7.4 Settlement, Closing Statements, and Prorations

Debits and credits

A settlement (closing) statement accounts for every dollar moving between buyer and seller. Each party has its own column that must balance.

• Debit = a charge against a party — money that party owes or pays.
• Credit = money in favor of a party — money received or already paid.

The most-tested entries:

Trap: the sales price is a debit to the buyer (the buyer owes it) but a credit to the seller (the seller receives it). The earnest money is a credit to the buyer because it was already paid and reduces what the buyer brings to closing.

Single-entry vs. double-entry items

Some amounts appear in only one party's column (single entry); others appear in both, once as a debit and once as a credit (double entry), because money passes between the parties.

• Double-entry (proration) example: unpaid property taxes the seller owes for the time they owned the property become a credit to the buyer and a debit to the seller — the buyer will pay the full tax bill later, so the seller funds their share now.
• Single-entry example: the buyer's loan origination fee is a debit to the buyer only; it does not involve the seller.

Who pays the day of closing?

The contract or local custom decides whether the seller owns the day of closing (seller pays through closing day) or the buyer does. The exam will tell you — read carefully, because including or excluding that one day changes the answer. The default convention used on many exams: the seller owns the day of closing.

Proration mechanics

Prorations split shared, time-based costs fairly as of the closing date. The standard method on most national exams uses a 360-day banker's year with 30-day months (the statutory or banker's method). Some questions instead require actual days in the month/year — read the instruction.

Four-step recipe:

1. Find the annual (or monthly) amount of the item.
2. Divide to get a per-day rate (annual ÷ 360, or monthly ÷ 30).
3. Count the number of days belonging to the responsible party (watch the day-of-closing rule).
4. Multiply per-day rate × days = the proration; assign it as a debit/credit.

Prepaid vs. arrears:

• Arrears (paid after the period, e.g., property taxes in many areas): the seller owes for time already used → credit buyer / debit seller.
• Prepaid (paid in advance, e.g., annual HOA dues, insurance, prepaid rent the seller collected): the seller paid past closing → credit seller / debit buyer (or, for collected rent owed to the buyer, credit buyer).

Worked proration example

Property taxes are $3,600 for the year, paid in arrears, and unpaid at closing on September 1. The seller owns the day of closing. Use the 360-day banker's year.

Step 1 — Annual amount: $3,600. Step 2 — Per-day rate: $3,600 ÷ 360 = $10/day. Step 3 — Days belonging to the seller (Jan 1 through Aug 30 = 8 full months at 30 days = 240 days, plus Sept 1 closing day = 241 days). Step 4 — Seller's share: 241 × $10 = $2,410.

Because taxes are in arrears and the buyer will pay the full bill later, the $2,410 is a debit to the seller and a credit to the buyer.

Rent proration trap

If the seller collected $1,500 monthly rent on Sept 1 and closes Sept 1 (seller owns day of closing), the buyer is owed rent for Sept 2–30 = 29 days × ($1,500 ÷ 30 = $50/day) = $1,450, a credit to the buyer / debit to the seller. Collected-but-unearned rent always flows to the buyer, the new owner.

Marketable Title, Closing Roles, and Post-Closing Steps

Settlement is more than prorations - the exam tests what must be delivered, who does what, and what happens after the table.

Marketable title and the closing exchange

The seller must deliver marketable title - title reasonably free of defects, liens, and encumbrances that a prudent buyer would accept. Title is examined through a title search and abstract or a title-insurance commitment; outstanding liens (an unpaid mortgage, a mechanic's lien) must be cleared or paid from proceeds at closing. At the table the seller delivers the deed and the buyer delivers the funds; the deed is then recorded to give constructive notice and protect the buyer's priority.

Who does what

RESPA at the closing table and post-closing

RESPA's Closing Disclosure must reach the borrower at least three business days before consummation so the buyer can compare it to the Loan Estimate. After closing, the deed is recorded, the seller's old loan is paid off and released (satisfaction of mortgage or deed of reconveyance), and the new mortgage is recorded.

Worked entry check: a $3,600 annual tax bill, unpaid (arrears), at a September 1 closing on a 360-day year produces a per-day rate of $10; the seller owes Jan 1 through the closing day. Because the buyer pays the full bill later, the seller's share is a debit to the seller and credit to the buyer - the most common single-line settlement question. Knowing the roles, the marketable-title duty, and the arrears-vs-prepaid direction answers most settlement items.