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Table of Contents

I. Introduction

Purchasing Time-line

II. Before You Buy

Are You Ready to be a Homeowner?

III. Determining What You Can Afford

IV. Shopping for a House

Role of the Real Estate Broker

Selecting an Attorney

Terms of the Sales Agreement

Affiliated Businesses

Builder

 V. Shopping for a Loan

Loan Originator

Types of Loans and Programs

 VI. Good Faith Estimate (GFE)

Page 1

Page 2

Page 3

VII. Shopping for Other Settlement Services

VIII. Your Settlement and HUD-1

Page 1

Page 2

Page 3

IX. Your Loan after Settlement

 X. Home Equity and Refinances

XI. Appendix

XII. Glossary of Terms

 Types of Mortgage Products

XIII. HUD-1 Settlement Statement

 
 3

I. Introduction

The Real Estate Settlement Procedures Act (RESPA) requires lenders and 

mortgage brokers to give you this booklet within three days of applying for a 

mortgage loan. RESPA is a federal law that helps protect consumers from unfair

practices by settlement service providers during the home-buying and loan process. 

Buying a home is an important financial decision that should be considered

carefully. This booklet will help you become familiar with the various stages of the 

home-buying process, including deciding whether you are ready to buy a home, and 

providing factors to consider in determining how much you can afford to spend. You 

will learn about the sales agreement, how to use a Good Faith Estimate to shop for 

the best loan for you, required settlement services to close your loan, and the HUD-1 

Settlement Statement that you will receive at closing. 

This booklet will help you become familiar with how interest rates, points, 

balloon payments, and prepayment penalties can affect your monthly mortgage 

payments. In addition, there is important information about your loan after 

settlement, including how to resolve loan servicing problems with your lender, and 

steps you can take to avoid foreclosure. After you have purchased your home, this 

booklet will help you indentify issues to consider before getting a home equity loan or 

refinancing your mortgage. Finally, contact information is provided to answer any 

questions you may have after reading this booklet. There is also a Glossary of Terms 

in the booklet‟s Appendix.

Using this booklet as your guide will help you avoid the pitfalls and help you 

achieve the joys of home ownership.
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II. Before You Buy 

Are You Ready to Be a Homeowner?

Buying a home is one of the most exciting events in your life and is likely to be 

the most expensive purchase that you will ever make. Before you make a 

commitment, make sure you are ready. 

Avoid the pressure to buy a home that you cannot afford. Here are some things 

to consider:

 Are you ready to be a homeowner? It is critical that you consider whether you 

have saved enough money to support a down payment in addition to your 

other debts. You must have job stability and a steady income.

 How long do you plan on living in your home? Real estate is not always an 

investment. No one can predict what will happen with your local housing 

market. If you plan to sell your home in the next few years, realize that the 

property may not increase substantially in value or may have actually lost 

value. You may ultimately owe more to pay off your mortgage than your home 

will be worth.
 5

 What is your estimated monthly payment for the home? In addition to the 

monthly payment for principal and interest, you will have to pay for taxes and 

insurance and possibly homeowner association dues. If your down payment is 

less than 20%, your lender may require that you pay the added expense for 

mortgage insurance.

 What are the other costs of owning a home? Be realistic about the costs of 

owning a home like heating and cooling and other utilities. You will generally 

need to budget for repairs and routine maintenance of your home, especially if 

you buy an older home.

 What can you afford? Be confident that you can make the monthly payments. 

Have a financial plan and make a budget. Do you have a steady source of 

reliable income to pay your mortgage should your interest rate increase in the 

future? Consider how many long-term debts you have such as car or student 

loans, as well as credit card bills. 

 Have you talked with a housing counseling agency? Housing counselors can 

be very helpful, especially for first-time home buyers. The U.S. Department of 

Housing and Urban Development (HUD) supports housing counseling agencies 

throughout the country that can provide free or low-cost advice. You can 

search online at HUD‟s web site, or you can call HUD‟s interactive voice 

system. This contact information can be found in the Appendix of this 

booklet. 

 After answering the questions above, have you determined that buying a 

house is right for you? If so, congratulations! Let‟s start shopping for a house and a 

loan.

III. Determining What You Can Afford

To determine how much you can afford, you first need to know your monthly 

income. Second, you will need to calculate your monthly expenses which may include 

credit card bills, car payments, insurance premiums and all other debts. There is a 

worksheet in the Appendix (“Determining What You Can Afford Worksheet”) 

that will help you calculate your income and expenses to help determine what you can 

afford.

Consider talking with a financial professional such as a housing counselor to 

help you determine what you can afford. Keeping your payments affordable is the 

best way to avoid foreclosure or other financial difficulties. While mortgage lenders 

will tell you how much they are willing to lend you (which is the loan amount you 

“qualify” for), you probably know your finances better than anyone, so you should 

determine how much you are willing and able to pay every month for your home.
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IV. Shopping for a House

Role of the Real Estate Agent or Broker

Frequently, the first person you consult about buying a home is a real estate 

agent or broker. Although these agents and brokers provide helpful advice, they may 

legally be representing the interests of the seller and not yours. You can ask your 

family and friends for recommendations.

It is your responsibility to search for an agent who will represent your interests

in the real estate transaction. If you want someone to represent only your 

interests, consider hiring an “exclusive buyer’s agent”, who will be working 

for you. 

Even if the real estate agent represents the seller, state laws usually require 

that you are treated fairly. If you have any questions concerning the behavior of an 

agent or broker, you should contact your State‟s Real Estate Commission or licensing 

department.

Sometimes, the real estate broker will offer to help you obtain a mortgage 

loan. He or she may also recommend that you deal with a particular lender, 

mortgage broker, title company, attorney, or settlement/closing agent. You are not 

required to follow the real estate broker‟s recommendation, and you should compare 

the costs and services offered by other providers before making a decision.

Role of an Attorney

Before you sign a sales agreement, you might consider asking an attorney to 

review it and tell you if it protects your interests. If you have already signed your 

sales agreement, you might still consider having an attorney review it.

If choosing an attorney, you should shop around and ask what services will be 

performed and whether the attorney is experienced in representing homebuyers. You 

may also wish to ask the attorney whether the attorney will represent anyone other 

than you in the transaction.

 In some areas, an attorney will act as a settlement agent to handle your 

settlement.

Terms of the Sales Agreement

Before you sign a sales agreement, here are some important points to 

consider. While the real estate broker will probably give you a preprinted form of the 

sales agreement, many terms are negotiable so you may make changes or additions 

to the agreement. The seller, however, must agree to every change you make in 

order for such changes to be incorporated into the sales agreement.

For most home buyers, the sales price is the most important term. Make sure 

you know what the sales price includes, such as appliances. Here are other important 

terms of the sales agreement: 
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 Mortgage Clause

The mortgage clause will provide whether or not your deposit will be 

refunded if the sale is cancelled should you be unable to get a mortgage loan. 

Your agreement could allow the purchase to be canceled if you cannot obtain 

mortgage financing at or below a specific interest rate or through a specific 

loan program.

 Settlement Costs

You can negotiate which settlement costs you will pay and which will be 

paid by the seller. The seller may contribute a lump sum amount or may agree 

to pay for specific items on your behalf.

