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Good Faith Estimate and Settlement Statements - An Introduction for Home Buyers

For many first time home buyers, estimating expenses related to closing a real estate transaction is overwhelming. Sellers find its counterpart viz. estimating the equity due to them when the transaction closes equally trying. While Good Faith Estimates are intended to ease this situation, it is not an accurate science. Complicating things further is the fact that multiple good faith estimates, each with minor adjustments, are usually sent out within the 30-day span of closing. Estimation is hard to generalize – each transaction is unique, a number of service providers are involved and taxes vary by location.

In the US, HUD 1 settlement statement is a standard form that both the buyer and the seller employ to itemize real estate transaction services and fees. The final closing settlement statement for the buyer and seller is derived from this form. For those wishing to distance from anything financially related, good faith estimates, HUD settlement statement, and the final closing settlement statement are just unavoidable distractions before closing escrow. While in a majority of instances, a hands-off approach works fine; these statements can contain mistakes too. The forms are fairly simple once the essence of each is gleaned, so whatever effort made to decode them provides good dividends.

The intention of good faith estimates is to provide the buyer with a rough idea of the costs involved in the transaction. Below is a look at a sample good faith estimate:

HUD-1 Line	Description of Charges	Amount
801	Loan Origination fee (0.000%)
802	Loan Discount (0.000%)
803	Appraisal Fee	$250
804	Credit Report	$12.50
809	Processing Fee	$695.00*
810	Tax Service Contract	$80.00*
1303	Flood Certification	$18.00*
805	Final Inspection Fee
811	Underwriting Fee
812	Buydown Funds	$395.00*
901	Interest Adjustment 30 days - $74.096 per day	$2,222.88*
902	Mortgage Insurance Premium
903	Hazard Insurance Premium
904	Flood Insurance Premium
1001	Hazard Insurance Reserve	$150.00
1002	Mortgage Insurance Reserve
1004	Property Tax/Assessment Reserve	$3,249.98
1006	Flood Insurance Reserver
1008	Aggregate Escrow Adjustment	$(450.00)
1101	Settlement or Closing Fee	$275.00*
1105	Document Preparation Fee
1106	Notary Fees	$60
1108	Title Insurance	$1397.79
1111	Contract Coord Fee	$275.00*
1201	Recording Fees	$125.00
1202	City/County Tax Stamps	$572.55
1203	State Tax Stamps
1301	Survery Fee
-	Total Estimated Charges	$9328.70

Looking at the sample Good Faith Estimates spreadsheet above, notice the first column is titled ‘HUD-1 Line’ and each line has a distinct number. This is because the standardized HUD-1 form assigns numbers to each itemized line item charge. The ‘HUD-1 Line’ column in the spreadsheet indicates the number in the HUD-1 form that corresponds to the charge listed. The description and amount columns are self-explanatory. Many of the figures listed are starred, indicating the value is classified as a finance charge as opposed to other charges such as taxes or costs of other services. The last line titled ‘Total Estimated Charges’ is an estimate of the closing cost needed at close of escrow (COE). While this is a rough estimate, this is the only document to go with until the day before (earliest) the close of escrow, regarding the closing cost that is to be funded. Hence it is prudent to have at least 20% more in the bank to fund closing costs on the day of COE, in addition to the down payment.

A final HUD-1 settlement statement is provided along with the final closing settlement statement on the day of COE. The HUD-1 settlement statement is a mine of information – the snag is that it is available only when signing on the day of COE. Below is a look at a portion of the HUD-1 settlement statement that lists the borrower’s side of the transaction:

