Documenting loan transactions

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HUD-1For over 35 years, since the implementation of the Real Estate Settlement Procedures Act of 1974, real estate transactions that used borrowed funds have been documented with a something we have come to affectionately call the “HUD-1.” This multiple page document summarizes the entire transaction into a series of numbers that show how much the buyer and seller paid and received in order to close the deal. It boils it all down to dollars and cents.

The HUD-1 came into being because the government found a need to standardize the reporting of the charges and credits so that it was always clear exactly what happened. The HUD-1, and the Real Estate Settlement Procedures Act (RESPA), came about in an attempt to fight confusing (at best) or illegal and unethical (at worst) lending practices. Every part of the transaction that could be stated monetarily had to be on the HUD-1, and it had to be accurate. The penalties are pretty stiff, and include jail time when the situation warrants.

This document was used, unchanged, until 2010. In that year, we started adding the Good Faith Estimate. If you’ve ever applied for a mortgage loan, you’ve seen a Good Faith Estimate (GFE) — or you should have. It’s also part of RESPA, and requires that — within three days of loan application — the lender must make, in good faith, an estimate of the borrower’s closing costs. That’s all it was until 2010: an estimate. There was no accountability.

Most lenders made an attempt to be reasonably accurate. Let’s face it, the good ones didn’t want to have a reputation for completely misstating the closing costs. Borrowers were relying on having a pretty good idea on how much they were going to need to bring to closing. Unfortunately, there were some sloppy lenders around who played fast and loose with the rules, so in the 2010 revision to the HUD-1, the Good Faith Estimate was added. The lender-determined charges — those that the borrower could not “shop around” for — had to be within 10% of their estimates, or they were adjusted. To me, that revision to the HUD-1 was fair.

Now, for 2014, the HUD-1 will be revised again, for only the second time in 40 years. This coming revision to the HUD-1 is going to be mostly formatting, but it makes the whole thing look very different, and some information is being added that I’m afraid is going to make it quite confusing until everyone gets used to the new format.

First of all, it’s no longer going to be called the “HUD-1.” The HUD-1 will now be officially called the “Closing Disclosure.” I’ll hazard a guess, though, that for a few years at least it will continue to be called the HUD-1.

One thing that is being added to the HUD-1 — er, excuse me, the Closing Disclosure — is something called the Total Interest Percentage (TIP). This is being added to the Good Faith Estimate also, which is being renamed to “Loan Estimate.” The TIP will show “the total amount of interest that you will pay over the loan term as a percentage of your loan amount.” I’m going to go out on a limb here and say that when this figure first hits the streets, it will cause people to nearly faint. First of all, it’s a figure that has never been presented to borrowers before. They just won’t have a feel for what’s reasonable. Secondly, the number will just flat-out seem outrageous until borrowers learn to really carefully shop for loans.

In the example that was shown to me, a 30-year fixed-rate conventional loan of $162,000 with an interest rate of 3.875% (4.441% APR) results in a Total Interest Percentage (TIP) of 69.468%.

cough, cough

That’s going to take some explaining.

Let me know what you need from me.

With warmest regards,





Randall Brennan, REALTOR

Certified Distressed Property Expert
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