 Inspections

Most buyers prefer to pay for the following inspections so that the 

inspector is working for them, not the seller. You may want to include in your 

sales agreement the ability to cancel the agreement or renegotiate the contract 

for a lower sales price or for the needed repairs if you are not satisfied with the

inspection results.

o Home Inspection: You should have the home inspected. An 

 inspection should determine the condition of the plumbing,

 heating, cooling and electrical systems. The structure should also 

be examined to assure it is sound and to determine the condition 

of the roof, siding, windows and doors. The lot should be graded 

away from the house so that water does not drain toward the

 house and into the basement. You should be present to ask 

any questions.

o Pests: Your lender may require a certificate from a qualified

inspector stating that the home is free from termites and other

pests and pest damage. Even if your lender does not require a 

pest inspection, you may want to obtain a pest inspection to 

ensure the property does not have termites or other pests.

o Lead-Based Paint Hazards: If you buy a home built before 

1978, you have certain rights concerning lead-based paint and 

lead poisoning hazards. The seller or sales agent must give you 

the EPA pamphlet “Protect Your Family From Lead in Your Home” 

(or other EPA-approved lead hazard information). The seller must 

also disclose any known lead-based paint hazards in the property 

through a Lead Warning Statement and give you any relevant 

records or reports. 

o Other Environmental Concerns: Your city or state may require

sellers to disclose known environmental hazards such as leaking 

underground oil tanks, the presence of radon or asbestos, lead 

water pipes, and other such hazards. You may want to determine 
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the environmental condition of the home for your own safety. 

You could also be financially liable for the clean-up of any 

environmental hazards. 

 Sharing of Expenses

You need to negotiate with the seller about how expenses related to the 

property such as taxes, water and sewer charges, condominium fees, 

and utility bills, are to be divided on the date of settlement. Unless you 

agree otherwise, you should only be responsible for the portion of these 

expenses owed after the date of sale.

Affiliated Businesses

When you are shopping for your home and your mortgage, a settlement 

service provider may refer you to its affiliated business. Affiliated business 

arrangements exist when several businesses are owned or controlled by a common 

corporate parent. When a lender, real estate broker, builder, or others refer you to 

an affiliated settlement service provider, RESPA requires that the referring party give 

you an Affiliated Business Arrangement Disclosure. Except under certain 

circumstances, you are generally not required to use the affiliate and are 

free to shop for other service providers. You should shop around to 

determine that you are receiving the best service and rate. 

Builders

If you are buying a newly constructed home, a builder may offer you an 

incentive or “deal” if you select its affiliated mortgage company or other settlement 

service business. You should shop and compare interest rates and other settlement 

charges before entering a contractual agreement to use these affiliated companies. 

V. Shopping for a Loan

Your choice of mortgage lender or broker, as well as type of loan itself, will 

influence your settlement costs and your monthly mortgage payment. You may find a 

listing of local lenders and mortgage brokers in the yellow pages and a listing of rates 

in your local newspaper. You may also wish to search the internet for lenders and 

brokers and their advertised rates. You can ask your family and friends about loan 

originators they have used and recommend.
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Loan Originator 

A loan originator is a lender or a mortgage broker.

o Mortgage Brokers Some companies, known as “mortgage brokers,” offer 

to find you a mortgage lender willing to make you a loan. A mortgage 

broker may operate as an independent business and may not be operating 

as your “agent” or representative. 

o Lenders A lender typically makes loans to borrowers directly. They receive 

payment through fees charged to you at settlement, payment from interest 

when you make your monthly mortgage payments and payments if they sell 

your loan or the servicing of your loan after settlement.

Note: Whether you apply for a loan with a lender or mortgage broker, you should 

receive Good Faith Estimates of settlement costs from multiple loan originators to 

make certain you get the best loan product at the lowest interest rate and lowest 

settlement costs.

Types of Loans and Programs 

Shopping for your loan is probably the most important step in your homebuying process. Mortgage brokers and lenders have a wide variety of mortgage 

products. The type of loan product and your interest rate will not only influence your 

total settlement costs but will determine the amount of your monthly mortgage 

payment. 

Government Programs

You may be eligible for a loan insured by the Federal Housing Administration 

(FHA), guaranteed by the Department of Veterans Affairs (VA) or offered by the Rural 

Housing Service (RHS). These programs usually require a smaller down payment. 

Ask your lender or mortgage broker about these programs. You should shop and 

compare quotes from different loan originators because each may offer different rates 

and loan terms.

If you are a first time homebuyer, ask your real estate agent/broker and loan 

originator about the availability of local or state programs such as reductions in 

transfer taxes, special income tax deductions or state homestead exemption 

discounts.

Types of Mortgages

Two of the most common types of mortgage loans are fixed-rate mortgages 

and adjustable rate mortgages. The interest rate on a fixed-rate mortgage will 

remain the same for the entire life of your loan while the interest rate on an 

adjustable rate mortgage (ARM) may adjust at regular intervals and may be tied to an 

economic index, such as a rate for Treasury securities. When the interest rate on an 

ARM adjusts it may cause your payment to increase. 
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Some adjustable rate mortgages allow the borrower to pay either the “interest 

only” or less than the “interest only.” In both options, none of the mortgage payment 

is applied towards the loan balance (principal). In a less than “interest only” option, 

the unpaid interest is added to your loan balance and you can owe more than the 

amount you initially borrowed. When the loan balance increases to the 

maximum amount the loan is “recast” and your loan payment may double or 

even triple. When faced with “payment shock,” you may discover too late that the 

loan payments no longer fit within your budget and that the loan is difficult to 

refinance. You may then be in danger of losing your home.

WARNING: Choosing an ARM product could affect your ability to pay your 

mortgage in the future resulting in loan default or foreclosure. You need to become 

familiar with the features of ARM products to find the one that best fits your needs. 

If you decide to obtain an ARM, consider obtaining additional information. Additional 

information may be found by contacting the Federal Reserve Board. Contact 

information is given in the Appendix to this booklet.

Taxes and Insurance

 

In addition to the principal and interest portion of your mortgage payment, you 

will have to pay property taxes and insurance to protect the property in the event of 

disaster such as a fire or flood. Based on your down payment, you may also have to 

pay mortgage insurance. Your lender may require an escrow or impound account to 

pay these items with your monthly mortgage payment. If an escrow account is not 

required, you are responsible for making these payments. 

Mortgage insurance may be required by your lender if your down payment is 

less than 20% of the purchase price. Mortgage insurance protects the lender if you 

default on your loan. You may be able to cancel mortgage insurance in the future 

based on certain criteria, such as paying down your loan balance to a certain amount. 

Before you commit to paying for mortgage insurance, find out the specific 

requirements for cancellation. Mortgage insurance should not be confused with 

mortgage life, credit life, or disability insurance that are designed to pay off a 

mortgage in the event of a borrower‟s death or disability. Your Good Faith Estimate

should not have any charges for mortgage life, credit life, or disability insurance.

Homeowner’s (hazard) insurance protects your property in the event of a 

loss such as fire. Many lenders require that you get a homeowner‟s policy before 

settlement. 

Flood insurance will be required if the house is in a flood hazard area. After 

your loan is settled, if a change in flood insurance maps brings your home within a 

flood hazard area, your lender or servicer may require you to buy flood insurance at 

that time.

VI. Good Faith Estimate (GFE)

The GFE is a three page form designed to encourage you to shop for a 

mortgage loan and settlement services so you can determine which mortgage is best 

for you. It shows the loan terms and the settlement charges you will pay if you 
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decide to go forward with the loan process and are approved for the loan. It explains 

which charges can change before your settlement and which charges must remain the 

same. It contains a shopping chart allowing you to easily compare multiple mortgage

loans and settlement costs, making it easier for you to shop for the best loan. The 

GFE may be provided by a mortgage broker or the lender. Until they give you a 

GFE loan originators are only permitted to charge you for the cost of a credit

report.

