Defining a Settlement Statement
A settlement statement is a document that lays out and clarifies, in clear terms, what the parties to a transaction have agreed to pay and receive. It is not uncommon for buyers or sellers to walk away from a deal with different expectations of what funds are involved.
A buyer and seller of a home, for example, may have come up with a deal that all parties thought was clear: a specific sum based on the value of the property. But there are various costs associated with buying a home or selling a home that need to be included – which is where a settlement statement comes in. Its purpose is to ensure that there are no surprises when it comes to the final price that is paid. It provides a clear outline of what the buyer will have to pay, including closing costs, and what the seller should expect to receive at the close of the process .
A simple example of the benefit of a settlement statement is the commission a real estate agent might receive for helping to close a deal. A real estate agent’s commission is typically 5 percent of the final sale price. If a home sells for $300,000, the agent is entitled to $15,000. However, this sum is divided between the selling agent’s company and the purchasing agent’s company. If the purchasing agent receives all of the sales amount his or her company was entitled to, he or she would receive $7,500, and the selling agent would also receive $7,500.
Had the above example been omitted from a settlement statement, however, the selling agent might have received an unpleasant surprise at closing: only $7,500.
Typical Elements within a Settlement Statement
Although the amount of detail included on a settlement statement may differ, these statements usually comprise the following basic components:
Charges
In some states, charges from lenders may include transfer taxes, yet in other states the seller may be responsible for these taxes. Itemized closing costs may also show up in this section, such as loan origination fees or appraisal fees. On the other hand, items excluded from the settlement statement may include third party costs such as title insurance, credit reports, inspections or surveys.
Credits
Credits may show amounts owed to the buyer and credits from the seller. Items such as interest already paid by the buyer or taxes already paid by the seller may fall into this category.
Fees
Included within the set-off charged or credited amounts, fees may be included as well as real estate agent commissions and attorney fees.
Assets
Assets may include the selling price of the home and any money the buyer may have deposited into an escrow account.
Property Records
Property records are mainly incorporated for the benefit of investors and real estate agents. There is no requirement under federal law for a settlement statement to show property records such as a listing number, the property tax identification number, or legal descriptions of real property such as parcel numbers.
Other Items
Other items may include documents that must be delivered to the buyer or seller at closing. Some examples of these types of items include a statement by the buyer that an attorney reviewed all closing documents, a loan itemization, additional addendums to the purchase and sale agreement, or an important notice to consumers.
As you can see, a settlement statement outlines the details of a real estate transaction. It not only lets you know how much money is required to complete the transaction, it also includes a general record of the transaction itself.
How to Interpret a Settlement Statement
A settlement statement is typically 2-3 pages long. However, the information contained in each section is important to know.
The breakdown below will help explain what is meant in each section of a settlement statement:
- A section identifying the parties to the action. Including the parcel and the tax ID number.
- A description of the property.
- A section regarding how the interests are to be transferred. This is typically in the form of a deed that is signed at closing. The deed will describe if the interest being transferred is a fee simple title or some other form of limited interest. Another common method of transfer is a Personal Representative’s Deed. This type of deed doesn’t imply any positive claim or right that the Grantor may have in the property being conveyed.
- The net amount of the mortgage loan. This means that the total of all unpaid principal of the loan plus accrued and unpaid interest and all other fees, charges, and costs on the loan less the amount of the payments received by the lender.
- The sale price of the property and dividing up the closing costs between the buyer and seller.
- The payment of the buyer’s deposit and advance payments of principal on the mortgage loan.
- Any delinquent payments in property taxes, dues, or assessments owed by the seller. The title company will buy title insurance for the buyer of the real property.
- Any outstanding bills or loans owed by the seller.
- Extinguishing any outstanding deeds of trust or mortgages that the seller has encumbering the property.
- The closing costs, homeowner’s association cost, and realtor fees.
- Any required payments to be made post-closing.
- The final amounts of the buyer’s net mortgage and the seller’s net proceeds.
Example of an Actual Settlement Statement
We will not charge you any real estate closing fees. You will see a credit for $250.00 on the Settlement Statement line 1102. Let’s take a look at a completed Settlement Statement (HUD-1) for a closing where our closing fee was waived: Below are line by line explanations:
1 – Mortgage Loan: This is the amount of the loan that you were approved to close at the time of application with your lender.
2 – Loan Amount: This is the loan amount showing on your loan estimate and what you actually will borrow from the lender.
3 – Amount Financed: The loan amount minus all fees that you will not be paying to your lender.
4 – Interest Rate: The rate your lender will be charging to loan the funds to you.
5 – Monthly Principal & Interest: Your monthly mortgage payment indicated on your loan estimate.
6 – Release of Claim: In the event of a loss to the property before closing, your lender has the right to be paid out of the insurance policy and that will reduce the proceeds you received from the sale in the amount of any claim that is released to your lender.
7 – Prepaid Finance Charges: All of the fees that you will be paying to your lender for originating your loan, loan processing, etc. These are considered "prepaid finance charges" because you will not paying these back over the term of the loan.
8 – Closing Costs: This is all of the mortgage fees you will be paying to your original lender as well as fees for origination, processing and/or closing with your closing attorney.
