6.3 Settlement and Prorations

The Closing Process and RESPA

Settlement (closing) is the event where the deed and funds change hands and the transaction completes. In Florida, closings are commonly handled by title companies or attorneys acting as the closing agent. The agent orders title work, prepares the settlement statement, collects funds, records the deed, and disburses proceeds.

Federally, the Real Estate Settlement Procedures Act (RESPA) governs settlement on most residential mortgage loans. Under the TRID rule (TILA-RESPA Integrated Disclosure), two forms apply:

• Loan Estimate — given within 3 business days of application.
• Closing Disclosure (CD) — given to the borrower at least 3 business days before closing.

The Closing Disclosure replaced the old HUD-1 settlement statement for consumer mortgage loans. RESPA also prohibits kickbacks and unearned referral fees (Section 8) between settlement-service providers, and it limits how much a lender may require a borrower to hold in an escrow (impound) account for taxes and insurance.

If a buyer waives the 3-business-day review (allowed only for a bona fide personal financial emergency) or if certain changes occur after the CD is issued — a change in APR beyond tolerance, a prepayment penalty added, or a change in loan product — a new 3-business-day waiting period is triggered. Most minor changes do not restart the clock. RESPA applies to federally related mortgage loans on one-to-four-family residential property, which covers the vast majority of Florida home purchases.

Prorations: 365-Day vs 360-Day

Prorating divides shared expenses (property taxes, prepaid rent, HOA dues, interest) fairly between buyer and seller as of closing. Two methods exist:

Florida customarily uses the 365-day method, and by convention the buyer owns the day of closing — so the seller is responsible through the day before closing.

Worked example (taxes): Annual taxes are $3,650; closing is April 1 (non-leap year). Daily rate = 3,650 / 365 = $10/day. The seller owned Jan 1 through Mar 31 = 90 days, so the seller owes 90 × $10 = $900. Because Florida taxes are paid in arrears (billed in November), the buyer typically receives a $900 credit and the seller a $900 debit at closing.

The direction of the proration depends on whether the expense is paid in arrears (seller used it but has not paid — credit buyer, debit seller) or paid in advance (seller prepaid beyond closing — credit seller, debit buyer). Prepaid annual HOA dues, for example, would credit the seller for the unused portion after closing. Always identify (1) the daily rate, (2) the number of days each party owns, and (3) who has already paid, before assigning debits and credits.

Debits, Credits, and Florida Closing Charges

A debit is an amount charged to a party; a credit is an amount in favor of a party. Two columns are reconciled:

• Buyer: purchase price is the buyer's largest debit; the new loan and earnest-money deposit are credits.
• Seller: the price is the seller's largest credit; the existing mortgage payoff and selling costs are debits.

The difference is the cash the buyer must bring and the net the seller receives. An item is never a debit to one side and also a debit to the other for the same dollars — a proration that debits the seller credits the buyer.

Florida closing taxes (who customarily pays): the seller typically pays the deed documentary stamps ($0.70 per $100 of price); the buyer/borrower typically pays the note doc stamps ($0.35 per $100) and the nonrecurring intangible tax (2 mills, $0.002 per dollar of the loan). These are negotiable but tested by custom.

Title Insurance and Escrow

Title insurance protects against defects, liens, and ownership claims; Florida premium rates are promulgated (set by rule). An owner's policy protects the buyer; a lender's (mortgagee) policy protects the lender for the loan balance.

Escrow / trust accounting: earnest money and other client funds must be held in a separate, non-interest-bearing trust account (unless parties agree otherwise) and never commingled with brokerage operating funds. In Florida, a broker who receives a deposit generally must deposit it by the end of the third business day, and Florida law sets strict timelines and escrow-dispute procedures (mediation, arbitration, litigation, or an FREC escrow disbursement order) when buyer and seller disagree over the deposit.

When a broker has conflicting demands or good-faith doubt about who is entitled to the deposit, Florida law requires the broker to notify the Florida Real Estate Commission (FREC) in writing within a set period and then choose one of the statutory escape procedures within a further deadline. Releasing funds to the wrong party, or to oneself, is a serious violation. Commingling (mixing trust funds with the brokerage's own money) and conversion (using client funds for the broker's purposes) are among the most heavily disciplined acts in Florida real estate.

Reconciling the Statement

The finished settlement statement must balance: total debits equal total credits for each party. The buyer's bottom line is the cash needed to close; the seller's bottom line is net proceeds. A quick exam check: any item that appears as a debit to one party and a credit to the other (such as a tax proration or an assumed loan) keeps the statement balanced, whereas a closing cost like the buyer's loan origination fee is a single-entry debit to only the buyer.