HUD-1 Line	Description	Amount
100	Gross Amount Due From Borrower:	-
101	Contract Sales Price	$500,000.00
102	Personal Property
103	Settlement charges to borrower (line 1400)	$14,000.00
-	Adjustments for Items Paid by Seller in Advance:	-
106	City/Town Taxes
107	County Taxes	$750.00
108	Assessments	-
120	Gross Amount due from Borrower	$514,750.00
200	Amounts paid by or in behalf of borrower:	-
201	Deposit or Earnest Money	$12,000.00
202	Principal amount of new loan	$400,000.00
203	Existing loan(s) taken subject to
-	Adjustments for Items Unpaid by Seller:	-
210	City/Town Taxes
211	County Taxes
212	Assessments
220	Total Paid By/For Borrower	$412,000.00
300	Cash at Settlement from/to borrower:
301	Gross amount due from borrower (line 120)	$514,750.00
302	Less amounts paid by/for borrower (line 220)	$412,000.00
303	Cash (From) (To) Borrower	$102,750.00

The actual HUD-1 settlement statement has columns for both the buyer and the seller side of the transaction. The columns of interest to the buyer are titled ‘Summary of Borrower’s transaction’ and to the seller it is the columns titled ‘Summary of Seller’s transaction’. The borrower’s summary rows are divided into two sections as in the spreadsheet above – a Debit section titled ‘Gross Amount Due from Borrower’ and a Credit section titled ‘Amounts Paid by or on Behalf of Borrower’. Line 103 (line 502 in summary of seller’s transaction) is the total of all the settlement charges listed in that section of the form. The settlement charges include many items under the following sections: Broker Fees, Loan Fees, Lender required pre-payments, Reserves deposited with lender, Title Charges, Government recording and transfer fees, and any additional settlement charges.

The closing settlement statement to the buyer and the seller are both derived from the HUD-1 settlement statement. The corresponding portions from the HUD-1 settlement statement are presented in a bookkeeping format with Debits and Credits instead of a single Amount column in the final closing settlement statements. Below is a look at a sample final buyer’s closing settlement statement – we added a column to indicate the line in HUD-1 that corresponds to each entry in the closing settlement statement:

Description	Debits	Credits	HUD-1 reference
Sales Price	$500,000.00	-	101
Amount of New Loan	-	$400,000.00	202
Deposit retained by xxx	-	12,000.00	201
County Taxes	$750.00	-	107
Prorate Taxes to	$800.00	-	901 – settlement charges page 2
Appraisal Fee	$250.00	-	804 – settlement charges page 2
Credit Report Fee	$20.00	-	805 – settlement charges page 2
Tax Service Fee	$80.00	-	806 – settlement charges page 2
Underwriting Fee	$400.00	-	811 – settlement charges page 2
Processing Fee	$700.00	-	812 - settlement charges page 2
Flood Certification Fee	$20.00	-	809 – settlement charges page 2
Commitment Fee	$280.00	-	814 – settlement charges page 2
Interest to	$1,000.00	-	901 – settlement charges page 2
Home owner’s insurance premium	$800.00	-	903 – settlement charges page 2
Home owner’s insurance reserve	$200.00	-	1002 – settlement charges page 2
County Property Taxes reserve	$3,000.00	-	1005 – settlement charges page 2
Lender’s Title Insurance	$600.00	-	1104 – settlement charges page 2
Owner’s Title Insurance	$900.00	-	1106 – settlement charges page 2
Transfer Taxes	$3000.00	-	1203 – settlement charges page 2
City/County Tax Stamps	$1950.00	-	1204 – settlement charges page 2
Subtotals	$514,750.00	$412,000.00	NA
Balance Due From Buyer	-	$102,750.00	303
Totals	$514,750.00	$514,750.00	NA

Each row in the statement is taken from the completed HUD-1 form. The statement has three columns – a description column followed by Debits and Credits columns. The amounts in the Debits column is taken from the column titled ‘Gross Amount Due from Borrower’ and the amounts in the Credits column is taken from the column titled ‘Amounts Paid by or in Behalf of Borrower’. The row titled ‘Balance Due From Buyer’ is the total amount owed at COE.

