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How can HUD-1 help you generate business?
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The HUD-1 is the standard form that you use quite often. The form not only serves as the settlement closing statement but also serves as proof of payment of various tax deductions. Understanding the forms and tax deductible items and communicating them to your clients will help your clients reduce their taxes and help you build trust and achieve greater business performance.
What is HUD-1
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The HUD-1 is a form used by the closing agent to itemize all incoming funds and all fees paid and accrued by a borrower and seller for a real estate transaction.
When is the HUD-1 issued?
The Real Estate Settlement Procedures Act (RESPA) requires that the form be issued in all real estate transactions in the United States that involve federally related mortgage loans. RESPA states that you must be given a copy of the HUD-1 at least one day before settlement.
When do clients need a HUD-1 for taxes?
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Customers use the information included in the form when they file their annual taxes. The filing deadline for the proceeding year is typically April 15 each year. To give the client enough time to file taxes using the HUD-1 information, it is recommended that a copy of the HUD-1 be mailed to the client in January.
Because real estate transactions occur during the year, usually long before the tax return is filed, the HUD-1 given to the customer at closing may be lost or misplaced. Sending the copy of HUD-1 along with the cover letter to the client will be very helpful and time-saving for the client.
HUD-1 Client Sample Letter
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The following is a sample letter that you can use to send to your customers:
[Date]
tax time is coming
Dear [Client’s Name],
Tax time is really around the corner, and the first thing you need is a copy of the closing statement on your property. Moving can be a very busy time, and you may have lost this very important document.
I want to ensure that you take advantage of all possible tax benefits from our transaction. If your accountant has any questions, please feel free to call me (if you need a referral to someone in accounting you can trust, I’ll be happy to provide one for you).
I look forward to continuing to be your Realtor and providing you with the highest level of service.
Regards,
[your name]
Oh, by the way… If you have a friend or relative looking to buy or sell a home, I’d be more than happy to be of service to them. So, when you think of these people, just call me with their name and number. I would be happy to follow up and fulfill their real estate needs.
Which HUD-1 information is important for your client’s taxes?
The information reported on HUD-1 relates to the following tax statements and schedules:
Tax Form HUD-1 Line
Schedule A (itemized deduction), line 10 – annual mortgage interest deduction line 901
Schedule A (Itemized Deductions), Line 10 – Itemized Deductions Line 802
Schedule A (Itemized Deduction), Line 6 – Real Estate Tax Deduction Lines 1003, 1004
Schedule E (rental income), line 20 – depreciation (cost of asset is required) lines 101, 102
Schedule E (rental income), line 12a – mortgage interest deduction lines 901, 802
Schedule E (rental income), line 9 – Insurance 903, 1001, 1002
Schedule E (Rental Income), Line 16A – Actual State Tax 1003, 1004
Schedule E (rental income), line 18 – Other deductions 703, 801-811, 1005, 1101-1110, 1201-3, 1301-1302
Schedule D (Capital Gains) Part I, II, Column D – Sale Value 401, 402
Schedule D (Capital Gains) – Part I, II, Column E – Cost or other basis 101, 102
Form 6252 (installment sale), line 8 – sale price 401, 402
Form 6252 (installment sale), line 8 – cost or other basis 101, 102
Form 4797 (Sale of Business Property), Part I, Column D – Cost or Other Basis 401, 402
Form 4797 (Sales of Business Property), Part I, Column f – 101, 102
HUD-1’s two sections
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Section J, Summary of Borrower’s Transactions
This section has 6 sections, and is basically a summary of the entries made for section L (settlement fee, see below).
o Section 100, Gross Amount Due from the Borrower
o Section 200, amount paid by or on behalf of the borrower
Section 300, Cash at settlement from/to the borrower
o Section 400, Gross amount payable to seller
o Section 500, reduction in amount payable to seller
o Section 600, Cash on settlement to/from seller
Section L, Settlement Charges
This is where many entries are tabulated before being brought forward to page 1. The column contains charges that are paid with either the borrower’s or the seller’s funds. Your closing statement may not contain entries on all lines.
o Section 700, Agency commission
o Section 800, Items payable in respect of loan
o Section 900, Requisites Paid in Advance by the Lender
o Section 1000, Reserve Fund Deposited with Lender
o Section 1100, Title Fee
o Section 1200, Government Recording and Transfer Fee
o Sections 1300 and 1400, additional settlement fee and sum
line by line description
Section 700, Agency commission
701 Commission paid to real estate agencies
702 Commission paid to real estate agencies
Section 800, Items payable in respect of loan
801 processing or loan origination fee. If the fee is a percentage of the loan amount, the percentage will be mentioned.
802 “points” are charged by the lender. Each point is 1% of the loan amount.
803 assessment fee. If payment is made with the loan application prior to closing, it should be marked “POC,” (payment outside closing). The amount will be shown, but will not be included in the total fee that you will bring to settlement.
804 Cost of credit report if it is not included in the origination fee.
805 inspection fee, performed at the request of the lender.
806 Private Mortgage Insurance (PMI) Application Fee.
807 assumption fee, when the buyer takes over the seller’s existing mortgage.
