The U.S. Department of Housing and Urban Development (HUD) made a number of changes to the Real Estate Settlement Procedures Act (RESPA) designed to protect consumers from unreasonably high settlement charges. These changes, effective January 2009, modified the HUD-1 form in several ways, in part to streamline the comparison between final charges and the Good Faith Estimate (GFE) made at the start of the real estate process. Unfortunately the calculations can be confusing even to experienced real estate professionals unless they are using legal software programs such as Easy HUD that do the math automatically.
GFE comparison is done on page 3 of the HUD-1 form. On the surface the calculation is simple: ensure that if final charges are higher, then the difference falls within the tolerances established by HUD. The reality is a bit more complicated because the allowed tolerances and how they are administered are different depending on what kind of charge. RESPA divides GFE-HUD comparisons into three categories: 0% tolerance, 10% tolerance, and no tolerance.
Final 0% tolerance fees are not allowed to be higher than the GFE. These fees include origination charges, points and transfer taxes. Note that 0% tolerance fees are evaluated line by line so each individual charge in this category must be equal to or lower than GFE. It is not acceptable to compensate for one higher charge with a lower charge in this section.
The 10% tolerance category includes HUD 1 entries such as government recording charges. Unlike 0% tolerance fees, the 10% tolerance is calculated on the total of all values. When the form is complete, the fees in this category are summed and the total must be no more than 10% higher than the total of the same fees on the GFE. It would be possible for specific fees to be more than 10% higher than GFE as long as the sum is within tolerance.
The no tolerance category includes everything else on the HUD 1: homeowner's insurance, daily interest charges, etc. The final value of these fees can exceed GFE by any amount without penalty.
This is further complicated by the fact some fees can be in more than one category. For example owner's title insurance is in the 10% category if chosen by the lender, and in the unrestricted category if not chosen by the lender.
Completing HUD forms correctly is challenging if done by hand. Confusion about proper tolerance, or the difference between how 0% and 10% tolerances are administered, or arithmetic mistakes can lead to inaccurate forms.
Rather than doing this manually, use legal software programs designed to complete the HUD forms according to the latest HUD regulations. Download a demo of EasyHUD and see just how effortless HUD-GFE comparison can be.