A similar closing settlement statement is provided to the seller as well. As with the buyer’s statement, the data is derived from the same HUD-1 settlement statement, with rows from the ‘Summary of Seller’s Transaction’ section.

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Last Updated: 03/2012.

Taxes, Laws & Regulations - A Primer for New Homeowners

While owning a home is a reward beyond compare, it does have a significant say when it comes to taxes. Below is a look at the details of taxes due:

Property Taxes: Most everybody is alert to this tax due twice a year (November & April). The actual tax rate varies with state and county. In Alameda County, our property tax rate stood at 1.25% of the assessed value of the home in 2010 – the basic property tax rate is capped at 1% but miscellaneous provisions tallied up to another 0.25%.
Transfer Taxes: In some states, this is split between the buyer and seller. In California, it is a negotiable item, although for the most part, the seller meets it. The actual taxes vary by county and city. For Alameda County and City, the rates were 0.11% at the county level and 1.2% at the city level.

Depending on the area, some laws can have a huge financial impact when it comes to owning a home. In California, two of the leading laws every home owner should be aware of are:

Proposition 13: This law signed in 1978 aims to protect long-term homeowners from being taxed out of their homes – in essence this is built-in property tax relief for long-term homeowners. The law limits the annual increase of property taxes to an annual inflation factor that cannot exceed 2%, essentially bringing automatic property tax relief as long as home ownership is maintained. In effect, homeowners can figure out their maximum property tax liability for any year in the future, as long as they are in the same house. Prior to this law, houses were reassessed annually and the rates followed suit, allowing arbitrary annual increases to the property tax amount. The enormous effect of this law on homeowners is best illustrated by Warren Buffett’s multimillion-dollar property ($4M or so) in the Laguna Beach area in California. Buffett is taxed in the $2K range, while an average 350K new-construction home in the suburbs is subjected to almost twice that amount in taxes – this huge property tax relief enjoyed by Buffett is solely because he took charge of the property in the early 70s, while the 350K home was a recent purchase – Buffett’s property reaps the benefit of Proposition 13 in its entirety.
Anti-deficiency laws: This California foreclosure law (similar laws exist in Arizona and in other states as well) limits the lenders ability to obtain a deficiency judgment, when a borrower defaults on a loan used to acquire and occupy a residential dwelling for four or fewer families. The law bars the lender from laying claim to the borrower’s assets following a foreclosure or a short sale. California foreclosure law is aimed at protecting the borrower’s assets against the vagaries of the housing market and at achieving relative home price stability by dis-incentivising lenders from getting deficiency judgments. Exceptions exist and an important one is that protection from deficiency judgments based on California foreclosure law is lost on refinanced loans. Other exceptions include unsecured loans and loans for construction after handover.

Regulations exist for all kinds of remodeling or enhancements to the house – replacing the flooring and paint jobs are the only exceptions – HOA permits may still be necessary for outside paint jobs. City permits were mandatory for most everything in the area we lived in. Significant losses in both time and money can be the consequence of neglecting to get these permits before the work is done. The general impression imparted by the service providers is that these will be handled by them in a transparent fashion, but in our experience, it is the homeowner’s responsibility to ensure the service provided conforms with the guidelines and/or regulations. We were extremely naive and caught unawares when it came to permits/regulations the first time around. We are yet to figure out whether our contractor was plain clueless or could not be bothered to go through the permit approval process. We filed applications after the fact – fines are egregious (5x) when forced to do it this way. From that point on, we proceeded with work only after the permits were in place and in almost all the cases, the contractors got the permits as part of their work-order.

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Last Updated: 01/2019.

Home Maintenance Schedule – A Primer with a focus on costs

The home we purchased in 2004 in Alameda, CA (Bay Farm Island) had a vintage appeal, though it was only seventeen years old. The elderly couple that owned the house for all those years had understandably let home maintenance on the back burner towards the end of their tenure there. Though the home inspector had pointed out some of the negatives, negotiating the price was not an option, given the market conditions we were in.

