Closing on your next investment property is just around the corner!
As the big day approaches, you're eager to stay on top of everything from your lender and title company. You check your inbox and find an attachment labeled HUD-1 (short for Housing and Urban Development) settlement statement. You click on the attached document to learn more. As you scan the HUD-1, it’s hard to focus on anything with so many numbers and unfamiliar terms. Then, just when you started to feel overwhelmed, you realized that you have a guide to walk you through this document!
With the right information, you’ll be able to read this document confidently. In this comprehensive guide, we’ll break down the terms and key sections of the HUD-1 you need to know.
Before jumping into the details of the HUD-1, it’s important to have context. These are some of the most frequently asked questions that real estate investors have about HUD-1 settlement statements.
The HUD-1 is a summary of your purchase, which is sent out to the buyer (borrower) and seller as one of the final steps before closing. It shows you and the seller a line-by-line breakdown of all costs related to the transaction.
When reviewing the document, you will see key details such as the purchase price, loan amount, closing costs, and any prorated expenses (such as property taxes or insurance).
Yes, it comes down to your title company’s preference. Some title companies use the HUD-1 and others use the Closing Disclosure (CD) form. Both forms provide the same information for investment property loans, though the details may be presented in different formats.
You typically receive the HUD-1 before your scheduled closing date, giving you time to review the information before signing anything. By confirming that you're paying exactly what was agreed upon, you can avoid costly surprises at the closing table.
The person who prepares the HUD-1 varies depending on the state that your property is located in. Certain states have attorneys prepare the HUD-1 (like Massachusetts), while other states use title companies(like Texas). Ahead of closing, the person who prepares this document, the broker, or your loan officer will send the HUD-1 to you.
The HUD-1 is sent out ahead of closing for review and informational purposes. You don’t need to sign anything at that time – this document will be signed at closing. However, you should absolutely read and review the entire document to check for potential mistakes. It also helps you get a better understanding of all the costs involved in a real estate transaction.
In the event you spot a mistake or have additional questions, you should reach out to your Waltz account executive and your title company to request clarification.
The main idea behind receiving the HUD-1 ahead of closing is to provide complete transparency. It’s in your best interest to take the time to look for mistakes. As you review your HUD-1, here are some tips to make sure that everything is accurate:
1. Compare the HUD-1 to your purchase agreement: Make sure that the down payment amount and purchase price from your purchase agreement are accurately reflected in the HUD-1. If you requested any concessions like money towards closing costs, you will want to do the same.
2. Double check your loan details: Pay close attention to the sections detailing your loan fees, including origination fees, points, and any other charges from the lender. If anything doesn’t align, bring it to your lender’s attention.
3. Review credits and costs line-by-line: Look at what the buyer (you) and the seller are paying for. Confirm that all credits and debits are in the right place.
4. Don’t be afraid to ask questions: If you see something you don’t understand or suspect an error, ask for clarification. Whether it's from your lender, title company, or attorney, it’s important to ask questions before closing.
By this point in the closing process, usually the fees listed on the HUD-1 are non-negotiable. The only exceptions would be if there were any mistakes made on the document. With this information in mind, let’s break down the different sections found in the HUD-1.
Sections A through I of the HUD-1 provide crucial reference and identification information about the transaction. These sections help confirm the details of the property, parties involved, and key transaction terms.
Before closing on your new investment property, you want to take the time to double check these important details. Addressing any questions and identifying potential errors ahead of closing gives the title company (or attorney, depending on the state) and your lender time to correct them. Your review ahead of closing helps decrease the chance of closing delays.
Additionally, making sure the information in sections A through I is correct can help avoid legal issues that may arise if the documents aren’t entered correctly. For example let’s say that your LLC name is entered incorrectly at closing. That could cause confusion with your lender in regards to who should be paying the mortgage or even which LLC is insured on the property. Also, if your company name and the LLC on title vary, potential title issues could arise when you sell or refinance in the future.
Needless to say, reading these sections carefully now can help you avoid headaches later.
As you begin reading through the different components, you’ll notice a variety of sections related to your loan along with identification information. Here’s an example of what these sections may look like on your HUD-1:
The way that this section appears may vary depending on how your title company prepares them. Also keep in mind that sometimes slightly different wording may be used. Even so, the information remains the same.
While all elements are important, here are some to pay special attention to:
Section D (name and address of the borrower): You want to be sure that this properly identifies your entity (the LLC that you are using to buy this property) as the owner. The address is also important. It should reflect the address of your LLC because this is where the lender will send mortgage information and where other crucial documents will be mailed to.
Section G (property location): This is the address and legal description of the property that you’re buying. While this may seem obvious, you want to ensure that you’re buying the right property!
Section I (settlement date): The date that you’re scheduled to officially close and take ownership of the property. Coordinate with your title company and lender to make sure that all parties involved are aware that this is the closing date. There are a lot of moving parts that need to be taken care of such as:
Finally, another reason to verify the settlement date is because it can affect prorated line items like property taxes and pre-paid interest. These are calculated by the day, meaning even a slight change in the date can impact your final costs.
Sections J (borrower and buyer) and K (seller) of the HUD-1 outline who is paying for what at closing. These sections provide a clear breakdown of the buyer's and seller's financial responsibilities such as loan fees, taxes, and other costs.
