The Real Estate Settlement Procedures Act (RESPA) is a consumer protection law that governs disclosures required at various stages during the home buying process. Having general knowledge about these disclosures helps you be more informed and prepared as you make your way from the financing process to the closing table. What kind of disclosures does RESPA require?
Generally speaking, required RESPA disclosures include advance notice of estimated settlement costs; descriptions of business relationships among parties involved in the settlement process; and details about loan servicing and escrow account practices. Here's a look at each of these disclosures in more detail:
As a borrower, it's helpful to know the amount of loan-related expenses you can expect before you commit to the loan. RESPA requires that lenders give you a Good Faith Estimate that details these costs. Sometimes you will receive the estimate when you apply for a loan. If not, lenders are required to give or mail the estimate to you within three days of your loan application unless you are declined during that time. Be aware that you are not getting a guarantee that these will be your actual expenses. Actual costs may vary from those in the estimate, but they should not be egregiously higher.
You will see the actual settlement costs on the HUD-1 Settlement Statement. This is a standard form that details all charges for borrowers and sellers in the transaction. RESPA allows borrowers to request the statement one day before closing and to be provided with costs based on the information known at that time. If not requested a day ahead, the Settlement Statement is presented at the time of closing.
Whenever your real estate agent, lender, or other participants in your transaction make a referral that involves an affiliated business arrangement, they must disclose the existence and nature of that relationship, along with a written estimate of the other provider's charges. Under RESPA, a business is considered to be an affiliate when the referring party has an ownership or other financial interest in that business. Although there are some exceptions, generally you cannot be required to use the services of the affiliate being referred.
Servicing and Escrow Practices
The lender that funds your loan may not always service (collect payments on) your loan. Sometimes they will sell your loan to another lender or transfer servicing rights to another provider. Either way, RESPA requires the lender to give you a written Servicing Transfer Statement that tells you this will happen.
There is also the matter of escrow account operation. You will need to fund and maintain an escrow account if your lender will pay your real estate taxes and hazard insurance. The company that services your loan has 45 days from your closing date to provide an Initial Escrow Statement that itemizes estimated payments and expenses for the first 12 months of the loan. In addition loan servicers must provide you with an Annual Escrow Statement that summarizes all deposits and payments during the servicer's 12-month time period.
For Your Protection
As you can see, RESPA exists to protect you during the real estate settlement process. It does so by ensuring that you receive timely, pertinent information needed to make prudent decisions and by prohibiting participants in the process from carrying out unethical practices. To learn more about RESPA, visit the web site for the Department of Housing and Urban Development at www.hud.gov.
Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.