What is a settlement statement in real estate?
When it comes to buying or refinancing a home, understanding the financial aspects of the transaction is crucial. One of the key documents in this process is the settlement statement, which provides a detailed breakdown of all costs and credits associated with a mortgage loan or refinance. In this blog post, we’ll delve into what a settlement statement entails, how it differs from the newer closing disclosure, and what you can expect to find on it.
What is a Settlement Statement?
A settlement statement is a comprehensive document that summarizes all costs owed by or credits due to the homebuyer and seller (or borrower in the case of a refinance). This includes vital information such as the purchase price of the property, loan amount, and other relevant details. The statement essentially informs the parties involved how much money will be due at the closing, and to whom. Additionally, it outlines the seller’s proceeds from the transaction.
Who Provides the Settlement Statement?
The settlement statement can be provided by various parties involved in the real estate transaction, including the mortgage lender, a settlement agent, a title company, or a real estate attorney. This ensures that all parties have a clear understanding of the financial aspects of the deal.
Settlement Statement vs. Closing Disclosure:
Before October 2015, borrowers received a HUD-1 settlement statement, provided by the U.S. Department of Housing and Urban Development (HUD). However, with the implementation of consumer protection laws known as TRID (Know Before You Owe), a more streamlined and user-friendly document known as the closing disclosure took its place. While most borrowers now receive a closing disclosure, some may still refer to it informally as a HUD-1 or settlement statement.
How a Settlement Statement Works:
For residential purchases and sales, a five-page closing disclosure is typically used today. This document is a finalized version of the loan estimate (previously known as the good faith estimate), which provides an overview of expected fees at the beginning of the mortgage application process. The lender is required to provide the closing disclosure at least three business days before the closing date. On the other hand, the HUD-1, an older form similar to the closing disclosure, must be delivered at least one day prior to closing. The figures on this form can be adjusted during the closing process.
What to Expect on Your Settlement Statement:
A settlement statement includes a detailed breakdown of expenses and credits that need to be paid by the homebuyer and seller (or borrower in the case of refinancing). Some common items you can expect to find on a settlement statement include:
- Loan amount, interest rate, and terms
- Property’s contract price
- Allocation of real estate taxes and assessments
- Real estate agent commissions
- Escrow fees
- Lender fees (e.g., loan origination, underwriting, discount points)
- Inspection and appraisal fees
- Insurance premiums (private mortgage, homeowners)
- Title-related fees (administration, insurance policy, notary, deed preparation)
- Transfer taxes or conveyance fees
- Homeowners association fees (if applicable)
Conclusion:
A settlement statement is a crucial document in the real estate transaction process, providing a detailed breakdown of all financial aspects. While the closing disclosure has replaced the older HUD-1 form for most borrowers, understanding the information on this statement is essential for making informed financial decisions. By reviewing the settlement statement carefully, buyers and borrowers can ensure that all costs are accurate, providing them with a clear picture of their financial obligations.