 In the loan application process, the loan originator will need your name, Social 

Security number, gross monthly income, property address, estimate of the value of 

the property, and the amount of the mortgage loan you want to determine the GFE. 

Your Social Security number is used to obtain a credit report showing your credit 

history, including past and present debts and the timeliness of repayment.

Your GFE Step-by-Step

Now let‟s go through the GFE step-by-step. The top of page 1 of the GFE shows 

the property address, your name and contact information and your loan originator‟s

contact information. 

Important Dates

The Important Dates section of the GFE includes key dates of which you should 

be aware.

 Line 1 discloses the date and time the interest rate offer is good through.

Line 2 discloses the date “All Other Settlement Charges” is good through. This 

date must be open for at least 10 business days from the date the GFE was issued to 

allow you to shop for the best loan for you.

 Line 3 discloses the interest rate lock time period, such as 30, 45 or 60 days, 

that the GFE was based on. It does not mean that your interest rate is locked. 

Line 4 discloses the number of days prior to going to settlement that you must 

lock your interest rate.

Note: “Locking in” your rate and points at the time of application or during the 

processing of your loan will keep the interest rate and points from changing until the 

rate lock period expires. 
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Summary of Your Loan

The Summary of Your Loan Terms discloses your loan amount, loan term, the 

initial interest rate and the principal, interest and mortgage insurance portion of your 

monthly mortgage payment. It also informs you if your interest rate can increase, if 

your loan balance can rise, whether your mortgage payment can rise and if there is a 

prepayment penalty or balloon payment.

In the example above, the loan amount is $200,000 which will be paid over 30 

years. The initial interest rate is 5 percent and the initial monthly mortgage payment 

is $1,173 which includes mortgage insurance, but does not include any amounts to 

pay for property taxes and homeowner‟s insurances if required by the lender.

In our example, the loan has an adjustable interest rate. Since the interest 

rate can rise, the „yes‟ box was checked, and the loan originator disclosed that the 

initial interest rate of 5 percent could rise as high as 10 percent. The first time your 

interest rate could rise is 6 months after settlement which could increase your 

payments to $1,290. Over the life of your loan your monthly payments could increase

from $1,173 to $1,842.

This example does not contain a balloon payment or a prepayment penalty. 

NOTE: A prepayment penalty is a charge that is assessed if you pay off the loan 

within a specified time period, such as three years. A balloon payment is due on a 

mortgage that usually offers a low monthly payment for an initial period of time. 

After that period of time elapses, the balance must be paid by the borrower, or the 

amount must be refinanced. You should think carefully before agreeing to these

kinds of mortgage loans. If you are unable to refinance or pay the balance of the 

loan, you could put your home at risk.
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Escrow Account Information

The GFE also includes a separate section referred to as „„Escrow account 

information,‟‟ which indicates whether or not an escrow account is required. This 

account holds funds needed to pay property taxes, homeowner‟s insurance, flood 

insurance (if required by your lender) or other property-related charges.

 

If the GFE specifies that you will have an escrow account, you will probably 

have to pay an initial amount at settlement to start the account and an additional 

amount with each month‟s regular payment. If you wish to pay your property taxes 

and insurance directly, some lenders will give you a higher interest rate or charge you 

a fee. If your lender does not require an escrow account, you must pay these 

items directly when they are due.

Summary of Your Settlement Charges

The final section on page 1 of the GFE contains the adjusted origination 

charges and the total estimated charges for other settlement services which are 

detailed on page 2. You should compare the “Total Estimated Settlement Charges” on 

several GFEs.

Page 2 of the GFE

The price of a home mortgage loan is stated in terms of an interest rate and 

settlement costs. Often, you can pay lower total settlement costs in exchange for a 

higher interest rate and vice versa. Ask your loan originator about different interest 

rates and settlement costs options.
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Your Adjusted Origination Charges, Block A

Block 1, “Our origination charge” contains the lender‟s and the mortgage 

broker‟s charges and point(s) for originating your loan. 

Block 2, “Your credit or charge point(s) for the specific interest rate chosen.”

o If box 1 is checked, the credit or charge for the interest rate is part of the 

origination charge shown in Block 1. 

o If box 2 is checked, you will pay a higher interest rate and receive a credit to 

reduce your adjusted origination charge and other settlement charges. 

o If box 3 is checked, you will be paying point(s) to reduce your interest rate and, 

therefore, will pay higher adjusted origination charges. 

Note: A point is equal to one percent of your loan amount.

After adding or subtracting Block 2 from Block 1, “Your Adjusted Origination 

Charge” is shown in Block A.

In the example shown, the origination charge is $6,750. No points were paid 

to reduce the interest rate. Instead, because of the interest rate chosen, the offer 

contains a $3,000 credit that reduces the adjusted origination charge to $3,750. 
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Your Charges for All Other Settlement Services, Blocks 3 through 11

In addition to the charges to originate your loan, there are other charges for 

services that will be required to get your mortgage. For some of the services, the 

loan originator will choose the company that performs the service (Block 3). The loan 

originator usually permits you to select the settlement service provider for “Title 

services and lender‟s title insurance” (Block 4). “Owner‟s title insurance” is also 

disclosed (Block 5). Other required services that you may shop for are included in 

“Required services that you can shop for” (Block 6). 

Block 3 contains charges for required services for which the loan originator 

selects the settlement service provider. These are not “shoppable” services and often 

include items such as the property appraisal, credit report, flood certification, tax 

service and any required mortgage insurance.

Block 4 contains the charge for title services, the Lender‟s title insurance policy

and the services of a title, settlement or escrow agent to conduct your settlement.

 

Block 5 contains the charge for an Owner‟s title insurance policy that protects 

your interests. 

 

NOTE: Under RESPA, the seller may not require you, as a condition of the sale, to 

purchase title insurance from any particular title company. 

Block 6 contains charges for required services for which you may shop for the 

provider. Some of these items may include a survey or pest inspection.
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Block 7 contains charges by governmental entities to record the deed and 

documents related to the loan. 

 

Block 8 contains charges by state and local governments for taxes related to 

the mortgage and transferring title to the property. 

 

Block 9 contains the initial amount you will pay at settlement to start the

escrow account, if required by the lender. 

Block 10 contains the charge for the daily interest on the loan from the day of 

settlement to the first day of the following month. 

Block 11 contains the annual charge for any insurance the lender requires to 

protect the property such as homeowner‟s insurance and flood insurance. 

Total Estimated Settlement Charges

“Your charges for All Other Settlement Services”, Blocks 3 through 11, are 

totaled in Block B. Blocks A and B are added together resulting in the total estimated 

settlement charges associated with getting the loan. These Blocks are carried forward 

to the bottom of page 1 of the GFE.
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Page 3 of the GFE

Page 3 of the GFE contains important instructions and information that will help 

you shop for the best loan for you.

Understanding which charges can change at settlement

There are three different categories of charges that you will pay at closing: 

charges that cannot increase at settlement; charges that cannot increase in total

more than 10%; and charges that can increase at settlement. You can use this as a 

guide to understand which charges can or cannot change. Compare your GFE to the 

actual charges listed on the HUD-1 Settlement Statement to ensure that your lender 

is not charging you more than permitted.

