For instance, in many communities the water company is actually a governmental agency. Don’t pay your water bill and there can be a lien against the property, Don’t pay the lien and the property can be foreclosed. Think about it the next time you take a shower….

And then, of course, we have property taxes. Fail to pay your property taxes and your house can be sold at auction to pay the debt.

Foreclosure Taxes

Taxes take precedence over any other claims. This is the reason why lenders want to escrow money each month from those who buy with less than 20 percent down. Lenders absolutely want to assure that property taxes are paid because otherwise their security for the loan — the house — could be at risk.

The deal with property insurance is a little different. Don’t pay your property insurance and you will be in violation of your mortgage agreement. Break your mortgage agreement and…you guessed it, you can be foreclosed.

Lenders also escrow money to pay property insurance premiums for those who purchase with less than 20 percent down. Again the reason is to protect the lender’s security. The lender does not want the house to burn down if only because the security for the loan will then have a reduced value.

I used to think that borrowers were better off paying their own taxes and insurance so they could control the money and perhaps get some interest, but now I prefer to have the lender collect the money each month as part of the mortgage payment. Why? Property taxes have turned into huge bills and it’s easier from a budgeting perspective to pay a little each month rather than a huge amount when taxes are due.

Foreclosure Taxes is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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A closing, settlement or escrow is merely an accounting of who owes what to whom. Among the interests represented at the closing table are not only the buyer and seller, but also the government (it wants taxes), brokers (they want commissions for their work), lawyers (they want to be paid for their services), title insurance companies (they need to collect their premiums) and everyone else with a claim for payment.

Closing Foreclosure

With a closing for a foreclosed property you still have various players and interests who need to be paid. However, there are some differences.

First, in some cases the seller is also providing the cash needed to finance the deal. Since the seller of a foreclosure is the lender, this can make sense for everyone if the mortgage terms are competitive.

Second, while buyers normally want good, marketable and insurable title, with a foreclosure they may get no more than a quitclaim deed. Such a deed merely says that whatever interest is held by the seller is now the property of the buyer. If the seller’s interest is bogus or nonexistent, then that’s what the purchaser has lawfully been sold.

Third, because the seller is a lender in general and maybe the source of financing for this transaction — and because the buyer may not be getting a general warranty deed or a special warranty deed — buyers should work with both real estate brokers and attorneys who specialize in real estate when purchasing foreclosure properties.

What Makes A Foreclosure Settlement Different? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The original HUD-1 was developed as a by-product of the Real Estate Settlement and Procedures Act of 1974 — or, as it’s usually called, RESPA. Prior to 1974 settlement forms could be different, meaning that it was very difficult to compare costs or to know what was deductible for tax purposes in the year of the transaction.

So what do we get after 36 years? The new HUD-1 is a vast improvement over the old model. It’s three letter-sized pages long rather than two legal pages, but there’s much more information in the new HUD-1. Buried in the form is an accounting of closing costs and perhaps even some write-offs. Buyers will find the full and complete cost of buying real estate while sellers will see how much cash (if any) they’re getting from the transaction.

Page One

The first page of the form is a summary of the transaction. In effect, it translates the sales contract between buyers and sellers into hard numbers.

At the top of the form we first have administrative data such as:

• The type of loan (conventional, VA, FHA, etc.).
• The place and date of settlement (the date can be very important for tax purposes).
• The mortgage insurance case number (important if you’re ever facing foreclosure).
• The street address of the property. This is a concern because for great clarity and assurance the form would be better if it also included the legal address of the property.
• The name of the settlement (or closing) agent. The party that conducts the settlement is typically regarded as an agent of the settlement process. In other words, they do not represent you.

Page One, Buyer’s Side

The HUD-1 shows transaction costs for both buyers and sellers — you get to see what the other person’s information. More important you get to see your own.

On the right side of the first page we have buyer costs grouped by sections.

Section 100 — This is where buyers see the cost of the property and the cost of settlement (the figure found on line 1400). Combine the two and you get the gross amount — but not the final amount — due from the purchaser.

