3.3 Alabama Closing and Settlement

Closing (settlement) is where title transfers and funds change hands. Alabama's closing customs, prorations, and federal settlement rules appear on both portions of the exam.

Who Conducts an Alabama Closing

Alabama is, in practice, an attorney/title-company closing state. Residential closings are typically handled by a closing attorney or an attorney-supervised title company, who:

• Examines title and clears defects.
• Prepares the deed and settlement documents.
• Receives and disburses funds through an escrow/trust account.
• Records the deed and mortgage with the Probate Court of the county where the land lies.

Key Point: Recording in the county Probate Judge's office gives constructive notice and establishes priority. Alabama generally follows a race-notice recording approach - record promptly to protect your interest.

Federal Settlement Rules (RESPA + TRID)

Trap: The Closing Disclosure must be delivered at least 3 business days before consummation - a favorite numeric test item. RESPA prohibits paying or accepting a fee for a referral of settlement business.

Prorations

At closing, recurring costs are prorated between buyer and seller so each pays for the portion of the period they own the property. Common prorated items: property taxes, prepaid HOA dues, rent (for income property), and prepaid insurance.

Worked Example - Tax Proration

Assume annual taxes of $1,200 ($100/month, $3.333/day on a 360-day basis) and a closing on April 1, with taxes paid in arrears and the seller responsible through the day before closing.

• Seller owes Jan 1 - Mar 31 = 3 months = $300 as a credit to the buyer (who will pay the full bill later).
• This $300 appears as a debit to the seller and a credit to the buyer on the settlement statement.

Exam Tip: A debit is a charge to a party; a credit is money in that party's favor. Prepaid items the seller already paid become a seller credit; arrears the seller owes become a seller debit.

Deeds and Title Transfer

To be valid, an Alabama deed must be in writing, name a grantor and grantee, contain a legal description, include words of conveyance, and be signed by the grantor and delivered and accepted. Deeds are recorded in the county Probate Court.

Closing Costs - Who Customarily Pays

Exam Tip: "Customary" cost allocation is negotiable - the contract controls. The exam tests both the customary default and the principle that the purchase agreement governs when it specifies otherwise. Remember the 3-business-day Closing Disclosure rule and that recording provides constructive notice.

A Mini Settlement-Statement Mental Model

On a settlement statement, every figure is either a debit (a charge) or a credit (money in favor) to the buyer or seller. The buyer's debits include the purchase price and their share of closing costs; the buyer's credits include the earnest money already paid and the new loan amount. The seller's credits include the sale price; the seller's debits include the payoff of the existing mortgage and the seller's costs.

Recording, Notice, and Title Insurance

Recording the deed in the county Probate Court gives the world constructive notice of the new owner's interest and protects priority. Title insurance then protects the insured against covered defects not found in the record search:

• Owner's policy - protects the buyer's equity (one-time premium).
• Lender's policy - protects the lender up to the loan balance.

Exam Tip: Distinguish actual notice (you really know) from constructive notice (recording makes it knowable to all). Recording does not transfer title - delivery and acceptance of the deed does - but recording protects the interest against later claims. Tie this back to the Statute of Frauds: the deed, like the contract, must be written and signed to be effective.