7.4 Settlement, Closing Statements, and Prorations

The Closing Process and Who Does What

Settlement is where documents are signed, funds disbursed, and title transferred. Typical sequence:

1. Title search and title commitment issued.
2. Loan conditions cleared; final underwriting done.
3. Final walkthrough confirms condition and repairs.
4. Closing Disclosure reviewed (received 3 business days prior).
5. Documents signed, funds wired, deed recorded, title policy issued.

The escrow/closing agent is a neutral party that holds funds and documents until every condition is met, then disburses. The title company runs the search and issues title insurance. Depending on the state, the closing agent may be a title company, an escrow officer, or an attorney.

Who Signs Which Document

This table is a guaranteed exam item.

Recording the deed provides constructive notice to the world and establishes priority. Until recording, a buyer may hold equitable title but not record-title protection. Title insurance covers losses from defects not found in the search (forged deeds, undisclosed heirs, recording errors) — it protects against past problems, not future maintenance, and does not replace the search.

Reading the Settlement Statement: Debits and Credits

Each party has a column of debits (charges) and credits (amounts in their favor).

• A debit to a party means money that party owes or that reduces their proceeds.
• A credit means money owed to that party.

Key paired entries:

• Purchase price — debit buyer, credit seller.
• Earnest money — credit buyer (already on deposit).
• New loan proceeds — credit buyer.
• Seller's existing loan payoff — debit seller.

Double-entry rule: most items hit both sides oppositely. The price is a buyer debit and a seller credit because the buyer pays it and the seller receives it. Getting the direction right is half of the closing math on the exam.

Prorations: Methods and Setup

Proration allocates a shared expense between buyer and seller based on the closing date. First decide the daily rate method:

• Statutory / 365-day method (actual days): annual amount ÷ 365 (or 366) for the daily rate, using actual days.
• 30-day / banker's (statutory 360) method: each month = 30 days, year = 360 days.

Then decide whether the item is paid in arrears (property taxes in most areas — the seller owes for the time they owned it) or prepaid (insurance, some HOA dues — the seller has paid ahead and gets a credit for the buyer's portion).

Convention: on the exam, the seller usually owns the day of closing unless told otherwise.

Worked Proration

Annual property taxes are $3,650, paid in arrears, and closing is June 30 (181 days, Jan 1–Jun 30, using 365-day actual method; seller owns closing day).

1. Daily rate = $3,650 ÷ 365 = $10/day.
2. Seller's days owned = 181.
3. Seller's share = 181 × $10 = $1,810.

Because taxes are in arrears (not yet paid), the seller's $1,810 share is owed to the buyer, who will pay the full bill later. On the statement that is a debit to the seller and a credit to the buyer of $1,810.

Now the 30-day method on the same facts: Jan–Jun = 6 × 30 = 180 days; daily rate = $3,650 ÷ 360 = $10.139; seller share ≈ 180 × $10.139 = $1,825. Note the methods differ by a few dollars — read which one the question demands.

Worked Example: Closing-Statement Prorations

At closing, recurring costs are prorated so each party pays only for the period it owned the property. The exam usually uses a 360-day banker's year (30-day months) unless told otherwise. Determine who owes whom: a prepaid item the seller already paid (such as annual taxes paid in advance) generates a credit to the seller and a debit to the buyer; an unpaid item the seller owes through closing (such as accrued but unbilled taxes) generates a credit to the buyer and a debit to the seller.

Worked example: annual property tax is $3,600, paid in advance for the calendar year, and closing is June 30 (180 days used by the seller). Daily tax = $3,600 / 360 = $10. The seller has prepaid the buyer's remaining 180 days: 180 x $10 = $1,800. Because the seller paid for time the buyer will own, the buyer is debited $1,800 and the seller is credited $1,800. On the statement, the buyer's debits are amounts the buyer must bring; the seller's credits increase the seller's net proceeds.

Debits, Credits, and Who Pays

On a settlement statement, a debit is a charge a party must pay and a credit is an amount in a party's favor. The sale price is a debit to the buyer and a credit to the seller. The earnest-money deposit is a credit to the buyer. A new loan is a credit to the buyer; the seller's existing loan payoff is a debit to the seller. Prepaid expenses follow the proration rule covered above. The buyer's bottom line is the cash needed to close (total debits minus total credits), while the seller's bottom line is net proceeds (total credits minus total debits).