 Written list of settlement service providers

A written list will be given to you with your GFE that includes all settlement 

services that you are required to have, and that you are allowed to shop for. You may 

select a provider from this list or you can choose your own qualified provider. If you 

choose a name from the written list provided, that charge is within the 10% tolerance 

category. If you select your own service provider, the 10% tolerance will not apply.

Even though you may find a better deal by selecting your own provider, you 

should choose the provider carefully as those charges could increase at settlement. If 

your loan originator fails to provide a list of settlement service providers, the 10% 

tolerance automatically applies.
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Using the tradeoff table 

The “tradeoff table” on page 3 will help you understand how your loan 

payments can change if you pay more settlement charges and receive a lower interest 

rate or if you pay lower settlement charges and receive a higher interest rate.

The loan originator must complete the first column with information contained 

in the GFE. If the loan originator has the same loan product available with a higher or 

lower interest rate, the loan originator may choose to complete the remaining 

columns. If the second and third columns are not filled in, ask your loan originator if 

they have the same loan product with different interest rates. 

Using the shopping chart

 
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You can use this chart to compare similar loans offered by different loan 

originators. Fill in each column with the information shown in the “Summary of your 

loan” section from the first page of all the GFEs you receive. Compare each offer and 

select the best loan for you. 

After You Choose the Best Loan for You

After comparing several GFEs, select the best loan for you and notify 

the loan originator that you would like to proceed with the loan. Keep your 

Good Faith Estimate so you can compare it with the final settlement costs stated on 

your HUD-1 Settlement Statement. Ask the lender and settlement agent if there are 

any changes in fees between your GFE and your HUD-1 Settlement Statement. Some 

charges cannot be increased, and your lender must reimburse you if those charges 

were illegally increased.

New Home Purchases

If you are purchasing a new home that is being built or has not been built yet, 

your GFE could change. If the GFE can change, the loan originator must notify you 

that the GFE may be revised at any time up to 60 days before settlement. If you get 

a revised GFE, look at it to determine if the loan and settlement costs it discloses are

the best for you. 

Changed Circumstances

If there are changes involving your credit, the loan amount, the property value,

or other information that was relied on in issuing the original GFE, a revised GFE may 

be issued. Only the charges affected by the changed circumstance may be revised.

VII. Shopping for Other Settlement Services

 There are other settlement services that the lender will require for your loan. 

You may be able to shop for these services or you may choose providers identified on 

the written list you receive from the loan originator. If you select providers on the 

list, the charges shown on the GFE must be within the 10% tolerance. Even though 

selecting a settlement service provider that is not on the list nullifies the 10% 

tolerance, you still may be able to find a better deal by shopping and selecting a 

provider yourself. However, remember that those charges could increase at 

settlement.

Title Services and Settlement Agent

When you purchase your home, you receive “title” to the home. Certain title 

services will be required by your lender to protect against liens or claims on the 

property. Title services include the title search, examination of the title, preparation 

of a commitment to insure, conducting the settlement, and all administration and 
 20

processing services that are involved within these services. Many lenders require a 

lender‟s title insurance policy to protect against loss resulting from claims by others 

against your new home. A lender‟s title insurance policy does not protect you. 

If a title claim occurs, it can be financially devastating to an owner who is 

uninsured. If you want to protect yourself from claims by others against your 

new home, you will need an owner's policy.

To save money on title insurance, compare rates among various title insurance 

companies. If you are buying a newly constructed home, make certain your title 

insurance covers claims by contractors. These claims are known as “mechanics‟ liens” 

in some parts of the country. In many states, title insurance premium rates are filed 

with the state and may not be negotiable, but other title service related charges may 

be. Be sure to ask your title agent about any available discounts such as a reissue 

rate or a simultaneous issue discount.

 Title services also include the services of a settlement agent. Settlement 

practices vary from locality to locality, and even within the same county or city. 

Depending on the locality, settlements may be conducted by lenders, title insurance 

companies, escrow companies or attorneys for the buyer or seller. In some parts of 

the country, a settlement may be conducted by an escrow agent. Unlike other types 

of settlement, the parties may not meet around a table to sign documents. Ask how 

your settlement will be handled.

Survey

 Lenders or title insurance companies may require a survey to disclose the 

location of the property. The survey is a drawing of the property showing the location 

of the house and other improvements on the property. You may be able to avoid the 

cost of a new survey if you determine the company who previously surveyed the 

property and request an update. Check with your lender and title insurance company 

on whether an updated survey is acceptable.

Homeowner’s Insurance

As a condition to settle, many lenders will require that you procure 

homeowner‟s insurance, flood insurance or other hazard insurance to protect the 

property from loss. Don‟t forget to shop for the best rates.
 21

VIII. Your Settlement and HUD-1

You have determined what you can afford, found the right house and shopped 

for the best loan for you. After all the hard work, it is time to go to settlement, but 

don‟t forget to bring your GFE to compare with the charges listed on the HUD-1

Settlement Statement. It is a good idea to review your HUD-1 before your settlement. 

Let your settlement agent and lender know that you want to receive a completed 

HUD-1 at least one day prior to your settlement.

Settlement

 Your settlement may be conducted by your lender or your title insurance 

company, an escrow company, your attorney or the seller‟s attorney. Regardless of 

who performs the settlement, there will be many important documents that you will 

need to sign. Make sure you carefully read and understand all the documents before 

you sign them. Do not be afraid to ask the lender any questions you have about your 

loan documents.

 HUD-1 Settlement Statement

The HUD-1 Settlement Statement (HUD-1) is a form that lists all charges and 

credits to the borrower and seller in a transaction. You have the right under RESPA to 

inspect the HUD-1 Settlement Statement before settlement occurs. When you receive 

a copy of the HUD-1, compare it to your GFE. Ask the lender questions about any 

changes in fees between your GFE and the HUD-1. Your lender must reimburse you if 

a closing cost tolerance was violated.
 22

100 – 300 Series, Summary of Borrower’s Transactions

The first page of the HUD-1 summarizes all of the charges and credits to the 

buyer and seller. 

Line 101 is the contract sales price. 

Line 103 is the total settlement

charges from page 2. 

Lines 106 to 112 lists items you

are reimbursing the seller for 

that were already paid for by 

the seller, such as property taxes 

or homeowner association dues.

Line 120 is the total of the 100

.series section and is the total 

amount you owe.

Lines 200 to 209 contain credits 

for items paid by you, such as the 

earnest money deposit and other 

credits from the seller and other

parties.

Lines 210 to 219 are credits

from the seller for items owed by 

the seller that are due after

settlement.

Line 220 is the total of all credits 

from Lines 201 to 219. Subtract

the amount on Line 220 from the 

amount on Line 120.

Line 303 is the amount you 

must bring to settlement or the 

amount you will receive.
 23

700 Series, Total Real Estate Broker Fees

This section of the settlement statement shows the commissions paid to the 

real estate agents. There are no corresponding lines on the GFE because the lender 

does not require this service before you get your loan.

800 Series, Items Payable in Connection with Loan

Line 801, “Our origination charge,” lists the lender‟s and mortgage broker‟s 

charge for getting you the loan and references GFE Block 1. In this example, Line 

801 designates an origination point of $2,000 for possible tax deductibility.

Line 802 lists either the charge for the interest rate (points) or a credit and 

references GFE Block 2. 

Line 803 lists “Your adjusted origination charges.” This amount is the sum of 

Lines 801 and 802 and references Block A on the GFE. 