The side-by-side format allows you to compare buyer and seller expenses in a transparent way. As you go down the lines in section J and K, you’ll notice that the numbers all balance out. To get a better understanding of this, let’s break down the important parts using an example that focuses on section J.
As you scroll through section J, you will notice that lines in the 100s eventually lead to the “gross amount due from the borrower.”
While you should go line-by-line through this section, some notable costs seen here include:
Line 101 (contract sales price): This is the agreed upon purchase price.
Line 103 (settlement charges to the borrower): The line item you’ll see in this part of the HUD-1 is the total of all charges related to closing. Line 103 reflects the sum of all of section L, which breaks down each individual settlement charge– it will be addressed later on in this article.
Lines 106 to 116 (adjustments for items paid by the seller in advance): There are multiple line items under this section such as taxes and HOA dues (when relevant). The most important thing to make note is that these may be prorated because they are paid in advance (many counties collect taxes quarterly).
Proration means you only pay for the part of something you used. On line 106, you’ll notice that the buyer was charged for the remaining time in that quarter of the tax cycle (ending December 31). Since taxes are paid in advance, the seller already paid for that quarter. So, the buyer is paying $480.80 towards taxes to reimburse the seller.
Line 120 (gross amount due from the borrower): In this example, line 120 is the sum of all costs from lines 101 to 116.
This section relates to money that you or your lender already paid towards closing. Items include costs such as:
Line 201 (deposit or earnest money): When your offer to purchase was accepted, you likely had to put a deposit (also called earnest money) on the property. Line 201 shows a credit for the fact that you already paid your deposit.
Line 202 (principal amount of new loan): This is the amount of money you're borrowing from the lender to help pay for the investment property. It's the part of the purchase price that you don’t pay right away but will pay back over time, usually in monthly payments.
Line 206 (seller concessions): Depending on what you and the seller agreed to in your offer to purchase, the seller may be responsible for paying some of the costs for you. In this example, the buyer is being credited $5,050.
Line 220 (total paid by/for borrower): By adding lines 201 through 219 together, you’ll arrive at the total for this section.
At the bottom of section J, you’ll see that line 303 says “cash from borrower.” This is the amount that you are responsible for bringing to closing.
To get this number, you subtract the gross amount due from the borrower (from line 120) by the total paid by/for the borrower (line 220). Here is the equation to determine the cash needed from the borrower at closing:
Gross amount due from the borrower - total paid by/for the borrower = Cash from the borrower
In this example, $86,821.67 is needed from the borrower at closing. Knowing this ahead of time allows you to get all of your funds into one bank account for a wire transfer.
Section L of the HUD-1 breaks down the settlement charges that are either paid from the borrower or seller at closing. Knowing how to interpret each of these charges is crucial as a real estate investor. By understanding the terms below and how the charges are determined, you’ll be able to calculate the total costs involved in buying your investment property.
There are a variety of components to section L, each with its own set of different categories of charges. Here are some of the most common ones:
This refers to the commissions paid to the real estate agents who helped in your transaction. Typically, the buyer and seller’s agent get a percentage of the purchase price as commission. Depending on the agreement, you as the buyer may be responsible for paying a portion of the commission.
Notice that in this example, there was no commission paid. That likely means that the buyer purchased the property without using a real estate agent.
These are fees related to securing the mortgage. Common line items include: loan origination fees, underwriting fees, and appraisal costs.
On line 805, you may also notice that it says “authorized signatory.” An authorized signatory is an individual whom you have appointed to sign on your behalf for your entity. When buying a property from abroad, this may help you close remotely– this will vary greatly from county to county within a state.
There are certain items that need to be paid ahead of closing, such as insurance and potentially even interest.
You may also see reserves on your HUD-1 using different names such as impounds or pre-paids depending on your title company–they all mean the same thing. This is the amount held in escrow as a requirement by your lender. An escrow is where your lender holds funds to cover future costs such as property taxes (quarterly) and insurance (after year one).
Before buying the property, you want to make sure that it has a clear title. In other words, checking that there are no outstanding claims or legal disputes from other parties regarding ownership of the house you are buying. To do this, you pay fees to your title company for the title search, title insurance, and other costs related to protecting your ownership of the property.
These are fees that are charged to you by title for helping you legally record the deed in your LLC’s name and transferring property ownership to your business.
Just about anything that wasn’t covered on previous lines can be mentioned as additional settlement charges. One potential example is repairs. If the seller paid for a new roof prior to closing, you might be required to provide a credit to the seller at closing to reimburse them for that expense.
When you add up the amounts in each of these sections (from 700 to 1304), you will have the total settlement charges–this can be found on line 1400. This number is then taken and plugged into the gross amount due from the borrower on line 103.
Understanding how to verify basic information and double-check your settlement costs will help you protect yourself as a real estate investor. Now that you know how to read and review your HUD-1 settlement statement, you can close with confidence.
At Waltz, we’re here to support you every step of the way. Taking the time to review everything carefully now can help you avoid costly mistakes down the road. If you have any questions or just want a second set of eyes on your documents, don’t hesitate to reach out to your lender!
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