When estimating their closing costs, many people do not consider the adjustments made on their HUD...
Wait what? Back up. What is a HUD??
In this context, HUD is short for HUD-1 Settlement Statement. This is the last document you will review before you closing on your purchase or refinance. The HUD is the borrower's go-to-guide and outlines all the money that is changing hands during the transaction. It summarizes all the important information including your interest rate, term, closing costs, amount to be paid at closing, and adjustments for expenses paid by the seller.
HUD Adjustments can be very tricky to understand, so we have put together a short guide with an example scenario to help all confused homebuyers.
Adjustments are a mechanism by which attorneys take into consideration items which may be prepaid in advance or due by a Seller involving the real property to be purchased.
Commonly adjusted items include:
- Fuel such as propane and oil
- Water and sewer assessment and usage charges
- Real estate property taxes and fire district taxes
- Rents and security deposits, in the case of rental properties or those occupied by tenants
- PUD (planned unit development) or Condominium Common Charges
Adjustments appear on the HUD and are typically adjusted as of the date of the purchase, with the Buyer taking responsibility for the date of closing.
Example of A HUD Adjustment:
In most towns in Connecticut, property taxes are paid on a semiannual basis, meaning twice a year. When the first installment of taxes is paid in January, the payment covers the period from January 1st through June 30th, and when the second installment of taxes is paid on July 1st, the payment covers the period from July 1st through December 31st.
Closing Date: May 1st
Yearly Property Tax Liability: $5,000
- Installment 1 (covering January 1st- June 30th)- $2,500
- Installment 2 (covering July 1st – December 31st)- $2,500
On the date of closing the Seller has already paid the January installment covering through the end of June of the present year, thus the Seller is due back a credit for taxes from May 1st through June 30th, which is calculated in the following manner:
Calculation of days: 31 days in May + 30 days in June = 61 days to adjust
Per diem tax adjustment: $5,000 total tax liability / 365 days in a year = $13.70 per day
Total adjustment due from Buyer to Seller on line HUD-1 Line 106: $13.70 per day x 61 days = $835.70