Our maintenance summary over the six-year period of ownership follow:

Yard – The house was on a corner lot with a land area of around 6200 square feet. The property layout was such that a substantial yard area was committed for the curb appeal. The appeal was largely missing as the lawn had dilapidated to a patchy spread and the garden area immediate to the house had stumpy bushes from the ‘80’s and a dwarf Japanese maple tree. The back yard had several fully-grown mature trees – mostly from the pine and holly family, an empty vegetable patch, a semblance of a lawn, and a Japanese rock garden corner complete with a concrete pedestal lamp all swathed in layers of ivy. The fences had almost doubled up under the ivy in full vigor. The family room opened to a concrete patio area. The previous owners had taken privacy to verdant heights – not even the windows were spared. Being no green thumbs we contracted to get the backyard cleared for around $1K.

As we were not into puttering around the yard, only low maintenance options were in our radar and below are the ways we achieved it:

The front-yard had an L-shaped lawn with a tree in the middle. There was no escaping the drudgery of mowing the lawn on a weekly basis except during winter. The condition of the lawn at the time we took ownership was so poor that we attempted various tricks of the trade - aerating, winterizing, sowing seeds, fertilizing, etc. These items were only a few dollars apiece and the lawn could not show any worse for our experimenting. Ultimately, when it came time to sell the house, we chose to avail of our agent’s service and laid down a new lawn in the front and back. That service came to around $1500.
Power washing the front of the garage, patio area, and the atrium immediately gave a face-lift to the house. This was done twice – the first immediately following our move-in and the second before selling. In general, this is a good investment as costs are nominal.
The house was a zero-lot one with our sidewalls acting as the boundary wall for our neighbor. The fence on that side was set back for curb appeal which had dwindled down to bushes over time. At our neighbor’s initiative, we decided to move the fence on that side to the front. A win-win for all – our neighbor suddenly had his yard space and we had only the small box area next to the brand new fence to maintain.
Periodically, we purchased plants, mulch, pots, and such from Home Depot to spruce up the yard. Regular trips to your local home improvement store are standard fare for most home owners and we were not exempt.

With the yard, it is hard to come up with an accurate home maintenance schedule – only ad hoc basis worked for us.

Fence – We replaced the original fencing, which had withered down to beyond repair on both the side and the back. The pricing was around $20 per linear foot. The linear footage for the side-yard was around 150 while the shared back yard was another 100; this improvement set us back $4K. With some peer advice, those savvy with the saw can save a considerable amount in this quarter. While standard 6-foot redwood fences can hold their ground for anywhere between 10 and 15 years based on the type of soil and other factors, for home maintenance scheduling it is reasonable to plan for replacement after twelve years.

Roof, siding, outside painting, gutters, etc. – Roofing and siding companies offer warranties that run upwards of 25 years. The warranty period generally acts as the guideline for scheduling home maintenance, including the roof replacement. Nonetheless, for the 17-year old house we purchased, the home inspector could only grudgingly give the roof two more years of life. The inspection report pointed out several places with siding damage and a number of wooden planks with water damage. Replacing the roof is fairly expensive and our cost for replacement came to around $12K for composite-shingle roofing with a thirty-year warranty. Steel roofing boasts the best warranty in the business (fifty years or so), but is on the expensive side – still, as they endure fire and storm better, they are the better alternative in areas prone to those factors.

Twelve years is a good stretch for the exterior painting and will work well for home maintenance scheduling. Exterior painting contractors also handle limited siding and water damage work as part of their job. The best quote that came our way for these maintenance works was a combination offer that included upgrading windows and patio doors to be double paned. The expense for the painting and siding work portion came to around $3.5K. The HOA’s update their palette every so often that it is worth the time and effort to check their latest color choices before embarking on a painting adventure. For what it is worth, a contemporary coat will greatly enhance the overall appeal of the house.