Notice that there can be some adjustments in this section. For instance, it may be that the seller has paid local property taxes in advance — those payments would be a credit to the seller and a cost at closing to the buyer.

Section 200 — As a buyer you may have certain credits to offset your gross costs. Credits include such things as your deposit, your new loan (for closing purposes the mortgage is a credit to the borrower because it represents money brought into closing) and any additional financing.

In the 200 section you can also see adjustments which are a credit to the buyer. For instance, maybe the seller still owes some property taxes.

Section 300 — This is a re-cap of all costs and credits. If you take the gross amount due from borrower (line 120) and subtract the buyer’s credits and cash you then get the total cash due to — or from — the borrower.

Most buyers, of course, will need to bring “cash” to settlement. By “cash” what most settlement agents really want is a certified check or a cashier’s check. Also, it may be possible to wire funds to the closing agent. Always ask the settlement provider well in advance of closing how payment can be made.

Gifts: To assure lenders that you are not somehow getting a secret loan from someone, it’s best to have closing funds in your name and on deposit for at least 90 days. If you are getting a gift to close, ask your lender how the gift is to be documented and precisely follow the lender’s instructions.

Page One, Seller’s Side

Settlement is a moment of truth for owners, the time when you find out exactly how much or how little you’re getting from your sale.

Section 400 — The sale price of the house, plus the cash paid for any personal items, are shown here as credits to the owner.

Also in this section are adjustments — credits for property taxes and other costs paid in advance.

Section 500 — If any mortgage debt remains unpaid it shows up here as a cost to the seller. Also, the costs of closing (line 1400) are here as a deduction as well as any adjustments for such costs as unpaid property taxes.

Section 600 — If we take the gross amount due to seller (line 420) and subtract the seller’s closing costs (line 520) we can then see how much cash the owner will get from closing (or, how much cash is needed to close if the seller is upside-down).

Practices around the country regarding cash to owners at closing vary. In some areas there are “wet” settlements where the owner gets a check at closing, in other areas there are “dry” closings where it takes a few days to get a check because it takes time for the lender to fund the transaction and paperwork to be recorded. In some jurisdictions there are rules requiring the disbursement of cash with a few days. For specifics, speak with your settlement agent.

Page Two

On the second page of the new HUD-1 we have a series of sections which show costs that may be paid by either buyers or sellers — or split between them. In other words, these are costs which can be negotiated when a sale offer is made. For instance, in a slow market a seller might agree to pay all transfer taxes. In a hot market, the buyer might pay.

Section 700 — If one or more real estate brokers are involved in the transaction, this section will show the compensation to each broker and the cost, if any, to buyers and sellers.

Section 800 — Getting a mortgage is hardly free. When the buyer applied for financing the lender provided a Good Faith Estimate of Closing Costs (GFE) on the new form developed by HUD. This section shows such costs as points, origination charges, appraisal fee, credit report and tax service. Borrowers should check the numbers at closing with the estimates provided in the GFE. The costs shown on lines 801 (origination charge), 802 (points), and 803 (adjusted origination fee) must be the same as the GFE.

Please see our guide to the new Good Faith Estimate form to see how it’s coordinated with the equally-new HUD-1.

Section 900 — Closing is scheduled at a time which is mutually-agreeable to the buyer and seller. That time, however, will mean that for such items as interest, mortgage insurance premiums and homeowner’s insurance there will likely be a need to make some payments for daily costs in advance until the next billing period.

Section 1000 — If you purchase a home with less that 20 percent down the lender will likely require that you pay additional amounts each month for property taxes and insurance. This money is held in an escrow or trust account and then paid out as the bills come due.

If you will have an escrow account then the lender will typically collect money in advance from borrowers to assure that the escrow account is properly funded.

Section 1100 — As part of the buying process, sellers typically promise to deliver good, marketable and insurable title — and buyers should want nothing less. This section shows the costs for title insurance — both lender’s and owner’s coverage.

Lender’s cover — which is required by lenders if you finance the purchase — protects you up to the remaining loan balance in the event of a title claim. In other words, it protects the lender.

