Understanding the Closing Settlement Statement

The transfer of property is a complex process—it requires more than just exchanging money and moving into a property. One document, the closing settlement statement, plays a big role in closing out the property transfer process.

1- What is Closing Settlement Statement
2- Closing Settlement Statement Explained
3- Seller’s Closing Statement
4- Loan Settlement Statement
5- Real Estate Settlement Procedures Act
6- Tips to Reduce Closing Costs
7- Frequently Asked Questions

What is the Closing Settlement Statement?

Also known as the closing statement, settlement statement, or seller’s closing statement, the closing settlement statement documents all of the buyer’s and seller’s costs.

Requirements for the settlement statement can vary depending on the type of agreement. Besides real estate agreements, settlement statements can also be used in insurance or legal matters or in any other business transaction.

Closing Settlement Statement Explained

Usually, an attorney or closing agent prepares the settlement statement which is a detailed list of every expense a buyer or a seller must pay as well as all the terms and conditions of the transaction.

Major Costs and Fees Involved in a Transaction are:

• The Total Cost of the Property
• Inspection Cost
• Appraisal Fee
• Title Search Fee
• Mortgage Cost
• Inspection Cost
• Escrow Funds
• Agent’s Commission
• Attorney’s Fee
• Property Tax Deposit
• Mortgage Insurance

 

Before drafting a closing statement, the seller and the buyer meet with the attorney or closing agent to discuss and finalize the particulars of the deal. Once the document is prepared, they review it to confirm that everything is correct.

The statement contains two columns each for the costs incurred by the seller and buyer. The total cost of the transaction is listed at the bottom of the document. Once the settlement statement is drafted and signed, it becomes a binding legal document.

The Seller’s Closing Statement

For sellers, the closing statement consists of all the commissions and fees they’ve had to pay. They will receive the closing statement from a settlement agent working with the title company selected to close the transaction.

The Consumer Financial Protection Bureau requires that sellers receive the closing statement and the particulars of the statements may vary from state to state.

Pro Tip: It is always better to ask for the settlement statement a day before the real estate transaction is finalized to review it for accuracy and ensure any misstatement is corrected.

Loan Settlement Statement

A loan settlement statement is a document that helps a borrower fully understand the terms and conditions of the home loan. This document also requires the lender to disclose all of a borrower’s miscellaneous fees such as appraisal fees, underwriting fee, loan insurance charges, and background checking fees.

Therefore, a loan settlement statement must include a summary of all associated charges along with the principal loan and interest rate of the home loan.

The Real Estate Settlement Procedures Act (RESPA)

The Real Estate Settlement Procedures Act (RESPA) is governed by the Housing Urban and Development (HUD). RESPA was designed to share the final closing costs with buyers and protect them from abusive practices like inflated closing costs.

Requires that:

• The borrower receives a closing cost information booklet that explains all costs associated with real estate transactions;
• The borrower is informed if the lender requires a special escrow agent to close the transaction; and
• The borrower must get an estimate of the settlement price.

RESPA only applies to federally-funded home loans. To protect the buyer, it requires that the lender informs the borrower of the closing costs.  RESPA also prohibits the lender from asking for an extra deposit for escrow accounts and restricts the malpractice of kickbacks or referral fees.

There are two types of documents used in mortgage lending: HUD-1 settlement statements and closing disclosure. The HUD-1 form enlists all charges a seller or a buyer is supposed to pay but it does not include payments paid by either party outside of closing.

Tips to Reduce Closing Costs

Closing costs are typically 3% to 5% of the purchase price which can be a substantial amount. Here are ways that you can reduce closing costs:

1. Ask your lender for an official loan estimate instead of  “fee itemization;”
2. Save money by combining the title insurance and service settlement into one document instead of hiring separate agents for them;
3. Understand all fees and, if possible, explore ways to avoid or re-negotiate them; and
4. Ask your lender if there are any discounts or rebates available.

Pro Tip:  During the loan approval process, your lender will be monitoring your credit right up until the closing. Therefore, try to avoid any activity which may adversely impact your credit score.

FAQs

What is a Credit to the Seller on the Settlement Statement?

A credit to the seller on the settlement statement is a payment made by the buyer to the seller at the closing of a real estate transaction. This payment represents a portion of the funds that the seller is entitled to receive, such as the proceeds from the sale of the property or reimbursement for prepaid expenses.

What Would be a Credit to the Buyer on the Settlement Statement?

A credit to the buyer on the settlement statement is a payment made by the seller to the buyer at the closing of a real estate transaction. This payment represents a refund or reimbursement for certain expenses or fees that the buyer has incurred. Such as prepaid property taxes, homeowner’s insurance, or inspection costs.

What is the Settlement Date on a Closing Statement?

The settlement date on a closing statement is the date on which the final transfer of ownership of a property occurs and the buyer takes possession of the property. It is the date when the seller receives payment for the sale and the buyer pays the remaining balance and associated closing costs.

Is a Closing Statement the same as a Closing Disclosure?

The closing statement and the closing disclosure are two different documents used in a real estate transaction.

What Day is Best for House Settlement?

It is advisable to schedule the settlement date at least a few days before the end of the month to avoid additional interest charges or prepaid expenses on Monday or Wednesday.

Conclusion

• A settlement statement lists all the costs and fees associated with a loan and includes the total cost of the property.
• A mortgage closing statement accompanies any loan application.
• A seller’s closing statement is drafted by a settlement agent and includes all commissions and costs that the seller must pay.