15 Important Things to Watch For on Your HUD-1 Settlement Statement

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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.

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About Author

Ken Corsini G+ is the founder of Georgia Residential Partners, LLC - a real estate investing firm based in Atlanta, Ga focused on creating turn-key investments for investors all over the country. He's been investing in real estate since 2005 with hundreds of real estate transactions.

15 Comments

  1. Hey Ken, nice article. I can tell you’re a details guy – which is a HUGE asset to any investor. It’s amazing how many people will skim over this kind of vital information on a settlement statement without really scrutinizing it. I ran into this issue when I bought my current house (purchase price was wrong), and neither the realtor nor closing agent caught it. This is definitely good stuff to watch out for.

  2. As a Broker, I can tell you how true this article is. I can’t believe how many agents don’t take the time to learn what a settlement statement is and how to correctly explain it to their buyers. I also think that all sales license courses should involve a much more in depth explanation of this as well. This article would be helpful for all agents to read and all buyers as well. Thanks for this information.

    • Very True – it seems rare that a mistake on the HUD actually benefits you as the investor. Most mistakes are going to be coming out of your pocket unless you catch them.

  3. Great reminder to be careful and make sure all or the details ae right. It is easier to make sure they are correct from the beginning than to have to clean them up later. Great blog post!

  4. It’s not usually on the P.A., but also verify the legal, on the P.A. Two REOs I bought in the last year both had issues, probably stemming from the selling bank (Beneficial and Fannie) not knowing what they had foreclosed, and what they owned. First case I’d have lost half of my 1.5 acre parcel (and my garage), since they only put one lot on the PA. I had agent fix the P.A. Second was a Fannie REO, The land under its nice deck was not included in the legal. Turned out the foreclosed owner had bought that separately, so it wasn’t Fannie-owned, which sucked but allowed me to negotiate a better price and buy it anyway. Now I’m trying to find the old owner, and/or I’ll have to wait and buy it when it goes tax forfeit (taxes on it are way behind). House rented just fine without the deck.

    So check your legals, and verify with your county’s GIS maps if possible.

    • John – great reminder! The legal description to a property is often overlooked … but VERY important. I actually bought a property a few years ago and found out after the fact that it included another lot. You would never have known it from the address, but sure enough, the legal description included the lot next door – Granted, I wouldn’t bank on these types of mistakes typically being in your favor as it was with mine.

  5. the thing I find that is often wrong is the pro-ration calculation. If I settle on say 15 Jan, then I should receive 17 days of rent say [if property is tenanted] but often I find that only 16days is included [31-15, instead of 31-14]. watch this for tax pro-ration too, depending on who pays whom you either over or underpay by 1 day.

  6. Mistakes on the other side of the transaction (note holder) can be interesting as well.

    During the bubble the lender on one of my properties spelled my name incorrectly a hatchet job to say the least. I decided at the time not to point out the mistake, the note also had the address incorrect sighting north on the address instead of south in the street name.

    Don’t worry I am an ethical guy always paying my way. The lender a small bank went up in smoke after the bubble popped. The new note holder on the other side of the country was not so nice, constantly invoicing late and for the wrong amount. They had no issue charging insane late fees and generally harassing me.

    I understand they wanted me to cash out the note so they could reap a huge return on their investment.

    What whipped the lender into shape (actually into submission) was the errors on the note they purchased. Pointing out the note was on the wrong collateral, and was naming a debtor that was not legally my person.

    I have been offered an extension on the note as the original balloon was in 2012, and a lower interest rate to sign a new note. Presently the note is 4% interest only locked in, the lender has extended the balloon period until 2014.

    I have no intention of signing a new note the payment is $200 a month interest only the property is rented at $825 a month with the tenant covering all costs of ownership.

    How about an eternal 4% loan, with no balloon date?

    I am currently seeking a refinance of a note from another up in smoke lender, the paperwork to get this done is insane (they don’t know about trusts in Philly it makes lenders nervous).

    I can guarantee you they will be paying great attention to details on all paperwork.

    The glory days of REI financing are over.

  7. I had to get a survey done for a refi as the old one was not going to be good enough. It was ordered through the bank and then they did not put it on the HUD -1 or pay the survey company in the closing. There have been some other issues with this company that I am disputing and I was wondering if this would be leverage for getting them to behave or am I on the hook for paying the survey company regardless. They are telling me the survey company is about to file a lein, but the closing was early in the month and yesterday was the first day I learned the survey company had not been paid. What are the legal ramifications of fees that are due not being disclosed on the HUD-1 and my obligation to pay them??

  8. Karl johnson on

    My HUD was wrong. Seller here and had to tell my lawyers office that it was not correct. They said “happens all the time”. I won’t be usin them again. Simple math people.

  9. Elizabeth Vega on

    A few years ago a closing took place that was being pushed aggressively through the system; very uncooperative sellers who did not want to extend a day or two for the buyer. They reluctantly gave an extension yet a HUD wasn’t available, literally, until the moment of closing appointment. Needless to say, this was against my better judgement and I advised the buyer not to feel pressured and rushed since my experience is that it will leave room for error; well as it goes, I was not available for the closing and the buyer rushed through the HUD review with attorney, as guess what …. he missed a $9,000.00 difference on the sales price noted on the HUD-1. The seller claims he never noticed and walked with an extra 9K in his pocket. The error/discrepancy was caught wtih 24 hours and the seller stated that the buyer can chase him for it. He believed that since both parties signed the HUD, it was their money to keep. The buyers are not interested in chasing $9K through a court of law; however, we are being told mixed stories of which signed document would stand first, the purchase contract or the final HUD-1. Clearly the seller agreed to one price yet happily walked away with a smile on his face. Does anyone have the facts on this type of situation??

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