Owner’s coverage protects you if there is a title claim up to the purchase price of the property — in other words the loan amount plus your equity. Be aware that some title insurance policies have an inflation rider so that the value of the coverage can actually increase over time. For specifics, speak with your title agent.

Also, take a look at line 1107. This shows the commission paid to the settlement agent for providing title insurance.

Section 1200 — This is where you can see how much state and local governments are getting from the transaction. Governments are elated when homes are sold because such transactions are a major source of revenue. Government taxes can includes such things as deeds, releases, transfer taxes, state taxes, stamps, etc. Call it what you will, a tax is a tax.

Section 1300 — This is where you can find additional settlement costs.

Section 1400 — The total costs to close — this number also appears on lines 103 and 502 on the first page.

Page Three

The third page of the new HUD-1 is partially a confirmation that the costs outlined in the Good Faith Estimate are what you’re actually paying — or pretty close.

Some quoted costs on the GFE cannot be changed, some can be changed as much as 10 percent and some can simply change with the winds.

Also shown on page three is a recap of your loan including the mortgage amount, interest rate, loan term, ARM-related terms (if any), prepayment penalties (if any), balloon payments built into the loan (if any) and related matters.

IMPORTANT: Always keep your closing papers in a safe place for tax reasons and to assure that your loan terms are actually the same as disclosed on the HUD-1. For questions regarding closing issues, speak with your real estate broker, mortgage lender and closing agent. Be aware that some costs found on a HUD-1 may be tax deductible — for specifics speak with a tax professional.

How To Read The HUD-1 is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Until this point HUD has generally allowed lenders to offer their own Good Faith Estimate of Closing Costs, however the new standard form for all lenders — a form that took 14 years to develop — will finally assure that borrowers actually understand what’s being charged for their loans, why and by whom.

“The mortgage crisis,” says former HUD Secretary Steve Preston, the last HUD secretary appointed by President Bush, “was fueled in part by people agreeing to mortgages that they ultimately could not afford. In some cases, people didn’t understand or know that their mortgages could result in large payment increases after just two or three years. Others did not recognize the total costs that come with homeownership. And others paid higher loan origination and closing costs simply because they did not know about other affordable options.”

So what makes this form better?

First, it’s a three-page document that every lender will have to use — meaning that offers from lenders will be the same and can readily be compared.

Second, the document is not just a list of fees and charges, it also explains in basic terms the purpose of each expense.

Third, mortgage brokers will have to show their yield-spread premiums (YSPs), costs which Preston says were “rarely understood by, or fully disclosed to, borrowers. These premiums are directly tied to the higher interest rates that borrowers pay. Consumers deserve to understand this and they need to get credit for essentially paying these premiums.”

Page One

The first page is actually a summary of loan costs — the specifics are found on page two.

Item 1 tells you how long the quoted rate and terms last. Items 3 and 4 concern loan lock-ins — how long the rates and terms will last if you lock them in at the time the GFE is issued.

The loan summary tells you the amount of the loan, the initial loan rate and monthly payment. IMPORTANT: If you have an ARM the next few items will tell you:

• How high the interest rate can go.
• When the interest rate can first rise.
• The maximum monthly payment you can expect.
• If a prepayment penalty is allowed and, if yes, how much it will cost.
• Whether there is a balloon payment at the end of the loan terms.

Next the form will tell you whether the lender will create an escrow or “trust” account to collect money each month for property taxes and insurance. Generally, if you buy with less than 20 percent down an escrow account is required by the lender.

Finally, the form adds your origination charges (the “A” items on page two) with other settlement costs (the “B” items on page two). Be aware that you can have additional costs at closing, depending on how the sale agreement is written.

Page Two

The second page is divided into two parts, A and B. Part A looks at “origination” fees, the cost to buy your mortgage.

First, the form shows your origination fee in a dollar amount, including any yield spread premium (YSP). Under the old rules, the yield spread premium could be shown as either a dollar amount or as a percentage of the loan. Now, the entire cost of the loan, including any YSP, is shown as a single dollar amount.

