans secured by a first or subordinate lien on one-to-four-family homes
• Loans that fall under the following categories:
  • Extended by a lender or creditor
  • Made or insured by the federal government (like a Federal Housing Authority (FHA) loan)
  • Home equity conversion mortgage
  • Reverse mortgage
  • Made in connection with a housing and urban development program administered by a federal agency

Federally related mortgage loans also apply to loan contracts that meet the following criteria:

• An entity subject to RESPA is funding the contract in whole or in part
• The contract relates to qualifying residential property

State laws may vary from federal.

Special Information Booklet

For federally related mortgage loans, mortgage brokers or lenders must give applicants a copy of the Consumer Finance Protection Bureau's special information booklet. HUD's Settlement Cost booklet aims to help borrowers understand the mortgage and closing processes. It explains concepts that include the prepayment penalty.

What are settlement costs?

Buying a home is a multi-step process. Closing or settlement is the last step before you can take possession of your new home. The closing process begins after you sign the purchase or sales agreement to buy your new home. You have a small window of time to do the following:

• Confirm ownership of the real estate
• Confirm the condition of the home
• Finalize home loan

Settlement or closing costs include the closing fees and other payments needed to settle a real estate transaction.

List of Potential Settlement Costs

Settlement costs can include the following:

• Title services, including title searches
• Title insurance
• Transfer taxes
• Loan origination fees
• Homeowners insurance premium
• Government recording charges
• Property Taxes
• Assessments

Settlement charges or costs are in addition to the property's sale price, including fees charged by your settlement service provider. Consumers should review their settlement statement with care before closing on the mortgage loan.

What is a good faith estimate?

Before 2015, mortgage brokers or lenders had to provide a good faith estimate, or GFE, and a Truth-in-Lending Act (TIL) statement.

Today, the loan estimate replaces these documents. Borrowers will receive a loan estimate from the mortgage broker or lender when applying for a mortgage.

Mortgage brokers may use a worksheet to give a borrower a rough estimate of closing costs. The borrower can use this estimate to compare mortgage loans.

The loan estimate and closing disclosure forms typically include the following:

• Loan Terms
• Loan Amount
• Origination charges
• Estimated monthly payments including:
  • Principal
  • Interest
  • Mortgage insurance
• Closing costs
• Total settlement charges
• Escrow accounting if the transaction requires an escrow account:
  • Property taxes
  • Homeowner's insurance
  • Flood insurance

These should let the new homeowner know that they'll be paying each month.

Estimated Versus Actual Charges

The loan estimate for the following must not underestimate the actual settlement charges:

• Origination fees
• Credit or charge for interest rate
• Adjusted origination charge
• Transfer taxes
• Revised GFE

Loan originators can revise the GFE in accordance with the law as long as they provide a reason for the revision. Reasons to revise the GFE include, but are not limited to, the following:

• Changed circumstances
• Borrower-requested changes
• Changes to specific interest rate

The GFE cannot be otherwise altered.

What are real estate disclosure statements?

Before 2015, prospective homebuyers who applied for a mortgage would receive a HUD-1 form. The form set out the following as they relate to the purchase of real property:

• Expenses
• Disbursements
• Adjustments

After 2015, most mortgages now use a closing statement. Reverse mortgages still use the HUD-1 Settlement Statement.

Closing Disclosure Statement

The closing disclosure statement provides information about the loan, including the following:

• Mortgage terms
• Anticipated monthly payments
• Fees
• Closing costs

Lenders must provide the borrower with the closing disclosure statement at least three business days before the loan closing date. This period allows the borrower to consider the loan terms and total amounts before committing.

You must review the closing statement to ensure it is equal to or less than the loan estimate and note any differences. A careful review is necessary to ensure the form covers the loan terms before you close on the house. This includes information about:

• Seller credits
• Partial payment options
• Service fees
• Estimated taxes

If you have questions about the terms in the closing disclosures, ask your lender or talk to your real estate attorney.

Get Legal Help

Buying a home is a significant financial undertaking. Under RESPA, your mortgage broker or lender must make certain disclosures to help you finalize your home loan. A qualified real estate attorney can help you understand these forms before you complete your real estate closing. Consider speaking to an experienced real estate attorney.