Before you close on a mortgage, you’ll need to make sure the final costs of the loan are in line with the estimates you were given when you applied. That’s where the settlement statement comes in.
A HUD-1, also called a settlement statement, is a 3-page form that shows you your actual closing costs when you sign your loan papers and finalize your mortgage.
The U.S. Department of Housing and Urban Development’s line-by-line itemization of costs allows you to see exactly where your money is going when you close on a mortgage. It’s used both for home purchases and refinances.
Page 1 shows what type of mortgage you’re taking out and how much money you’re borrowing.
If you’re buying a home (as opposed to refinancing), the settlement statement will show the purchase price, the gross amount due to the seller and any funds the seller is contributing toward your purchase, such as closing costs or money for home repairs.
The settlement statement also will show how much you deposited as earnest money when you entered the purchase agreement. Seller contributions and your initial deposit reduce the total cash you must bring to the closing table.
Page 2 shows the fee the lender is charging you for the service of arranging your mortgage financing (the origination fee) and any points you’ve chosen to pay to lower your interest rate. It also shows the fees you paid to have the home appraised and for the lender to pull your credit report.
You’ll also see how much the lender requires you to pay in advance toward your homeowners insurance (probably the annual premium), the daily interest charges on your mortgage (unless your loan closes on the last day of the month), and any mortgage insurance premiums (if you’re required to pay them).
If your loan requires an escrow account through which your lender collects your tax and insurance payments on a monthly basis and then remits them on your behalf, the settlement statement shows how much you have to deposit into this account.
The next sections show how much you’re paying for title insurance, the transaction fees your local government charges to record your deed and mortgage and to transfer the property’s ownership, and any additional settlement charges the lender requires you to pay.
Page 3 allows you to compare your final closing costs with the closing cost estimate your lender gave you when you began the mortgage process. Those approximate costs appear on your good faith estimate (GFE). By comparing your GFE to your settlement statement at closing, you can make sure your lender is honoring its initial offer.
Lenders are not allowed to change the origination fees or points they promise you up front.
Use our calculator, What costs are included in my mortgage APR?, to see the relationship between lender fees, your quoted interest rate and your quoted APR.
Finally, the settlement statement spells out the key terms of your mortgage: how much you’re borrowing, how long you’re borrowing it for, your interest rate, and your initial monthly payment.
It tells you whether your interest rate can change and, if so, by how much and how often. It shows whether your loan balance can rise, whether your loan has a prepayment penalty and whether your loan has a balloon payment.
(Unless you’re a sophisticated borrower, we hope the answer to these three questions is “no.” If you are a sophisticated borrower, try our Convertible Balloon Mortgage Calculator to work out how much your balloon payment should be.)
The final section shows how much you’ll pay into your escrow account each month for taxes and insurance.