Unless extended warranty coverage or home warranty coverage is availed for appliances and other electrical equipments in the house, chances are that periodical maintenance costs for the dishwasher, refrigerator, washer, dryer, water heater, furnace, miscellaneous plumbing, and electrical work will be the norm. Even with insurance, there is no getting away from sporadic expenses that arise from the warranty coverage exclusions - faucets and fixtures lead that list. From our experience, such expenses can easily add up to between $500 and $2K, depending on the age of the appliances and other factors.

As can be seen from the varied expenses above, it is tough to plan accurately for these expenses. The better option is to aside an estimated ballpark figure.

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Last Updated: 03/2012.

Mortgage Refinancing Decision – How to

Saving money drove our mortgage refinancing decision, which is, but one from a myriad of reasons for refinancing. Some common ones are:

Save Money.
Reduce Interest Rate.
Reduce monthly payment – sometimes even with a higher interest rate, refinancing could reduce the monthly payment, if the loan is spread over a longer term as compared to the old one.
Reduce or Increase Risk – Refinancing from a 30-year fixed to an ARM mortgage increases risk while the other way around reduces risk.
Changing the type of mortgage – Refinancing from a 30-year fixed to a 15-year fixed or vice-versa.
Cash Withdrawal – This increases the outstanding loan balance and could increase the monthly payment as well. They are a good option if there is equity tied up in the house and cash is required - the option allows for a comparatively low-cost loan. This is fine as long as it is understood that a part of the house is essentially given away as collateral for the cash taken out.
Consolidating other debt – again, the downside is that the collateral is your house.

The benefit reaped from refinancing is directly dependent on the motive and for most of the reasons cited above, it is an easy decision. On the other hand, refinancing to save money is not a straightforward decision.

Mortgage refinancing for saving money is hard to quantify given the number of variables involved. The mortgage industry has a Rolodex of guidelines to help arrive at the mortgage refinancing decision, which is counterproductive for the most part:

A popular ploy among lenders is to float a figure in the range of 1-2% as a threshold – largely flawed for such a simple formula is accurate only for a small minority.
Another familiar industry tactic is the calculation that focuses solely on the time required to recoup closing costs and endorse refinancing if ownership of the house is expected to surpass the duration required to recoup the closing costs. The obvious, but overlooked faux pas with this approach is that it down plays to insignificant the effect of extending the mortgage era – refinancing a 30-year mortgage for a lower interest rate after 5 years results in a new 30 year mortgage essentially adding five more years of mortgage.

Although the calculations can be complex, there are ways to make an informed mortgage refinancing decision. One way is to add closing costs back into the loan amount and determine the point at which the loan balances overlap for the old mortgage compared to the new one. Below is a sample spreadsheet showing this calculation:

The spreadsheet indicates that it makes sense to refinance if you plan to stay in the house for six years or more. Another way involves determining the present value of the costs involved in a refinancing decision:

Closing costs
The net present value (NPV) of future cash flows for the difference in the remaining mortgage period. The NPV formula needs a discount rate which makes this value variable depending on your assumptions.

Once the present values of the costs are determined, in the amortization table for the new mortgage, determine the point at which the savings from each monthly bill payment add up to the present value. The sample spreadsheet below shows this calculation:

The spreadsheet indicates that it makes sense to refinance if you plan to stay in the house for six years or more. The former method is more intuitive and gives you an exact time period. The latter method allows for a little bit more flexibility (discount rate adjustments).

Be extremely wary of these two potentially huge pitfalls when making the mortgage refinancing decision:

Recourse vs non-Recourse Debt: Some states have a non-recourse provision whereby the bank cannot come after one’s other assets, should one decide to walk away from the home. In such states, most first mortgages are classified as non-recourse while refinanced mortgages are recourse. Should there be a chance that walking away is a possibility, then it might makes sense to not refinance at all, even at the cost of higher monthly payments.
Prepayment Penalty: Many loans come with the dreaded prepayment penalty whereby the bank can collect a huge fee, if the loan is prepaid. This can be a huge deterrent when it comes time to refinance. The only way to avoid this situation is to ask and ensure that the loans do not have this penalty clause.