Next, the form shows if your interest rate is being impacted by the origination fee. In other words, let’s say you can borrow $100,000 at 6 percent interest over 30 years with no points. This is called the par pricing for this loan. But, let’s say that you could also borrow $100,000 at 5.75 percent — if you were willing to pay 1 point at closing. A point is equal to 1 percent of the loan amount or $1,000 in this case. The form shows if you are paying for any reduction of the interest rate OR any increase in the rate by paying a smaller origination fee.

Next we go to part B. This part of the form shows the cash costs you can expect to pay at settlement (or escrow) when the loan closes. As the bottom of part B is a total which shows “Your Charges for All Other Settlement Services.”

The totals for parts A and B are then shown at the bottom of the page and on the bottom of page one as well.

HUD encountered considerable opposition from the lending industry, especially with regard to the question of how yield spread premiums should be disclosed. In an important decision which reviewed 14 years of effort to update the good faith form, a court found in 2009 that HUD had acted fairly and in the public interest with the form it produced.

Page Three

The last page should really be the first page because it contains instructions for understanding the form.

The first section lists charges that the lender cannot increase, charges that can rise by as much as 10 percent, and charges that change prior to settlement. This is important information, it means that you should check the numbers on your good faith estimate with the final figures presented to you at closing.

Next, HUD gets into the issue of higher or lower settlement fees. In the same way that mortgage loans have par pricing, so does the settlement process. In other words, if you are willing to pay a somewhat higher interest rate you may be able to lower your cash costs at closing. Indeed, you may not have to bring any cash to closing.

In the third section HUD offers borrowers the opportunity to compare loan offers from different lenders. This is important because borrowers should look at different loan offers to find the rates and terms which best meet your needs.

Lastly, HUD notes that your loan may be sold in the future. If so, after settlement “any fees lenders receive in the future cannot change the loan you receive or the charges you paid at settlement.” Translation: A contract is a contract.

HUD estimates that the new form will save typical borrowers $700 each time they finance or refinance a home. That’s a lot of money, but more could be done to cut borrower costs — and it shouldn’t take 14 years to make additional changes.

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Copyright 2009 Peter G. Miller. All Rights Reserved. Use of this material without permission is illegal, however direct links to this page are welcome.

How To Read The New Good Faith Estimate Forms is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The money in a broker’s escrow account is typically a credit to the buyer at closing. If the sale does not close, however, then several alternatives are possible: First, buyer and seller may agree to return the escrow money to the purchaser. Second, buyer and seller may agree to give the money to the seller to resolve claims that the buyer did not perform as agreed under the sales contract. Third, buyer and seller may dispute how the funds should be distributed. In this situation, the money is usually turned over to a court or, in at least one jurisdiction, the state real estate commission.

In the event of an escrow dispute, please consult with an attorney or legal clinic for specific information.

Why Do Real Estate Brokers Have Escrow Accounts? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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How does the buyer know the system works? It’s best to wait until warmer weather to test the system.

But what if something is wrong with the system? Who will pay for repairs or replacements? To resolve buyer concerns, an “escrow” account can be created at closing. In this situation, money from the seller is held in reserve until a certain date to pay for needed repairs as defined in the escrow agreement. If repairs are not required, or if the cost is less than the amount of money set aside, the difference is returned to the sellers.

Because an escrow account created at closing can hold a large sum over several months, the parties to the sale should decide how any interest is to be credited.

How are real estate escrow accounts used at closing? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The purpose of the lender escrow account is to accumulate money to assure that the borrower’s property taxes and property insurance are paid (and thus reduce the lender’s risk).

Lenders typically collect 1/12th of the annual costs for property insurance and taxes each month. They are allowed to keep as much as one full year’s worth of tax and insurance payments in the account, plus a two-month safety margin, plus $50. The only time the account is likely to have 12 monthly payments plus the two-month cushion is just before property taxes or insurance are due.

Lenders must account to borrowers annually with a statement showing how much is in the account, whether monthly payments will rise or fall in the coming year, and whether any surplus or shortage appears in the account. If the surplus is more than $50, the excess must be returned to the borrower.

Note that some states require lenders to pay interest on escrow accounts, others do not.

What Is A Mortgage Lender Escrow Account? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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