Do all pre-paid inspection charges have to be itemized on the HUD-1?

QUESTION: A radon test was performed on behalf of a buyer during the due diligence period. Even though the test showed 6.0, the buyer did not ask the seller to mitigate for  radon. The buyer is concerned that if the radon inspection is paid for at closing, and the payment is referenced on the HUD-1 Settlement Statement, it will raise a red flag with his lender. Can the buyer pay for the test before closing and then not put it on the HUD-1 Settlement Statement?

ANSWER: If the radon inspection was required by the buyer’s lender, the payment must be shown on the HUD-1, regardless of whether that payment was made “outside”  closing. If the inspection was not required by the lender, disclosure on the HUD-1 may be advisable. However, based on our research, it is not clear whether disclosure on the HUD-1 is mandatory.

The HUD-1 is a form that was developed by the US Department of Housing and Urban Development (“HUD”). The Real Estate Settlement and Procedures Act states that the form “shall conspicuously and clearly itemize all charges imposed on the borrower and all charges imposed on the seller in connection with the settlement (of a real estate  transaction).” A note near the top of the form discusses the inclusion of charges paid outside the closing.

HUD has developed instructions for completing the HUD-1 (see 24 CFR – Chapter XX – Part 3500 – Appendix A). Those instructions state: “The settlement agent shall  complete the HUD-1 to itemize all charges imposed upon the Borrower and the Seller by the loan originator and all sales commissions, whether to be paid at settlement or  outside of settlement, and any other charges which either the Borrower or the Seller will pay at settlement.” Following those instructions literally, a radon inspection charge  paid prior to closing would not have to be included on the HUD-1 unless the lender insisted on that inspection.

However, earlier this year HUD published an updated “Settlement Cost Booklet” which gives slightly different guidance. You can find that booklet online by Googling HUD  Settlement Cost Booklet 2014. In discussing the completion of the “Series 1300” section of the HUD-1, the booklet states: “In addition to services the loan originator required  there may be additional services that you chose… A charge for a pest inspection or survey will appear as a line item in the 1300 series of the HUD-1, if the borrower elected  to obtain an inspection or survey that was not a condition of the loan or required by the lender.” The highlighted language suggests that all transaction-related inspection  charges should be shown on the HUD-1, even if the inspections in question were not lender-required.

In the 2013-2014 edition of its Real Estate Manual, the North Carolina Real Estate Commission discusses the charges that must and may be itemized in Section 1300 of the  HUD-1: “This section must be used to record charges to the borrower for lender-required services from providers that the borrower can choose, such as a survey or pest  inspection. The section may also be used to record miscellaneous additional specific settlement charges to either the borrower or seller, such as charges for a home  inspection, environmental inspection, home warranty, and courier fee for delivery of payoff(s) of seller’s mortgage or equity loan to the lienholder(s).” That language suggests  that disclosure of inspection charges is only mandatory if the services in question were lender-required.

To avoid a lender’s claim that material facts were concealed, agents may wish to recommend the itemization of all charges on the HUD-1, regardless of whether the  inspections in question were mandated by the lender. The closing attorney who acts as the settlement agent will have to make the ultimate decision on what to include.