Line 804 is the charge for the appraisal report prepared by an appraiser. 

Line 805 is the fee for a credit report showing your credit history. 

Line 806 is the fee paid to a tax service provider for information on the real 

estate property taxes. 

Line 807 is the fee paid to the service providing information on whether the 

property is in a flood zone. 
 24

Lines 804, 805, 806 and 807 usually reference GFE Block 3. 

Lines 808 and any additional lines are used to list other third party services 

required by your lender, including FHA or VA fees.

900 Series, Items Required by Lender to be Paid in Advance

These are charges which the lender requires to be prepaid at settlement. 

 

Line 901 lists the daily interest charges collected for the period between the 

date of your settlement and the first day of the next month. This charge is disclosed 

in Block 10 of your GFE. In this example, the loan closed on 1/31/10, and the 

interest on the GFE was calculated with a 1/31/10 closing date so the charges are the 

same on both. This amount on Line 901 may differ from the amount on the GFE if the 

settlement date changes. 

Line 902 lists the charge for any up-front mortgage insurance premium 

payment due at settlement. This is one of the charges disclosed in GFE Block 3 of 

your GFE. In this example, there is no payment due. 

Line 903 is the charge for the homeowner‟s insurance policy and is one of the 

charges disclosed in Block 11 of your GFE. In the example, the homeowner‟s 

insurance was paid prior to the day of settlement so the charge is listed as “P.O.C. by 

borrower”. P.O.C. stands for “Paid Outside of Closing”. You typically have to bring a 

pre-paid insurance policy to your settlement.
 25

1000 Series, Reserves Deposited with Lender

This series of the HUD-1 lists the amounts collected by the lender to be placed 

in your escrow account for future payments of items such as homeowner‟s insurance, 

mortgage insurance and property taxes. Line 1007 is an adjustment to make sure 

lenders are only collecting the maximum amount allowed by law. In this example, 

even though the first year‟s homeowner‟s insurance premium has already been paid, 

the lender has started escrowing money to pay the next bill.

1100 Series, Title Charges

Line 1101 lists the charge for all title services and the lender‟s title insurance 

policy. Title services includes any service involved with providing title insurance, such 

as title examination, preparing the title commitment, clearing the title to the property, 

preparing and issuing the title policies and conducting the settlement. These charges 

correspond to GFE Block 4. 

Line 1102 is the amount of the settlement or closing fee if performed by a 

company different from the one providing title insurance. This charge is part of the 

charge listed in Line 1101. 

Line 1103 lists the charge for the Owner‟s title insurance policy, if you decided 

to buy one. It corresponds to Block 5 of the GFE.

Line 1104 lists the charge for the Lender‟s title insurance policy which is part of 

the charge listed in Line 1101. 
 26

Line 1105 is the Lender‟s title policy limit. It often is lower than the value of the 

property because it only covers the amount of your lender‟s lien on your property.

Line 1106 lists the Owner‟s title policy limit. The liability limit of the owner's 

policy is typically the purchase price paid for the property.

Line 1107 lists the portion of the title insurance premiums retained by the title 

insurance agent.

Line 1108 lists the portion of the title insurance premiums retained by the 

underwriter. 

1200 Series, Government Recording and Transfer Charges

Government recording charges listed in the 1200 series on the HUD-1 are 

charges paid to state and local governmental agencies to record important documents 

such as the deed and mortgage or deed of trust and transfer taxes to legally transfer 

property.

Line 1201 lists all government recording charges and corresponds to Block 7 of 

your GFE. This represents the cumulative amount the borrower is paying for 

government recording charges. 

Line 1202 itemizes specific recording charges for the deed, the mortgage, and 

any releases of prior liens against your property shown in Line 1201. When the seller

pays for an item, such as a release, the charge is listed in the seller‟s column.

In this example, the borrower is paying $50.00 of the recording charges, and 

the seller is paying $15.00. The total paid for the government recording charges was 

$65.00 (borrower $50.00 / seller $15.00).

Line 1203 lists the charge for transfer taxes. Transfer taxes are charged by 

state or local government to transfer real property or place a new lien (mortgage or 

deed of trust) on a property. This charge is listed in Block 8 of your GFE.

Lines 1204 and 1205 itemize the charges for transfer taxes listed in Line 1203. 
 27

Line 1206 can be used to list additional items related to recording or transfer 

charges.

In our example, the government recording charge that appeared in block 7 of 

the GFE was $50.00 which is illustrated in the column on line 1201 on the HUD-1. 

Series 1300, Additional Settlement Charges

Line 1301 is the total of lender required services for which you chose the 

provider (other than title services). These services are itemized in the lines below 

1301. These charges are listed in Block 6 of your GFE.

In addition to services the loan originator required there may be additional 

services that you chose. In our example, Line 1304 lists a homeowner‟s warranty to 

provide protection for your home‟s mechanical systems and appliances. A charge for a 

pest inspection or survey will appear as a line item in the 1300 series of the HUD-1, if 

the borrower elected to obtain an inspection or survey that was not a condition of the 

loan or required by the lender.

Line 1400 is the total of all charges listed in page 2 on the HUD-1 for the seller 

and you, the buyer. These totals are also listed on page 1 of the HUD-1. Your 

charges appear in Section J, Summary of the Borrower‟s Transaction, on Line 103. 

The seller‟s charges are listed in Section J, Summary of Seller‟s Transaction, on Line 

502.

Page 3 of the HUD-1

The third page of the HUD-1 is made up of two sections: the Comparison Chart 

and the Loan Terms. The Comparison Chart will help you compare the charges 

disclosed on your GFE and the actual charges listed on page 2 of the HUD-1. The 

Loan Terms section can assure you that the loan you applied for is the loan you 

received at settlement. This section should compare with the “Summary of Your 

Loan” on page 1 of the GFE. 
 28

Comparison Chart

There are three categories in the Comparison Chart: charges that could not 

increase at settlement, charges that in total could not increase more than 10% and 

charges that could change. Compare the charges listed in the GFE column with the 

charges in the HUD-1 column. If the charges that cannot increase have increased or 

the total of the charges that cannot increase more than 10% have exceeded the 10% 

increase limit, the lender must reimburse you at settlement or within thirty (30) days 

after settlement.

In the example above, the “Charges That In Total Cannot Increase More Than 

10%” were only increased by $70 or 4% and did not exceed the 10% tolerance. For 

the category “Charges That Can Change” in this example the borrower selected a pest 

inspection and survey provider that were not on the written list.
 29

Loan Terms

The last section on the HUD-1 clearly sets forth the terms of your loan, 

including the loan amount, your interest rate and your monthly payments. It will also 

disclose the monthly escrow payment account information. It lets you know whether 

your interest rate, your loan balance or your monthly payments can increase and 

whether your loan has a prepayment penalty or a balloon payment. Look at this 

information carefully and make sure that you are getting the loan and the terms that 

were set forth in your GFE. If the loan terms do not match the loan terms on 

your GFE or if you have questions, contact your lender before signing any 

documents. 
 30

IX. Your Loan after Settlement

After settlement, RESPA requires that lenders give you disclosures concerning 

the servicing of your loan and any escrow account. RESPA also gives you certain 

protections in regard to the timely payment of your taxes and insurance. 

