7.4 Settlement, Closing Statements, and Prorations

Settlement (closing) is where ownership and money change hands. The exam tests the closing statement — who pays what — and prorations, the math that splits shared costs fairly between buyer and seller as of the closing date.

Debits and Credits

A closing statement lists debits (charges owed) and credits (amounts credited) for each party. The same item is often a debit to one and a credit to the other.

• Purchase price: debit to buyer, credit to seller.
• Earnest money already paid: credit to buyer.
• New loan proceeds: credit to buyer.
• Seller's existing loan payoff: debit to seller.

Who Customarily Pays What

Custom varies by region and is negotiable, but the exam expects defaults:

Trap: earnest money is not an extra credit on top of the price — it is part of the buyer's funds already applied, shown as a credit to the buyer.

Prorations — the Core Skill

Proration splits a recurring expense (taxes, HOA dues, prepaid rent, interest) at the closing date. Two conventions:

• Statutory/banker's year: 360 days, 30 days/month — common on exams unless told otherwise.
• Calendar (365-day): actual days.

Steps: (1) find the annual amount; (2) divide to a daily rate; (3) multiply by the number of days the responsible party owns/owes. Arrears items (paid after the period, like most property taxes) are usually a seller debit / buyer credit because the seller used the time but the buyer will pay the bill.

Worked Example — Property Tax Proration (arrears, 360-day)

Annual taxes are $3,600, unpaid, and closing is April 16. Seller owes for Jan 1 through April 15.

1. Daily rate = $3,600 ÷ 360 = $10/day.
2. Days seller is responsible = 3 full months (Jan, Feb, Mar = 90 days) + 15 days (April 1–15) = 105 days.
3. Seller's share = 105 × $10 = $1,050.

Because taxes are paid in arrears, this $1,050 is a debit to the seller and a credit to the buyer — the buyer will later pay the full bill but is reimbursed for the seller's portion now.

Worked Example — Prepaid Rent (credit to buyer)

A rented duplex closes June 10. Tenant prepaid $2,400 rent for June (30-day month).

1. Daily rent = $2,400 ÷ 30 = $80/day.
2. Buyer owns June 10–30 = 21 days (count the closing day to the buyer in this convention).
3. Buyer's share of rent = 21 × $80 = $1,680.

The seller collected rent for days the buyer will own, so that $1,680 is a credit to the buyer / debit to the seller. Prepaid items flip direction versus arrears items — a frequent trap.

Reconciling the Statement and the RESPA Heritage

Every closing statement must balance: total debits equal total credits for each side, and the buyer's required cash to close is the bottom line. The settlement statement evolved from the RESPA HUD-1; for most consumer mortgages it is now the TRID Closing Disclosure, but commercial and cash deals may still use a HUD-1-style ALTA settlement statement.

Cash to close ≈ purchase price + buyer's closing costs − earnest money − loan amount.

Worked Example — Buyer's Cash to Close

Price $320,000; buyer puts 20% down and finances $256,000. Buyer's closing costs (points, title, recording, prepaids) total $9,400, and earnest money already deposited is $5,000.

1. Down payment = $320,000 × 20% = $64,000.
2. Add closing costs: $64,000 + $9,400 = $73,400.
3. Subtract earnest money already paid: $73,400 − $5,000 = $68,400 cash to close.

The loan amount is not added to cash to close — it is paid by the lender directly to the seller and appears as a buyer credit on the statement.

Common Proration Items and Direction Cheat-Sheet

Knowing the direction (who gets debited vs. credited) is worth as many points as the arithmetic:

Rule of thumb: if the seller already paid for time the buyer will use, credit the buyer; if the seller used time the buyer will pay for, debit the seller.

RESPA Closing Rules a Salesperson Must Know

Beyond the arithmetic, the exam tests RESPA's consumer protections that shape closing. RESPA applies to most federally related residential mortgage loans (one-to-four family) and prohibits kickbacks and unearned referral fees between settlement-service providers - an agent may not accept a fee for steering a buyer to a particular title or escrow company.

Under the TRID rule, the lender must deliver the Loan Estimate within three business days of application and the Closing Disclosure at least three business days before consummation, giving the borrower time to compare final terms against the estimate. Certain changes (a higher APR, a prepayment penalty added, or a loan-product switch) restart that three-day clock. RESPA also limits the lender's required escrow/impound cushion for taxes and insurance. These rules explain why closings cannot simply be rushed to a same-day signing once figures change.