9 – Title Insurance: This is the fee that relates to having your home insured with a title insurance policy to insure the deed you will obtain after your closing against any defects in the title that could cause a title claim in the future.
10 – Fire / Hazard Insurance: This is the insurance to cover losses caused by a fire or other damage to your home that is not covered by your homeowners insurance .
11 – Impounds: This is the amount of money your lender is collecting at closing to pay for your escrows for real estate taxes and homeowners insurance.
12 – Contingency Reserve: This is a fee that some lenders charge to open the escrows and to maintain the escrows after closing.
13 – Lender Credits: If you are obtaining a loan with a higher than normal interest rate, your lender may offer you this credit which acts as a rebate of higher than market interest in exchange for a higher interest rate.
14 – Payment to Broker: This is the commission your real estate broker will be paid out of the sale proceeds, if applicable.
15 – Government Recording and Transfer Charges: These are the fees collected by your local and state governments to record the warranty deed to you and to show a tax assessment to your property after closing. The total is determined by the laws of your state.
16 – Balance: This is the amount of money you will have to bring to the closing to close the sale of your home. A substantial balance due at closing could be the result of the purchase of the home being for less than what was originally indicated on the original loan estimate, or even the result of the seller not paying their portion of the closing costs. The net proceeds on the HUD-1 should be listed on the seller netting sheet along with the seller’s contact information. A seller netting sheet is not a legally binding contract or agreement, but is typically provided to you at the closing by your real estate closing attorney for your reference. This is an example of a typical settlement statement with many of the items explained. It is a very detailed document that contains a lot of financial information related to the sale of your property. Always review this document carefully before you sign as it is essentially a contract for the sale of your home.
Common Mistakes when Preparing a Settlement Statement
Common mistakes can crop up on settlement statements that can have a rather large impact. For example, adding a home warranty fee to the buyer’s side can result in the buyer believing that the seller will be paying for something they are not. If the seller is to pay for the home warranty contract, it should be stated on the seller’s side of the statement. A common mistake in this area is simply to put the item on the buyer’s statement and forget to disclose the cost in the commission or credit to the seller.
In some areas, many different taxes may be due at closing, such as transfer taxes, stamp taxes, documentary fees, and the like. These payments vary greatly from state to state and sometimes county to county within a single state. They can range from a flat fee to a specific amount per $100 value of real estate. In Maryland there are two taxes to be paid to the State called the State Transfer Tax and Agricultural Transfer Tax. The state tax rate on most real estate transactions is 0.5% of the sales price, however, if the purchaser is a first-time home buyer the rate is reduced. The transaction must be a purchase of real property from an arm’s-length sale and the buyer must occupy the premises as his principal residence. Some counties have a second transfer tax in the amount of 1% of the total purchase price. In Montgomery County there is a total transfer tax of 1.5% for most transactions, which includes the 0.5% state tax. In Howard County the transfer tax is 1.0%. Individual counties set their own tax rates and also determine who will pay the tax, the seller or buyer.
The taxes are due to the State upon recordation, so if the buyer is paying for the taxes it is always best to check with the State or correct tax index card issued by the State before writing the check to be sure you are sending the correct amount to the State.
Sometimes mistake can occur when there are contributions made to a condominium or homeowner’s association. These contributions can be in the form of a donation for a special assessment or a contribution to the association for to a specific purpose outside of the normal expenses. The association may also charge a one-time fee. As these contributions are not paid through private mortgage insurance (PMI), the time share, or hazard insurance, these funds go to pay the ongoing costs of the association. Unless otherwise stated, these donations or one-time fees always go to pay the ongoing costs of the association. Be aware however, that very often these contributions may be specifically excluded from the sellers’ obligations under the sales contract. This may end up resulting in the buyer or seller "double paying" for a special assessment.
Another common error seen on settlement statements is the use of "assumed" or "delinquent" amounts. Phrases such as "assumed as of", "delinquent as of", and "payable at closing" are commonly used in settlement statements to indicate that the parties (buyer or seller) are taking care of their respective outstanding balances. The problem with these phrases is that unless there is a separate agreement between the parties, their escrow in their new mortgage does not account for these amounts. Purchasers should always take care to read the seller’s documents carefully and ensure that he/she will be fully credited for any amounts he/she has to pay out of pocket at closing. Likewise, sellers need to understand that unless agreed to otherwise, these amounts may be paid up front out of their share of the proceeds.
These are just some of the pitfalls that can make your settlement statement painful instead of helpful.
Things to Consider When Reviewing Your Settlement Statement
Buyers & sellers should be aware of the following questions to ask about their settlement statement:
Buyer:
Have I been properly credited for the amount of my earnest money deposit?
Have I been given a credit from the seller for the prorated property taxes based on the time I will own the home?
Have I been properly charged for my share of the HOA transfer fee (if applicable)?
Have I been properly charged for the recording fee for the mortgage and the deed?
Has the closing agent properly calculated the interest that is collected by the lender at closing?
Have my lender’s fees and charges been properly disclosed?
Have I been charged for my share of prorated property insurance?
Have all my loan fees been disclosed?
Has my warranty company (if applicable) been properly charged?
Seller:
Have I been properly charged by my warranty company?
Have I been properly charged by the title company?
What are title/closing fees and are some outside of the closing company’s control?
If so , which ones?