I remember how daunting the HUD 1 settlement statement seemed when I was first getting started in real estate. Trying to figure out what boxes to add together… it just didn’t seem as intuitive as you might think. I also remember blindly trusting lenders, attorneys and agents to make sure all of the numbers pertaining to a transaction were accurate. Nowadays, I’m much more careful about reviewing HUDs line by line to make sure everything is listed correctly.
I’ve found that a very high percentage of HUD statements have mistakes on them. It is not uncommon to coordinate with closing attorney’s up until the 11th hour to make sure everything is correct. While many investors probably leave this up to agents or lenders, I think it is crucial to know and understand the nuts and bolts of a transaction so that you can ensure you’re not leaving money on the table.
15 Items on a HUD-1 Settlement Statement That Should be Double-Checked for Accuracy:
Price: This is by-far the most obvious box to check on the HUD 1 settlement statement, but believe it or not, I see wrong numbers in here more often than you would think. In fact just last week I was closing on a new purchase and noticed the price was almost $5,000 above my agreed upon purchase price. It’s not uncommon for an attorney to work off of an original purchase and sale contract. However, if you’ve had subsequent negotiations with amendments to the contract changing the purchase price, it’s important to know whether or not the closing attorney (or title company) has this information before generating the closing docs.
Address: At the top of the HUD-1, you have a box for the buyer’s address as well as a box for the property address. It’s very important that both of these are accurate. I’ve seen where an investor had an incorrect personal address and the subsequent closing documents that were supposed to get mailed to him never made it.
Down Payment: You want to assume that your lender and you were speaking the same language during the loan process, but it’s important to double-check this. If your lender told you you were getting a loan with 20% down, you want to make sure nothing has changed. The last thing an investor wants to find out at the closing table is that he or she needs to cough up a few more thousand dollars for additional down payment.
Tax Proration: Typically, when buying or selling a property, both parties are responsible for the pro-rated tax bill. It’s important to make sure the total tax bill looks accurate and that each party is paying for the correct pro-rated portion of the year. (Because tax bills are usually paid once during the year, this is typically accounted for on the HUD-1 using a credit to one party or the other, depending upon who ends up paying the actual bill)
Title Insurance: It’s important as a buyer to make sure you always have title insurance on a property. I’ve actually had closing attorney’s that simply assumed that since I was paying cash, I didn’t want title insurance. Luckily, I ALWAYS check to make sure I’ve got title insurance and that I am not overpaying for it.
Title Insurance Coverage Amount: In addition to making sure you have title insurance, it’s important to examine just how much coverage you have. Some title policies only cover you up to your loan amount, rather than the full purchase price. Also, if you are doing a significant amount of rehab to a property, you may want to consider getting coverage up to your total expenditures on the property (i.e. acquisition and rehab)
Homeowners Insurance: I don’t think many investors would argue with the need for homeowners insurance. However, it’s important that all parties know how coverage is being paid for. It’s very common for buyers to pay for coverage outside of the closing (perhaps on a credit card), but have the HUD-1 reflect the premium being collected at the closing table as well. I’ve seen many instances where wires get crossed and the buyer ends up paying the full premium twice.
Appraisal Fee: Similar to homeowners insurance, an appraisal fee often gets collected via credit card during the loan process. I actually just saw it happen last week where a lender accidentally had the appraisal fee on the HUD-1 as well. Again, if you’re not watching for this, it’s very easy to accidentally pay this fee twice.
Intangible Taxes: In some states, an intangible tax is collected for any long term security or note. As is the case in Georgia, any note over 3 years falls under this tax. I’ve found that many closing attorneys are so used to collecting this tax, it automatically finds its way onto the HUD 1. However, most hard money and private loans are for 12 months or less and don’t fall under the intangible tax guideline. As such, I’ve had to make this correction on many closings over the years – it’s probably one of the most common mistakes I’ve found.
Payoff: For a seller, making sure your payoff is accurate is crucial in ensuring that you don’t leave money on the table. I’ve found that the most common problem is identifying what interest has already been paid on a given loan versus how much interest the lender rolls into the payoff. If a payment was recently sent to a lender, but that lender hasn’t received it or input into their system, it’s very easy for this payment not to be reflected in the payoff amount. I always communicate with my lenders when it comes time to calculate a payoff to make sure we are on the same page with the calculation.
Prepaid Interest: Again, when dealing with a lender it’s important to keep track of any interest that has been paid. When borrowing funds to purchase a property, many lenders will include prepaid interest through the end of the month on the HUD-1. It’s important to account for this interest and make sure you do not accidentally get invoiced later for this period of time that was already paid through closing.
Commission: It’s always important to make sure any amounts that were agreed upon by both selling and listing agents are accurately reflected. Also, it’s common for earnest money to be held by either brokerage and for the commission to be net of earnest money already held in escrow. I just saw a HUD this month where the HUD identified the wrong brokerage as holding the earnest money and thus shorted the commission due to that brokerage.
Earnest Money: As mentioned above, you want to make sure the entity holding the earnest money is accurately reflected on the HUD, but you also want to make sure for the correct amount.
HOA: Similar to Tax pro-rations, Homeowners Association Dues are typically pro-rated between buyer and seller. I always double-check this box to make sure the overall yearly fee is what I expected and that it’s accurately divided between buyer and seller.
Cash From/To Borrower or Seller: The cash to borrower and seller is typically displayed on the bottom of the first page of the Settlement Statement. Most software programs used by attorneys and title companies use all of the other data entered to calculate these two fields. When I look at a HUD, this is the first place I look. Usually as a buyer or seller, you have a general idea of what you are bringing to the table or walking away with. If the number isn’t quite what you expected, it usually means there is a mistake somewhere on the statement … at which point you begin your hunt through both pages to find the possible error.
Have you ever had an incorrect HUD-1? Share your story below in the comments.