Servicing and Escrow Disclosure Statements 

The company that collects your mortgage payments is your loan servicer. This 

may not be your lender. When you apply for your loan or within three business days, 

RESPA requires that your lender or mortgage broker tell you in writing whether 

someone else may be servicing your loan. After your settlement, if your loan servicer 

transfers the servicing of your loan to a new servicer, RESPA requires that you be

notified in writing at least fifteen (15) days before the transfer. The notice must tell 

you when the transfer is effective and when you will begin making payments to the 

new servicer. The notice letter must also give you the contact information for the 

new servicer as well as other important information about the servicing of your loan.

If your loan requires an escrow account, the servicer of your loan must give 

you an initial escrow account statement at your settlement or within the following 

forty-five (45) days. That form will show all of the payments which are expected to 

be deposited into your escrow account and all of the disbursements which are 

expected to be paid from the escrow account during the year. Your servicer will 

review your escrow account annually and send you a disclosure each year which 

shows the prior year‟s activity and any adjustments necessary in the escrow 

payments that need to be made in the upcoming year. You will not receive this yearly 

disclosure if your loan is in default. Remember that your monthly payment can 

increase if your taxes or insurance payments increase.

Servicing Errors

If you have a question any time during the life of your loan, RESPA requires 

the company collecting your loan payments (your “servicer”) to respond to you. 

Write to your servicer and call it a “qualified written request under Section 6 of 

RESPA.” A “qualified written request” (QWR) should be a separate letter and not 

mailed with the payment coupon. Describe the problem and include your name and 

account number. The servicer must investigate and make appropriate corrections 

within 60 business days.

Complaints

RESPA provides you with certain consumer protections during the loan 

process and during the servicing of your loan after settlement. If your lender 

charged you more than the allowable tolerances at settlement and failed to 

reimburse you; if you are aware that one of your settlement service providers paid 

or received a fee or kickback for referring business to someone; if you were 
 31

required to use a company that was affiliated with your real estate agent, builder, 

or loan originator, if your loan servicer fails to timely pay your taxes and insurance 

premiums; or if your loan servicer does not respond to a QWR about the servicing 

of your loan, you may wish to file a complaint with HUD‟s Office of RESPA. You 

should describe what you believe to be a violation and identify each violator by 

name, address and phone number. You should also include your own contact 

information for any follow-up questions. You can find out how to file a complaint at 

the RESPA website or by contacting the RESPA Office. The address is located in the 

Appendix. 

 

Avoiding Foreclosure

Once you move into your new home, you will want to make sure that you do 

nothing that could threaten you with the loss of your home. Make all payments on 

time. If you are having a dispute with the servicer, do not stop making your full 

payment each month. Consider carefully before putting another mortgage or lien on 

your home.

If you do not make your monthly mortgage payments, you will be in default on 

your loan. Foreclosure is a legal process in which a mortgaged property is sold to pay 

off the defaulted loan. If you find yourself facing foreclosure, there are steps that you 

should take. Contact your lender and be prepared to provide financial information. 

There may be a workout plan available to help you keep your home. There are also 

HUD-approved housing counseling agencies that are available to provide you 

information on and assistance in avoiding foreclosure. HUD‟s web site provides 

homeowners this information as well as other guidance in its “Guide to Avoiding 

Foreclosure” which can be found at http://www.hud.gov/foreclosure/. 

Beware of scams! Watch out for equity skimming when a buyer offers to repay 

the mortgage or sell the property if you sign over the deed and move out. Be aware 

that there are phony counseling agencies that charge you a fee for the same services 

you can usually receive at no charge. Be sure to use only HUD-approved counseling 

agencies. Most importantly, NEVER sign anything that you have not read or do not 

understand.

X. Home Equity and Refinances 

Home Equity Loan/Line of Credit

As you make payments on your mortgage loan or make improvements to your 

property, or if property values in your neighborhood increase, the equity in your home 

may increase. Home equity is the difference between your home‟s fair market value 

and the outstanding balances of all the loans and other liens on your property.

If you have equity in your property, you may be able to use it as collateral for a 

home equity loan or a home equity line of credit, often called a HELOC. 
 32

A closed-end home equity loan is for a fixed amount of money that you receive 

at closing. You will not be able to borrow additional money under the terms of this 

type of loan. An open-end home equity loan has a credit line set by the lender. With 

this loan you can choose when and how often to borrow money up to your credit limit.

Is a Home Equity Loan/Line of Credit Right For You?

You may want to make home improvements to increase the value of your 

home, or you may decide to consolidate your debts by paying off high-interest credit 

cards. Maybe you have unexpected medical bills or need funds to pay for school 

expenses. A home equity loan can be a convenient way to get money for these 

situations; however, before you get a home equity loan, there are things that you 

should carefully consider. Remember that a home equity loan creates another lien 

against your home and reduces the equity that you have built up. You could risk 

losing your home if you do not plan wisely.

Ask as many questions as you asked when you were looking for your 

home loan. The decision to get a home equity loan or line of credit should be made 

wisely. Make sure you can afford the loan. Have a solid financial plan and set up a 

budget, so you can be confident that you can make the additional monthly payment 

while still meeting your other financial obligations. You worked hard to get your 

home, don‟t risk losing it!

 Additional assistance and guidance can be found in “What you should know 

about Home Equity Lines of Credit” published by the Federal Reserve Board. You can 

contact the Federal Reserve Board at the address and phone number provided in the 

Appendix at the end of this booklet for additional information.

Refinancing: Should You Consider Refinancing?

Refinancing is paying off one loan by obtaining another and is usually done to 

secure better loan terms such as a lower interest rate. You might also want to 

refinance for the same reasons you may have considered a home equity loan or line 

of credit - to get cash from the equity that you have built up in your home for such 

things as home improvements, paying off other debts, major purchases, starting a 

business, or education costs, etc.

You should carefully consider the terms of a refinance as well as the long-term 

impact on your financial situation. You should shop as carefully for your refinance 

loan as you did when you bought your home. Refinancing can deplete the equity you 

have built up if you take out the equity in your home in cash, and it can negatively 

affect your ability to pay your loan if you do not closely review the terms of your new 

loan. Consider the same issues that you addressed when you first applied for your 

home loan that have been discussed throughout this booklet. 
 33

On the positive side, if you shop carefully for your refinance, you could lower 

your monthly payments by getting a lower interest rate. Be wary of unsolicited 

refinancing offers that you may get in the mail or through e-mail. Although not all of 

these offers are deceptive, there are many unscrupulous loan originators who use the 

offers to find unsuspecting home owners. Some of these unscrupulous loan 

originators will even use the HUD and FHA logos in an attempt to make their 

solicitations appear legitimate. If you have any doubts about whether a 

communication has actually been sent by HUD, use the information in the Appendix to 

contact HUD.
 34

XI. Appendix

ADDITIONAL INFORMATION

There are several federal laws which provide you with protection during the 

home buying process. The Equal Credit Opportunity Act (“ECOA”) and the Fair 

Housing Act prohibit discrimination, and the Fair Credit Reporting Act (“FCRA”) 

provides you with the right to certain credit information.

No Discrimination

ECOA prohibits lenders from discriminating against credit applicants in any 

aspect of credit transactions on the basis of race, color, religion, national origin, sex, 

marital status, age, the fact that all or part of the applicant's income comes from any 

public assistance program, or the fact that the applicant has exercised any right under 

any federal consumer credit protection law. 

The Fair Housing Act prohibits housing discrimination because of race, color, 

religion, sex, disability, familial status or national origin. This prohibition applies, 

among other things, to the sale of a home to you, the making of loans for purchasing, 

constructing, improving, repairing or maintaining a dwelling, and the brokering and 

appraising of residential real estate.

