- The Washington Times - Thursday, January 6, 2005

Making an offer for a home and waiting for it to be rejected or accepted can be the most stressful part of the home-buying process, but perhaps the next-scariest experience, especially for the novice buyer or seller, is settlement day.

Signing stacks of paperwork covered in legalese can be intimidating for anyone, but buyers and sellers who have been briefed by their Realtors, lenders and settlement agents should be more comfortable with the process.

“By the time the borrower walks in the door to the settlement, there shouldn’t be a lot of new things coming up,” says Paul Leighton, a settlement agent with Settlement Solutions in Manassas.

“Borrowers should see what’s called a good-faith estimate from their lender in advance of the closing,” he says, “and should have gone over this estimate of the closing costs and fees involved, so that there shouldn’t be too many questions.”

Though buyers and sellers might feel more at ease if they could view their actual paperwork in advance of the closing date, this rarely happens. Consumers need to rely on their Realtors, lenders and settlement agents — asking questions throughout the process — to make certain they understand what they are signing.

“In a perfect world, all the documents would be ready ahead of time so that people could review them at their leisure,” says Jim Savitz, a real estate attorney with Village Settlements in Gaithersburg. “But in the real world, documents often don’t arrive until the day of the settlement.”

The key to a smooth settlement is preparation. Sellers need to arrive with anything required under the contract; all the keys to the home, including keys to sheds, garages and mailboxes; and photo identification.

Buyers need to bring photo identification and money, either as certified funds, a cashier’s check or an arrangement to have the funds wired.

If a paid receipt and copy of their homeowner’s insurance has not been provided to their settlement agent or lender before the closing, buyers must also bring this to the settlement.

Resolving any disputes or concerns before closing is crucial, particularly if anything arises at the final pre-settlement walk-through by the buyer.

Any concerns about the condition of the property being purchased or which items convey to the buyer should be resolved before the settlement, if possible.

“Before we start to go over the documents that need to be signed, I make sure there are no walk-through issues,” says Vince Keegan, an attorney with Keegan & Sotelo in Fairfax. “If there is any confusion about anything related to the walk-through inspection, we discuss what the issues are and how to resolve them.”

“Once those issues have been resolved to everyone’s satisfaction, we can do the documents,” Mr. Keegan says. “The most important thing is to try to resolve any issues before settlement. It can be emotional sitting at the table with moving vans lined up, trying to settle a dispute. Everything goes smoother if dealt with in advance.”

Most settlements begin with the HUD-1 Settlement Statement, which sets forth all the costs and expenses of the settlement for both the buyer and the seller.

“Since the buyers typically have a lot more documents to sign, I try to go over the paperwork for the seller first so they can leave,” Mr. Keegan says. “Logistically, this is just easier. We start with the HUD-1 statement and go through it line by line with both the seller and the buyer, then have them each sign it and collect the money from each.”

Sellers will need to sign the HUD-1 statement, which lists the sales price of the property, the closing fees they must pay, the pay-off of their existing mortgage and the money they will receive after those items are paid.

Page two of the HUD-1 statement documents the amount of each fee to be paid by the buyers and sellers.

Sellers normally pay a commission to the real estate agents, a closing fee for preparing documents and conducting the settlement, and government recording and transfer fees.

“There are several categories of settlement fees paid by the buyer, including charges from the lender, which include loan origination fees, document and underwriting fees, an appraisal fee, a credit-report fee and an underwriting/processing fee,” Mr. Leighton says. “Prepaid items on the settlement report include interest charges on the mortgage from the closing to the end of the month. An escrow account is normally established with homeowners insurance and property taxes to be held in reserve.”

Next are the title-company charges, which include fees for a title search and examination, plus title insurance. Government recording and transfer charges also are paid by the buyer, and often there are additional settlement charges for items such as a termite inspection, a survey and mailing fees.

“The red flag that buyers should look out for when they read the settlement statement is the points,” Mr. Leighton says.

“Points are not a hidden charge, but borrowers need to make sure they understand what they mean,” he says. “When you pay points, the lender is taking money upfront so you can buy down your interest rate. Sometimes people pay more in points if they have poor credit, but it’s important for borrowers to discuss the points with their lenders to make sure they understand them.”

Other fees to check against the good-faith estimate include processing fees or underwriting fees, notary fees and courier or overnight delivery fees. These are all standard charges, but if they seem excessively high, buyers should question their settlement agent to find out why.

“Consumers need to look at each group of fees to see that they are close to the good-faith estimate,” Mr. Savitz says. “They need to verify that all charges are what they were anticipating and what they were previously advised.”

The next key document to be signed by the buyer is a promissory note that states how much the buyer must pay, to whom the money must be paid, and how.

“Before signing the promissory note, buyers should make sure the loan amount is correct and that the payment amounts are as expected,” Mr. Savitz says.

Buyers also will need to sign the deed of trust, a document that gives the lender security and an interest in the property, which would allow the lender to foreclose on the property if payments are not made.

“All the owners of record need to sign the deed of trust so that they are aware of the fact that the house functions as collateral for the loan,” Mr. Leighton says.

“There are riders with the deed of trust sometimes,” he says, “especially homeowners association or condominium documents — or, if the borrowers have chosen an adjustable-rate mortgage, there will be an adjustable-rate rider which restates the terms of the loan.”

Another document borrowers must sign is the government’s truth-in-lending statement, which summarizes the features of the mortgage, including whether there is a prepayment penalty, whether it is assumable by another borrower, whether it has a fixed or adjustable rate and the annual percentage rate.

“The APR is a concept of the federal government which is meant to help consumers shop for a mortgage rate,” Mr. Leighton says. “The APR looks at fees, points and the interest rate and amortizes this over the life of the loan to produce a number which represents the lender’s true yield or actual earnings. The APR is usually not the same as the interest rate listed for the loan.”

Mr. Savitz says he often calls this statement the “truth-in-confusion statement” because it tends to confuse consumers even if they already understand the terms of their loan.

After the HUD-1 settlement statement, the promissory note, the deed of trust and the truth-in-lending statement are all signed, buyers will be required to sign a number of additional documents.

“Buyers re-sign their loan application and various other documents, and they need to present to the settlement agent a paid receipt and copy of their homeowner’s insurance,” Mr. Keegan says.

A series of government disclosure documents also must be signed, including those that ensure that consumers understand they have a right to a copy of the property appraisal, instructions on how to complain if they have been discriminated against, a declaration that the buyer will be occupying the property and a declaration that the correct mailing address for the owners will be the property.

“The lender documents which must be signed are mostly documents acknowledging the loan requirements, plus Patriot Act documents proving the buyers’ identities and Social Security numbers,” Mr. Savitz says. “As long as you are honest, once you get to the settlement table, there should be nothing to worry about. As I like to say, ‘It’s only a problem if it’s a problem.’ ”

There are slight differences among Maryland, Virginia and the District in the transfer and recording fees at settlement, but aside from those local recording documents, the forms used at the majority of settlements are used generically throughout the country.

Settlement agents can provide samples of these documents to consumers when they deliver the good-faith estimate.

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