7.4 Settlement, Closing Statements, and Prorations

What Happens at Settlement

Settlement (closing) is the meeting or process where title transfers, funds change hands, and documents are signed and recorded. A settlement agent — often an escrow officer, title company, or attorney — prepares the closing statement showing each party's debits (amounts owed/charged) and credits (amounts paid or received).

The statement must balance: the buyer brings cash needed to close, the seller receives net proceeds, and every charge is assigned to the responsible party. Recording the deed and security instrument gives constructive notice and protects priority.

Debits and Credits Cheat Sheet

Think of it this way: a debit is money a party must pay; a credit is money a party has already paid or will receive. The sale price is the buyer's largest debit and the seller's largest credit.

Prorations — The Core Math

Proration divides a continuing expense or income between buyer and seller based on each party's days of ownership, settled as of the closing date. Common prorated items are property taxes, prepaid insurance, mortgage interest, and rent on income property.

Most exams use the statutory (banker's) year of 360 days and 30-day months unless told to use a 365-day calendar year. Two questions decide the entries: (1) Is the item paid in advance or in arrears? (2) Who has used the benefit? Items paid in arrears (like taxes due after the period) become a seller debit / buyer credit because the seller owned the property during the unpaid period.

Worked Proration Example

Scenario: Annual property taxes are $3,600, paid in arrears. Closing is on June 30 using a 360-day year (30-day months). The seller owned the property for the first 6 months (January-June).

• Daily tax = $3,600 / 360 = $10 per day
• Seller's share = 6 months x 30 days = 180 days x $10 = $1,800

Because taxes are unpaid (arrears) and the seller used those 180 days, the seller is debited $1,800 and the buyer is credited $1,800. The buyer will later pay the full tax bill but was reimbursed at closing for the seller's portion.

Prepaid vs. Arrears, and Single vs. Double Entries

The direction of a proration flips depending on whether the item was paid ahead or behind:

A prorated item appears twice on the statement — a debit on one side and a matching credit on the other — because money is shifting between the parties. A non-prorated cost (a recording fee, a one-time transfer tax) is a single entry charged to whoever owes it, with no offsetting entry.

Trap: rent collected in advance is the mirror image of taxes. The seller already has the buyer's money, so the seller is debited and the buyer credited for the post-closing days the tenant has already paid for.

Reading a Closing Statement and Wisconsin Practice

Three numbers anchor every settlement:

1. Buyer's cash to close = total buyer debits − total buyer credits. The buyer's debits (price, loan costs, prorated arrears they assume) exceed their credits (earnest money, new loan), and the difference is the certified funds they bring.
2. Seller's net proceeds = total seller credits − total seller debits. The seller's main credit is the sale price; debits include the loan payoff, commission, and prorated arrears.
3. The closing must balance — every debit to one party has a corresponding credit or charge somewhere.

Worked cash-to-close. Price $300,000 (buyer debit), new loan $240,000 (buyer credit), earnest money $5,000 (buyer credit), buyer closing costs $4,000 (debit), tax proration credit to buyer $1,800. Cash to close = ($300,000 + $4,000) − ($240,000 + $5,000 + $1,800) = $57,200.

Wisconsin note for the state portion: Wisconsin charges a real-estate transfer fee of $3 per $1,000 of value (0.30%), customarily paid by the seller and remitted with the transfer return when the deed is recorded. On a $300,000 sale that is $300,000 / 1,000 × $3 = $900 — a seller debit. Knowing both the federal Closing Disclosure framework and Wisconsin's specific transfer-fee rate prepares you for either portion of the exam.

Who Customarily Pays, and Title Transfer Mechanics

Many closing charges are negotiable, but the exam expects you to know the customary allocation, because a fact pattern that is silent defaults to custom:

Title actually transfers when the deed is delivered and accepted, not when it is signed or later recorded. Recording is not required to pass title between the parties, but it gives constructive notice to the world and protects the buyer's priority against later claims.

Trap: a question may say a deed was signed but "held in escrow." Title has not passed until delivery with intent to convey and the grantee's acceptance — signing alone does not transfer ownership, and recording is about notice, not about who owns the land.