If you feel you have been discriminated against by a lender or anyone else in 

the home buying process in violation of the Fair Housing Act, you can file a complaint 

at no cost with HUD. Following an investigation, if HUD determines that there is a 

reasonable cause to believe that your rights under the Fair Housing Act have been 

violated, it will issue a Charge of Discrimination on your behalf that will be adjudicated 

in administrative proceedings or in federal court. You may also file a complaint under 

ECOA with the Board of Governors of the Federal Reserve System or with an 

appropriate state agency under the state‟s equal credit opportunity laws.

 You may also be able to file a private legal action or take other appropriate 

action if you are the victim of discrimination. You may wish to consult with an 

attorney to understand your rights.

Prompt Action/Notification of Action Taken

Your lender or mortgage broker must act on your application and inform you of 

the action taken no later than 30 days after it receives your completed application. 

Your application will not be considered complete, and the 30-day period will not begin, 

until you provide to your lender or mortgage broker all of the material and 

information requested.
 35

Statement of Reasons for Denial

If your application is denied, ECOA requires your lender or mortgage broker to 

give you a statement of the specific reasons why it denied your application or tell you 

how you can obtain such a statement. The notice will also tell you which federal 

agency regulates the lender that denied your application so you can contact the 

agency if you believe it has illegally discriminated against you.

Obtaining Your Credit Report

The Fair Credit Reporting Act (“FCRA”) requires a lender or mortgage broker 

that denies your loan application to tell you whether it based its decision on 

information contained in your credit report. If that information was a reason for the 

denial, the notice will tell you where you can get a free copy of the credit report. You 

have the right to dispute the accuracy or completeness of any information in your 

credit report. If you dispute any information, the credit reporting agency that 

prepared the report must investigate free of charge and notify you of the results of 

the investigation.

Obtaining Your Appraisal

The lender needs to know if the value of your home is enough to secure the 

loan. To get this information, the lender typically hires an appraiser, who gives a 

professional opinion about the value of your home. ECOA requires your lender or 

mortgage broker to tell you that you have a right to get a copy of the appraisal 

report. The notice will also tell you how and when you can ask for a copy.

HOEPA

 If you ever decide to refinance your loan, or if you apply for a home equity 

installment loan, you should know about the Home Ownership and Equity Protection 

Act of 1994 (HOEPA). This law addresses certain unfair practices and establishes 

requirements for certain loans with high rates and fees. You can find out more 

information by contacting the Federal Trade Commission at the address and phone 

number listed in the Appendix.
 36

DETERMINING WHAT YOU CAN AFFORD WORKSHEET

Use the worksheet below to calculate your monthly income and expenses to 

determine the amount you have left over every month to pay for house related 

expenses such as your monthly loan payment, property taxes and homeowner‟s 

insurance. There is also a mortgage calculator you may wish to use. It can be found 

at: http://www.ginniemae.gov/2_prequal/intro_questions.asp?Section=YPTH.
 37

CONTACT INFORMATION

U.S. Department of Housing and Urban Development

451 7th Street, SW

Washington, DC 20410

202-708-1112

http://www.hud.gov

HUD’s Office of RESPA and Interstate Land Sales

202-708-0502

http://www.hud.gov/respa

HUD Housing Counselors

1-800-569-4287 (Interactive system)

http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm

HUD Foreclosure Prevention Information

http://www.hud.gov/foreclosure

Buying a HUD Home

http://www.hud.gov/offices/hsg/sfh/reo/reobuyfaq.cfm

FHA- Resource Center

1-800-CALL FHA (800-225-5342)

http://www.hud.gov/offices/hsg/sfh/fharesourcectr.cfm

Housing Discrimination Issues

Office of Fair Housing and Equal Opportunity

(See HUD address above)

1-202-708-1112

1-800-800-3088

http://portal.hud.gov/portal/page/portal/HUD/program_offices/fair_housing_equal_

opp

To file a Housing Discrimination Complaint:

http://www.hud.gov/offices/fheo/online-complaint.cfm
 38

Other Agencies

Truth in Lending Act, the Equal Credit Opportunity Act, adjustable rate 

mortgages, and home equity lines of credit

The Federal Reserve Board

Division of Consumer and

Community Affairs

20th and Constitution Avenue

Mail Stop 801

Washington DC 20551

202-452-3000

www.federalreserve.gov

Foreclosure Prevention Toolkit

Federal Deposit Insurance 

Corporation

Division of Compliance

1730 Pennsylvania Ave

7th Floor

Washington DC 20429

877-275-3342

www.fdic.gov/consumers/loans/prevention/toolkit.html

VA-Guaranteed Loans

Department of Veterans Affairs

Consumer Affairs Service

810 Vermont Avenue, NW

Washington DC 20420

202-273-5770

www.va.gov

Rural Housing Loan Programs

Department of Agriculture

Rural Development/Rural Housing Services

Mail Stop MC-0783

Washington DC 20250

202-690-1533

www.rurdev.usda.gov

Home Ownership and Equity Protection Act of 1994 (HOEPA) 

Federal Trade Commission

Consumer Response Center

600 Pennsylvania Avenue, N.W.

Washington DC 20580

877-382-4357

www.ftc.gov
 39

GLOSSARY of TERMS

Appraiser: one who is trained and educated in the methods of determining the 

value of property (appraised value). You will pay a fee for an appraisal report 

containing an opinion as to the value of your property and the reasoning leading to 

this opinion.

Credit report fee: this fee covers the cost of a credit report which shows your 

credit history. The lender uses the information in a credit report to assess your

credit worthiness. 

Default: the inability to pay monthly mortgage payments in a timely manner or to 

otherwise meet the mortgage terms.

Delinquency: failure of a borrower to make timely mortgage payments under a 

loan agreement.

Down Payment: the portion of a home‟s purchase price that is paid in cash and is 

not part of the mortgage loan.

Earnest Money Deposit: money you will put down to show that you are serious 

about purchasing the home. It often becomes part of the down payment if the offer 

is accepted, is returned if the offer is rejected, or may be forfeited if you do not 

follow through with the deal.

Escrow Account: an impound account in which a portion of your monthly 

mortgage is deposited to cover annual charges for homeowner‟s insurance, 

mortgage insurance (if applicable), and property taxes.

Escrow Agent: a person or entity holding documents and funds in a transfer of 

real property, acting for both parties pursuant to instructions. Typically the agent is 

a person (often an attorney), escrow company or title company, depending on local 

practices.

Flood Certification Fee: a fee for the assessment of your property to determine if 

it is located in a flood prone area.

Foreclosure: a legal process in which mortgaged property is sold to pay the loan 

of the defaulting borrowers.

Good Faith Estimate (GFE): an estimate of the settlement charges you are likely 

to incur; it also contains other information about the loan.
 40

Government Recording and Transfer Charges: fees for legally recording your 

deed and mortgage. These fees may be paid by you or by the seller depending 

upon the terms of the sales agreement.

Home Inspection: an inspection of the mechanical, electrical, and structural 

aspects of your home. You will pay a fee for this inspection, and the inspector will 

provide you a written report evaluating the condition of the home.

Homeowner's Insurance or Home Hazard Insurance: an insurance policy that 

protects your home and your possessions inside from serious loss, such as theft or 

fire. This insurance is usually required by all lenders to protect their investment 

and must be obtained before closing on your loan. 

