3.4 Pennsylvania Settlement Procedures
Key Takeaways
- Pennsylvania closings are called 'settlements' and are conducted by title companies or attorneys, not by independent escrow companies
- Pennsylvania is a title-theory mortgage state using a two-party mortgage (note + mortgage); it does not use deeds of trust, and foreclosure is judicial
- Pennsylvania realty transfer tax is typically 2% — 1% to the Commonwealth and 1% local — split by custom 50/50, but Philadelphia, Pittsburgh, and others are higher (Allentown rose to 2.5% on Jan. 1, 2026)
- Owner's title insurance is a one-time premium that protects the buyer's equity; the lender's policy protects the loan and is required by most lenders
- Closing costs are prorated and allocated by the agreement and local custom; the federal Closing Disclosure must reach the borrower at least 3 business days before settlement
The Settlement Process
In Pennsylvania the closing is the settlement, and it is run by a title company or an attorney — not the standalone escrow company common in western states. A licensed settlement agent coordinates the title search, document preparation, the settlement statement, signing, funding, and recording.
| Step | What happens |
|---|---|
| 1. Title search | Examine the chain of title; find liens/encumbrances |
| 2. Cure | Clear judgments, payoffs, or defects |
| 3. Documents | Prepare deed, note, mortgage, settlement statement |
| 4. Closing Disclosure | Borrower receives the federal CD at least 3 business days before settlement |
| 5. Signing & funding | Parties sign; funds collected and disbursed |
| 6. Recording | Record the deed and mortgage at the county recorder |
Title Insurance
Title insurance is a one-time premium protecting against title problems that a search may miss.
| Policy | Protects | Who customarily pays |
|---|---|---|
| Owner's policy | The buyer's equity/ownership | Often the buyer in PA (negotiable) |
| Lender's policy | The mortgage lender's interest | Buyer (required by most lenders) |
Covered risks include undisclosed heirs, forged deeds, recording errors, and unknown liens. In Pennsylvania, title insurance rates are filed and regulated, so the premium for a given coverage amount is the same across title agents — a fact the exam may test against the idea that you can 'shop' the premium itself.
Mortgages and Judicial Foreclosure
Pennsylvania uses a two-party mortgage: a promissory note (the promise to repay) plus a mortgage (the lien securing the property). It does not use the three-party deed of trust found in many western states, so there is no trustee and no power-of-sale foreclosure.
Foreclosure is judicial — the lender sues, obtains a judgment, and the property is sold at a sheriff's sale. This is slower than non-judicial states and includes borrower protections such as Act 91 pre-foreclosure notice on owner-occupied homes; deficiency judgments are possible.
Realty Transfer Tax (do the math)
The Pennsylvania realty transfer tax is generally 2% of the sale price: 1% to the Commonwealth plus 1% local (municipality and school district). Custom usually splits it 50/50 (1% each). Some jurisdictions are higher — Philadelphia and Pittsburgh are well above 2%, and Allentown rose to 2.5% total effective January 1, 2026.
| Sale price | 2% total transfer tax | Buyer 1% | Seller 1% |
|---|---|---|---|
| $200,000 | $4,000 | $2,000 | $2,000 |
| $350,000 | $7,000 | $3,500 | $3,500 |
Worked problem: On a $250,000 sale in a standard 2% county split 50/50, total tax is $5,000; the seller's share is $2,500. The tax is collected at settlement and must be paid before the deed is recorded.
Certain transfers are exempt, including many between family members, certain corporate reorganizations, and government transfers.
Closing Costs and Proration
| Typical buyer costs | Typical seller costs |
|---|---|
| Loan origination, appraisal | Commission |
| Lender's title policy, recording | Owner's title policy (often) |
| Prepaid taxes/insurance, 1% transfer tax | Loan payoff, 1% transfer tax |
Unpaid items such as property taxes are prorated as of the settlement date so each party pays for the days they own the property. Always read the agreement: customs vary by county, and the contract controls who pays what.
Proration Math and the Settlement Statement
Proration splits shared expenses fairly at settlement. The exam expects you to compute a tax or fee proration. The general method: find the daily rate, then multiply by the number of days each party is responsible.
Worked proration: Annual property tax is $3,650 and settlement is on day 200 of a 365-day year. Daily rate = $3,650 / 365 = $10/day. If the seller is responsible through the settlement date (200 days), the seller owes 200 x $10 = $2,000 and the buyer is responsible for the remaining 165 days. Whether taxes are billed in advance or in arrears determines who credits whom on the statement.
| Term | Meaning on the settlement statement |
|---|---|
| Debit (charge) | Money a party owes at settlement |
| Credit | Money a party receives or is credited |
| Proration | Splitting a shared cost as of the settlement date |
| Paid in arrears | Charge covers a period already past (common for PA taxes) |
TRID and the Closing Disclosure
Federal TRID (TILA-RESPA Integrated Disclosure) rules govern most residential mortgage closings. The borrower must receive the Closing Disclosure (CD) at least three business days before settlement. Major changes — a higher APR, a different loan product, or a prepayment penalty added — restart the three-day clock. The earlier Loan Estimate is delivered within three business days of application.
Recording and Priority
After settlement, the deed and mortgage are recorded at the county recorder of deeds. Pennsylvania is a race-notice state for recording priority: a later purchaser who buys without notice of a prior unrecorded interest and records first generally has priority. Prompt recording protects the buyer's title and the lender's lien position. Recording also provides constructive notice to the world of the new ownership.
Worked allocation example
On a $300,000 sale in a standard 2% county: total transfer tax is $6,000, customarily split so the buyer and seller each pay $3,000. The buyer also pays the lender's title policy and recording fees; the seller pays the commission and loan payoff. The settlement agent collects the buyer's funds, pays off the seller's mortgage, disburses the commission and transfer tax, and records the documents.
Exam tip: Remember that title insurance is a one-time premium (not annual), that PA does not use deeds of trust, and that the transfer tax must be paid before recording. These three facts appear repeatedly on the state portion.
A Pennsylvania home sells for $250,000 in a county with the standard 2% realty transfer tax split 50/50 by custom. How much transfer tax does the seller pay?
Which statement best describes Pennsylvania's security instrument and foreclosure system?
Who conducts a typical residential settlement in Pennsylvania, and what one-time protection does the buyer usually purchase?