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Last Updated: 04/2016.

Home Ownership Experience in the Bay Area - Lessons Learned

The seven years of owning two different homes in the turbulent Bay Area real-estate market have clued us into various key points as far as home ownership:

Location, Location, Location: This oft-repeated home ownership rhetoric has spared none on the quest for an abode. But there is more to this adage than choosing a residence based on school district, proximity to work places, view, and the average value of properties in the neighborhood. In a rapidly rising market, as in the early 2000 Bay Area’s bubble period, home ownership in new constructions in the suburbs provided the gold fever as opposed to well-established and comparatively more expensive neighborhoods nearer to the city. The graph below from zillow compares the home prices of two such neighborhoods – Alameda and Brentwood:

For the five years from September 2000 to September 2005, when home prices only knew the upward tick, the total appreciation of an average home in the Brentwood area recorded an astounding 125% while those in Alameda stood at a moderate but still handsome 65%. The trend took an about-turn during the 2005 to 2010 period when the bubble popped – average home price in the Brentwood area nose-dived to 50% while in Alameda took a more palatable 15% drop. As the average time of ownership of a home is around 5-6 years, it is worthwhile to mull over market conditions also than employing location as the sole criteria. Overall, for the 10-year period, the appreciation for an average home in Brentwood stood at just 8% while for Alameda it was closer to 40% - stressing location makes perfect sense when a home is purchased for the very long term.

Timing: Conventional wisdom perceives low interest rates as the prime time for home ownership. Factually, this is counter-productive and favors only the minority that intends to hold the home forever. The average homeowner can profit more by going for home ownership when the interest rates have peaked and is on the downward trend . This notion is based on the economist’s pet supply vs. demand theory. When interest rates are low, housing is more affordable which translates to higher demand, which in turn pushes home prices higher. By the same token, when the rates march higher, properties become less affordable reducing demand and home values, thereby allowing a prospective homeowner to enter at a lower price.

Buyers and Sellers Agents: While most residential real estate transactions involve both buyers and sellers agents, it is not uncommon to see listings bypassing an agent completely. The seller profits by not having to part with the agent’s commission, which is typically 5% of the money realized. The buyer’s assumption is that the costs would be lower sans an agent. The growing number of properties in the market availing of support systems (helpusell.com and other such businesses) in place of individual agents is a testimony to this perception. In our home ownership experience, going with a real-estate agent and specifically the best available wins handily, regardless of the market conditions. The only caveat is the type of agent – ideally, one should employ agents who specialize as either a buyer’s agent or a seller’s agent. In some markets, agents specializing this way are not an available option. If so, it is imperative to steer clear of the double-ending traps: when a popular agent has many listings and also many clients wanting to buy a house, it is inevitable that the agent will try to convince one of his clients into buying one of his own listings. More often than not, the parties involved are unaware of such connections, unless they specifically ask and/or read what they sign off. The downside with such deals is that the agent has a vested interest in double-ending the transaction.

The best agents in an area often have a team of support services that can alleviate the potentially stressful aspects of buying/selling a home such as renting back and relocation.It is important to be aware that there are other agents who do such real estate related transaction tasks such as appraisal, home inspection, insurance, title, etc. Their involvement is relatively transparent to both the buyer and the seller, especially if you have opted for the services of a better real-estate agent.

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Last Updated: 03/2012.

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Good Faith Estimate and Settlement Statements - An Introduction for Home Buyers

Taxes, Laws & Regulations - A Primer for New Homeowners

Home Maintenance Schedule – A Primer with a focus on costs

Mortgage Refinancing Decision – How to

Home Ownership Experience in the Bay Area - Lessons Learned

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