HUD-1 Settlement Statement: a statement that itemizes the services provided to 

you and the fees charged for those services. This form is filled out by the person 

who will conduct the settlement. You can ask to see your settlement statement at 

least one day prior to your settlement.

Interest: a fee charged by the lender for the use of its money.

Interest rate: the charge by the lender for borrowing money expressed as a 

percentage.

Lender Inspection Fees: this charge covers inspections, often of newly

constructed housing, made by employees of your lender or by an outside inspector.

Loan to value (LTV) ratio: a percentage calculated by dividing the amount to be 

borrowed by the price or appraised value of the home to be purchased (whichever 

is less). The loan to value ratio is used to qualify borrowers for a mortgage, and the 

higher the LTV, the tighter the qualification guidelines for certain mortgage 

programs become. Low loan to value ratios are considered below 80%, and carry 

lower rates since borrowers are lower risk.

Mortgage: the transfer of an interest in property to a lender as a security for a 

debt. This interest may be transferred with a Deed of Trust in some states.

Origination Fee: a fee charged to the borrower by the loan originator for making a 

mortgage loan. 
 41

Origination Services: any service involved in the creation of a mortgage loan, 

including but not limited to the taking of the loan application, loan processing, and 

the underwriting and funding of loan, and the processing and administrative 

services required to perform these functions. 

Payment Shock: a scenario in which monthly mortgage payments on an 

adjustable rate mortgage (ARM) rise so high that the borrower may not be able to 

afford the payments.

PITI: Principal, Interest, Taxes and Insurance – the four elements of a 

monthly mortgage payment; payments of principal and interest go directly towards 

repaying the loan while the portion that covers taxes and insurance goes into an 

escrow account to cover the fees when they are due.

Pest Inspection: an inspection for termites or other pest infestations of your 

home. This inspection is frequently required by your lender.

Point(s): amount of money paid to reduce the interest rate on a loan. A point is 

usually equal to 1% of the loan amount.

Pre-paid items: lenders often require the prepayment of items such as insurance 

premiums for private mortgage insurance, homeowner's insurance, and real estate 

taxes. 

Prepayment Penalty: a fee charged if the mortgage loan is paid before the 

scheduled due date.

Private Mortgage Insurance (PMI): insurance that protects your lender if you 

default on your loan. With conventional loans, mortgage insurance is usually 

required if you do not make a down payment of at least 20% of your home's 

appraised value. Your lender may require payment of your first year‟s mortgage 

insurance premium or a lump sum premium that covers the life of the loan in 

advance at settlement. The same insurance protection on an FHA loan is called 

Mortgage Insurance Premium (MIP).

Recording and Transfer Charges: these charges include fees paid to the local 

government for filing official records of a real-estate transaction. 
 42

Sales Agreement: the contract signed by a buyer and the seller stating the terms 

and conditions under which a property will be sold. It may also be called an 

“Agreement of Sale” or “Purchase Contract.” 

Settlement: the time at which the property is formally sold and transferred from 

the seller to the buyer. It is at this time that the borrower takes on the loan 

obligation, pays all closing cost and receives title from the seller.

Settlement/Closing Agent: in some states, a settlement agent, or closing agent, 

handles the real estate transaction when you buy or sell a home. It may also be an 

attorney or a title agent. He or she oversees all legal documents, fee payments, 

and other details of transferring the property to ensure that the conditions of the 

contract have been met and appropriate real estate taxes have been paid.

Settlement Costs/Closing Costs: the customary costs above and beyond the 

sales price of the property that must be paid to cover the transfer of ownership at 

closing; these costs generally vary by geographic location and are typically detailed 

to the borrower at the time the GFE is given. 

Survey Fee: a fee for obtaining a drawing of your property showing the location of 

the lot, any structures, and any encroachments. The survey fee is usually paid by 

the borrower.

Title Service Fees: title service fees include charges for title search and title 

insurance if required. This fee also includes the services of a title or settlement 

agent.

Title Insurance: insurance that protects your lender against any title dispute that 

may arise over your property. Through a title search, the lender verifies who the 

actual property-owners are and whether the property is free of liens. The title 

search company then issues title insurance which protects the title of the property 

against any unpaid mortgages and judgments. In case a claim is made against the 

property, the title insurance provides legal protection and pays for court fees and 

related costs. You may also purchase Owner's title insurance which protects you as 

the homeowner. 

Tax certificate: official proof of payment of taxes due provided at the time of 

transfer of property title by the state or local government. 
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Tax Service Fee: this fee covers the cost of your lender engaging a third party to 

monitor and handle the payment of your property tax bills. This is done to ensure 

that your tax payments are made on time and to prevent tax liens from occurring.

Tolerance Category: the maximum amount by which the charges for a category 

or categories of settlement cost may exceed the amount of the estimate for such 

category or categories on a good faith estimate. When the originator selects and 

identifies the provider of services, these charges may only increase 10% in the 

aggregate. If the borrower selects a provider that is not on the written list provided 

by the loan originator, the lender is not subject to any tolerance restrictions for that 

service. 
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Types of Mortgage Loan Products

Adjustable Rate Mortgage (ARM): a mortgage loan or Deed of Trust which 

allows the lender to periodically adjust the interest rate in accordance with a 

specified index. 

Balloon Mortgage: a balloon payment is due on a mortgage that usually offers a 

low monthly payment for an initial period of time. After that period of time elapses, 

the balance must be paid by the borrower or the amount must be refinanced. The 

large sum payable at the end of the loan term is called the “balloon payment.”

Construction Loan: a short-term, interim loan for financing the cost of 

construction; the lender advances funds to the builder at periodic interval as work 

progresses.

Conventional Loan: a private sector loan which is not guaranteed or insured by 

the U.S. government.

Fixed-Rate Mortgage: a mortgage with an interest rate that does not change over 

the life of the loan, and as a result, monthly payments for principal and interest do 

not change. 

Hybrid Arms: these loans are a mix or a hybrid of a fixed-rate period and an 

adjustable-rate period. For example, a 3/1 ARM will have a fixed interest rate for 

the first three years and then will adjust annually until the loan is paid off. The first 

number tells you how long the fixed interest-rate period will be and the second 

number tells you how often it will adjust after the initial period.

Interest Only ARMs: an interest-only (I-O) ARM payment plan allows you to pay 

only the interest for a specific number of years, typically between 3 and 10 years. 

This allows you to have smaller payments for a period of time. After that, your 

monthly payments will increase, even if the interest rate stays the same, because 

you must start paying back the principal as well as the interest each month.
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THE DO LIST 

Shop for your loan. 

Interview real estate agents, mortgage brokers, lenders and other settlement 

service providers to find the best professionals for your loan and settlement 

needs.

Be sure to read and understand everything before you sign anything.

Accurately report your debts.

Be honest about all sources of funds you will use to purchase your home.

Be upfront about any credit problems you have or have had in the past.

Be wary of unsolicited loan or refinance offers that you receive in the mail or 

through e-mail.

Always pay your mortgage payment on time, even if you are having a dispute 

with your loan servicer.

If you are having problems paying your mortgage, contact your loan servicer 

immediately.

THE DON’T LIST

Do not sign blank documents.

Do not overstate your income.

Do not overstate your length of employment.

Do not overstate your assets.

Do not change your income tax returns.

Do not list fake co-borrowers on your loan application.

Do not provide false documentation or permit someone to provide false 

documents about you.
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