7.4 Settlement, Closing Statements, and Prorations

Debits and credits

A closing statement records money flow. For each party:

• A debit is a charge—money that party must pay or that reduces what they receive.
• A credit is money in that party's favor—what they receive or have already paid.

The sale price is always a debit to the buyer (they owe it) and a credit to the seller (they receive it). The buyer's loan and earnest money are credits to the buyer because they reduce the cash the buyer must bring.

Proration basics

Proration splits a shared expense or income as of the closing date so each party pays only for the time they own the property. Three classic prorated items:

• Property taxes — often paid in arrears, so the seller owes their share up to closing.
• Mortgage interest — typically in arrears.
• Rent (income-producing property) — usually collected in advance (prepaid), so the seller credits the buyer for the unused days.

Rule of thumb:

• Paid in arrears (taxes, interest): seller hasn't paid yet → debit seller, credit buyer.
• Paid in advance (prepaid taxes, insurance, rent received): seller already paid/received → credit seller, debit buyer (or for rent received, credit buyer the days they will own).

Worked proration: property taxes (arrears, 360-day year)

Annual taxes are $3,600, unpaid, and closing is April 30. The seller owned the property January 1 through April 30 = 4 months. Using a 360-day banker's year (30-day months):

• Daily rate = $3,600 ÷ 360 = $10/day.
• Seller's share = 4 months × 30 days × $10 = 120 days × $10 = $1,200.

Because taxes are in arrears (buyer will pay the full bill later), the seller owes their portion now:

• Debit seller $1,200; credit buyer $1,200.

The buyer is reimbursed for the seller's months and will pay the entire bill when due.

Worked proration: prepaid rent (advance)

A seller of a rental collected $1,500 rent for June on June 1. Closing is June 16 (a 30-day month). The buyer owns the property for the remainder of June.

• Days buyer owns: June 16–30 = 15 days (closing day commonly charged to the buyer).
• Daily rent = $1,500 ÷ 30 = $50/day.
• Buyer's share = 15 × $50 = $750.

The seller already has the cash but the buyer is entitled to those days, so:

• Credit buyer $750; debit seller $750.

Trap — 360 vs. 365: A statutory/actual proration uses 365 days and the exact days in each month. If the question says "use a 365-day year" or "actual days," divide the annual figure by 365 and count calendar days. The default banker's method (360 days, 30-day months) gives cleaner numbers—read which the question demands.

Single vs. double entries and balancing the statement

Every closing item is either a single entry (affecting only one party) or a double entry (a debit to one party and an offsetting credit to the other). The sale price is the classic double entry: debit buyer, credit seller. The buyer's new loan is a single entry — a credit to the buyer only — because the lender, not the seller, provides it.

The buyer's bottom line is cash to close = total debits − total credits; the seller's is net proceeds = total credits − total debits.

Worked cash-to-close calculation

A buyer purchases at $320,000 with a $256,000 loan (80% LTV) and $8,000 earnest money already deposited. Buyer's closing costs (loan fees, title, recording) total $6,500, and prorated taxes credit the buyer $1,100.

• Total buyer debits: $320,000 (price) + $6,500 (costs) = $326,500
• Total buyer credits: $256,000 (loan) + $8,000 (earnest) + $1,100 (tax proration) = $265,100
• Cash to close = $326,500 − $265,100 = $61,400

The buyer must bring $61,400 to settlement. Notice the down payment ($64,000) is reduced by the earnest money already paid and the tax credit, illustrating why credits lower the cash a buyer needs.

Trap: Recording fees, transfer taxes, and title charges are allocated by custom and contract, not by a fixed national rule — read who the question says pays each item before assigning the debit.

Who typically pays what at closing

Although allocation is negotiable, the exam expects a default mental model of customary charges so you can spot an unusual fact pattern.

Worked seller-net check: A seller sells for $340,000, pays a 6% commission ($20,400), a $215,000 loan payoff, and $3,600 in other seller costs. Net proceeds = $340,000 − $20,400 − $215,000 − $3,600 = $101,000. This single subtraction is the seller-side mirror of the buyer's cash-to-close and is a very common exam item.