7.4 Settlement, Closing Statements, and Prorations
Key Takeaways
- On a closing statement a debit is money a party owes and a credit is money in its favor; the purchase price is a buyer debit and a seller credit.
- Accrued items such as taxes in arrears debit the seller and credit the buyer, while prepaid items credit the seller and debit the buyer.
- The day of closing is typically charged to the buyer; always confirm whether the problem uses a 360-day banker's year or a 365-day calendar year before computing the daily rate.
- Commission is almost always a seller debit, while the buyer pays most loan-related charges such as origination fees and the lender's title policy.
- For consumer mortgages, settlement is itemized on the Closing Disclosure, and the buyer's cash to close equals total buyer debits minus total buyer credits.
Reconciling the Money at the Table
Settlement (closing) is where the buyer pays, the seller conveys, and every credit and debit is reconciled. The exam tests whether you can read a closing statement, identify who pays what, and calculate prorations—the splitting of recurring costs between buyer and seller as of the closing date.
Debits and Credits Basics
On a closing statement, a debit is an amount a party owes (reduces their proceeds or increases their cash to bring), and a credit is an amount in their favor.
- The purchase price is a debit to the buyer and a credit to the seller.
- Earnest money already deposited is a credit to the buyer.
- The new loan is a credit to the buyer (it pays part of the price).
- The seller's existing loan payoff is a debit to the seller.
Some items appear on only one side. A single-entry item affects just one party (e.g., the buyer's loan origination fee is a buyer debit only). A double-entry item is a debit to one and a credit to the other (e.g., the sale price, or a proration).
Prorations: Accrued vs. Prepaid
Prorations divide ongoing expenses fairly at closing:
- Accrued (arrears) items are owed but not yet paid—the seller used them and must reimburse the buyer. Example: property taxes paid at year-end. The seller is debited, the buyer credited.
- Prepaid items are paid in advance beyond closing—the buyer reimburses the seller. The seller is credited, the buyer debited.
Exam tip: the day of closing is typically charged to the buyer unless the question states otherwise.
Proration Math: The Statutory (Banker's) Year
Many exams use a 360-day year with 30-day months (the "statutory" or "banker's" method); others use a 365-day calendar method. Read the question.
Worked example (360-day method): Annual property taxes are $3,600, unpaid (accrued), and closing is April 30. Daily rate = $3,600 ÷ 360 = $10/day. The seller owned Jan–Apr = 4 months × 30 = 120 days. Seller's share = 120 × $10 = $1,200, entered as a seller debit and buyer credit.
Worked example (365-day calendar method): Same $3,600 annual tax, closing April 30 (day 120 of a non-leap year). Daily rate = $3,600 ÷ 365 = $9.863. Seller's share = 120 × $9.863 = $1,183.56. The two methods differ slightly—always confirm which year length the problem specifies before dividing.
Common Closing Cost Allocations
| Cost | Typically paid by |
|---|---|
| Loan origination fee / discount points | Buyer |
| Owner's title policy | Negotiable (often seller) |
| Lender's title policy | Buyer |
| Transfer/recording of new deed | Buyer (deed); seller (release) |
| Real estate commission | Seller |
| Survey | Often buyer |
Allocations vary by region and contract, so treat the table as default exam logic, not absolute law. The commission is almost always a seller debit.
Worked Proration: Property Taxes
Prorations divide a shared expense as of the closing date. Using the statutory (banker's) year of 360 days and 30-day months, suppose annual taxes are $3,600 and have not been paid, with closing on April 30 (seller responsible Jan 1 through April 30 = 4 months).
- Daily rate = $3,600 / 360 = $10 per day
- Seller's share = 4 months x 30 days x $10 = $1,200
Because taxes are unpaid, the seller credits the buyer $1,200 (a seller debit, buyer credit) so the buyer can pay the full bill later. If the seller had prepaid the taxes, the proration reverses: the buyer reimburses the seller for the post-closing portion (buyer debit, seller credit). Always ask first whether the item is accrued (owed, not yet paid) or prepaid.
Worked Proration: Rent and the Day-of-Closing Convention
Income prorates the same way. If a tenant has prepaid $1,500 monthly rent and closing is on the 15th of a 30-day month, the seller has collected rent the buyer is entitled to for the second half of the month: $1,500 / 30 = $50 per day x 15 remaining days = $750 credited to the buyer. A recurring exam variable is who owns the day of closing — most problems assign the closing day to the buyer (seller pays through the day before), but always follow the convention the question states. Confirm whether the problem wants a 360-day banker's year or the exact 365-day calendar, because the daily rate changes the answer.
RESPA's Closing Disclosure at Settlement
For most consumer mortgages, the itemized settlement statement is the Closing Disclosure under TRID. It lists every debit and credit, the loan terms, and the cash needed to close. The buyer's cash to close equals total debits minus total credits on the buyer's side—what they must wire to settlement.
Annual property taxes of $2,400 are unpaid and closing occurs on June 30 using a 360-day year. What is the proration entry?
On a buyer's closing statement, how is the new mortgage loan recorded?
keyTakeaways
- A debit is money a party owes; a credit is money in their favor. The price is a buyer debit and seller credit.
- Accrued items (taxes in arrears) debit the seller and credit the buyer; prepaid items credit the seller and debit the buyer.
- The closing day is typically charged to the buyer; confirm whether to use a 360- or 365-day year before computing.
- Commission is a seller debit; the buyer pays most loan charges.
- For consumer mortgages, settlement is itemized on the Closing Disclosure, and buyer cash to close = total debits − total credits.
Summary
Closing reconciles every dollar through debits and credits, splitting recurring costs by proration. Master the accrued-versus-prepaid direction, the 360- versus 365-day daily-rate calculation, and standard cost allocations, and you can read any Closing Disclosure and compute the buyer's cash to close—the practical heart of the settlement section on the national exam.