808 Miscellaneous items related to the loan, such as fees paid to a mortgage broker.
809 Miscellaneous items related to the loan, such as fees paid to a mortgage broker.
810 Miscellaneous items related to the loan, such as fees paid to a mortgage broker.
811 Miscellaneous items related to the loan, such as fees paid to a mortgage broker.
Section 900, Requisites Paid in Advance by the Lender
901 interest accrued on settlement for the time period between closing and the first monthly payment.
902 Mortgage insurance premium due at settlement. Escrow reserves for mortgage insurance are entered later. This should be noted if the lump sum payment is good for the life of your mortgage insurance loan.
903 Risk insurance premium due on settlement. It is not used for insurance reserves that will go to escrow.
904 Miscellaneous items: Flood insurance, mortgage life insurance, loan life insurance, and disability insurance premiums.
905 Miscellaneous items: Flood insurance, mortgage life insurance, loan life insurance, and disability insurance premiums.
Deposit with creditor Section 1000 Reserve
1001-1007 Funds used to start the borrower’s escrow account from which the lender will pay the next year’s premiums. Each mortgage payment includes an amount that covers a portion of these recurring expenses.
The 1008 escrow adjustment is calculated by the settlement agent by comparing different escrow formulas to ensure that the lender does not collect more escrow funds than allowed.
Section 1100, Title Fee
1101 Settlement agent’s fees.
Abstract or title search and examination fees are entered in the lines
1102 abstract/title search fee
1103 Exam Fee
1104 Title Insurance binder (also called commitment to insure). Payment for title insurance policies is recorded later.
1105 Deed preparation record fee and deeds on mortgages and notes
1106 Fee charged by a notary public for attesting the execution of settlement documents
1107 Attorney’s fees.
1108 Title Insurance (excludes cost of binder).
1109 informational lines disclose costs for individual title insurance policies (only line 1108 is carried forward.)
The 1110 informational lines disclose costs for separate title insurance policies (only line 1108 is carried forward.)
Other fees related to heading 1111-1113 that vary by location: Tax Certificate Fee / Personal Tax Fee
Section 1200, Government Recording and Transfer Fee
1201 Recording Fee
1202 City or County Recording Fee
1203 State Recording Fee
1204-1205 Miscellaneous recording fee item
Section 1300, survey and inspection fees (inspection for pests, lead-based paint, radon, structural inspection, heating, plumbing, or electrical equipment) and home warranty.
Line 1400 Total settlement fees paid with the borrower’s and seller’s funds. They are also recorded in section J and K,
Line 103 and 502.
Section J, Summary of Borrower’s Transactions
Section 100, gross amount due from the borrower
Line 101 Gross sales value of the property.
Line 102 Personal Property Fee (Draperies, washer, dryer, outdoor furniture, and decorative items purchased from a seller)
Line 103 Total settlement fee for the borrower (from line 1400 section L)
Lines 104-105 Amount owed by the borrower or previously paid by the seller (includes the balance in the seller’s escrow account if the borrower is assuming a loan and without rent the borrower may owe to the seller)
Lines 106-112 Item seller paid in advance (pro-rata share of city/county taxes)
Line 120 The gross amount due from the borrower. Total lines from 101 to 112
Section 200, Amount paid by or on behalf of the borrower
Line 201 Credit to buyer for earnest money paid when offer is accepted.
Line 202 New loan paid by the lender to the borrower.
Line 203 The loan borrower acquires or holds title to an existing loan or lien on the property.
Lines 204-209 Miscellaneous items paid for by or on behalf of the buyer (allowance the seller is making for repair or replacement of the items or a note the seller accepts from the borrower for part of the purchase price)
Lines 210-219 Bills not yet paid by the seller but outstanding (tax, assessment or rent collected in advance by the seller for the period beyond the settlement date)
Rows 220 total for all items in section 200. The total is added to the borrower’s income.
Section 300, Cash on settlement from/to borrower
Lines 301 Summary of the total amount due from the borrower.
Lines 302 Summary of all items already paid by or for the borrower.
Lines 303 is the difference between Lines 301 and 302, representing the amount the borrower owes at closing. If a negative number, the borrower will receive the money back at closing.
Segment, seller transaction summary
Section 400, Gross amount due to seller (amount added to seller’s fund)
Line 401 The gross sale value of the property.
Lines 404-405 Amount owed by the borrower or previously paid by the seller (escrow account balance or uncollected rent)
Lines 406-412 Item paid in advance by seller (pro-rata share of city/county taxes)
Line 420 is the gross amount payable to the seller. Total from line 401 to 412.
Section 500, deduction for amount payable to seller (amount is deducted from seller’s funds)
Line 501 is when a third party holds the borrower’s earnest money deposit, and will pay it directly to the seller.
Line 502 Total from line 1400, total of seller’s fees as calculated in section L.
Line 503 when the borrower acquires or takes title under an existing lien that is subtracted from the sale price.
Line 504-505 The first and/or second loan that will be repaid as part of the settlement (including accrued interest).
line 506-509 miscellaneous entries
Line 506 Deposit amount paid by the borrower to a third party other than the seller or settlement agent
Line 510-519 Bills not paid by the seller (taxes, assessments, or rent collected in advance)
Line 520 Sum of all items in section 500. The total is deducted from the seller’s income.
Section 600, Cash on settlement to/from seller
From line 601 the gross amount to the seller, from line 420.
Line 602 Total deduction of seller’s income, from line 520.
Line 603 Difference between line 601 and 602. Cash amount paid to the seller (if a negative number, the seller owes money at closing)
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