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Real Estate Purchases and Refinances are a Net Transaction

Last night a reader of this blog asked this question through Google search:

“When do I have to pay the total estimated settlement charges?”

Our fellow reader is obviously concerned with the amount of money that is listed as the total estimated settlement charges.  This number shows up on the bottom of page two of the new Good Faith Estimate or on lines 103 and 1400 of a preliminary or final HUD-1.

No matter what number appears on either of those lines, you may have to bring money to or get money after settlement because all real estate transactions are net transactions.

All Real Estate Purchases and Refinances are a Net Transaction.

dollars in a net transaction

All too often I am asked by borrowers when or if they will have to write a check for the closing costs.  That’s not really the right question.  The real question is whether they will have to bring cash to closing.  Sometimes they will and sometimes they won’t; it depends.

When we say that real estate transactions, purchases or refinances are a net transaction it means that we add up all the debits (those costs that are charges and due) and subtract out all of the borrowers credits (reductions in amount due).  The amount left over is the net balance due from or to the borrower.

Examples of Borrower Purchase Debits

When buying a property there are several debits (charges) you will find on the settlement statement or HUD-1.  The first is the purchase price (line 101.  “Contract sales price”).  This will typically be the largest charge on the HUD-1 to you and is the basis for many of the other charges.

Next is the compilation of charges and credits from the second page of the settlement statement.  These expenses will appear on line 103, “Settlement charges to borrower” (line 1400) on the HUD-1.  They may include but are not limited to Realtor fees, a lender origination charge/(credit), appraisal, credit report, tax service and flood cert, per diem interest, escrows including taxes, home owner’s insurance and mortgage insurance if required and the aggregate adjustment, title charges including, lender’s title insurance and owner’s if you opted for it, abstract services and deed preparation, the state and county charges for recording and transfer, and any additional charges such as a payoff that won’t fit on the first page, pest inspection or HOA or condo fee charges.

An additional series of charges you may see as a purchaser of a Fairfax County property if the real estate taxes have already been paid is the “Adjustments for items paid by seller in advance”.  You’ll see these debits on lines 106 through 112.  See the real estate tax section below.

Examples of Borrower Purchase Credits

The single biggest credit that a typical borrower will have in a real estate transaction, purchase or refinance is one or more new loans.  That will appear on line 202 and in subsequent lines in the section entitled, “Amounts paid by or on behalf of borrower.”

Other credits due to the borrower such as a seller closing credit will also appear in this section.  The amount of this kind of credit is limited by the loan-to-value ratio of the new loan and is determined by the type of loan being originated.  In general, the more equity you have or create with a down payment the larger your credit can be.

Your loan officer may have arranged for a lender credit included in the pricing you received.  That would appear on page 2, line 803, “Your adjusted origination charges”.  It would be a negative number reducing your total settlement charges.

There may be other miscellaneous credits such as from the one lender we utilize who regardless of whether it is a refi or a purchase mortgage always charges for an appraisal management company (AMC) fee on page 2 and credits the same amount back on the first page of the HUD-1.  We’re not sure if they understand why they do this.  We suspect it has something to do with compliance.

An additional series of credits you may see as a purchaser of a Fairfax County property especially if the real estate taxes or some other assessments have NOT been paid is the “Adjustments for items unpaid by seller”.  You’ll see these credits on lines 210 through 219.  See the real estate tax section below.

And let’s not forget your Earnest Money Deposit (EMD) that typically becomes a part of the original purchase offer.  EMDs will appear on page 1 of the HUD-1 settlement statement.  This too, will reduce the amount of cash you must bring to closing.

All of these expenses and credits will have been disclosed on your Good Faith Estimate of Settlement Costs.

Refinances have Different Debits

Typically, the biggest debit or charge in a refinance is paying off any existing mortgage.  That payoff balance will appear on the HUD-1 on line 104 and line 105 (if there is a second lien).  The calculation of the payoff balance can be a mystery to many home owners and even some in the business.

You will have many of the same types of charges on page 2 that will be carried over to line 103 on page 1.  A few of the notable exceptions will be no tax stamps for the sale price (only the recorded mortgage amount) and no charge for owner’s title insurance.  This is typically bought and paid for one time when you purchase the property and covers you during your ownership.  Of course, there will not be any Realtor fees, either.

Many title companies will offer owner’s title insurance at the time of a refinance and if you decline they will ask you to sign a waiver acknowledging this.  With a refi, there will be no proration of real estate taxes on page 1 of the HUD-1.

Credits Can Vary Wildly with a Refinance

Many of the same credits that exist with a purchase can exist with a refinance with the exception of a seller or Realtor credit.  Once again, the single largest credit will be the new loan that is being obtained.

The more usual credit that a refinance borrower will experience is a lender credit as arranged by the borrower’s mortgage broker.  This is how No Closing Cost loans are accomplished.  You may only receive a partial credit from your loan officer for costs of the appraisal and credit report.  Although this is somewhat more complicated with the new compensation rules, it is still very doable.

Real Estate Taxes and Proration

Each taxing jurisdiction practices different rules and they all vary by due date and timing.

Fairfax County real estate taxes are due in arrears.  Taxes paid by July 28th were for the first half of 2013 or that period from January 1, 2013 through Jun 30, 2013.  When they come due again on December 5, they will be for the second half of 2103, the period from July 1, 2013 through December 31 of the same year.

In most cases when buying a property in Fairfax County the seller will reimburse you with a credit for the real estate taxes that are unpaid.  If the seller has already paid the taxes for a period of time that you will own the house then you will reimburse them.  Those charges will appear as a debit.  This is one example of what is called proration.

Let’s say your settlement were to take place on October 25th of this year, the seller will reimburse you for the period from July 1 through October 24, 2013.  Of course, that’s assuming that the taxes were unpaid.  If the seller had already paid the taxes, you will reimburse him for the period from the settlement date, October 25 through the end of the tax period or December 31, 2013.

Will I Have to Bring Money to Settlement and if so, How Much?

This is really what it comes down to for all borrowers.  How much cash do I need and when?  And of course, what form does the payment need to be in?

For a purchase the sale price (largest debit) and the total of all loan amounts (largest credit) will for the most part determine the bulk of funds required at settlement.  The difference between the two is your down payment or your initial equity investment.

In the case of a refinance, your largest debit is typically the sum of all the lien payoff totals and the largest credit is the sum of all your new loans.  The difference between the two may result in funds being due from you if you are paying down the balance or funds being due to you if you are getting “cash out”.

*  Please realize that this is a work in progress…  Thanks for your understanding.



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