7.4 Settlement, Closing Statements, and Prorations

Who Signs What

Closing (settlement) is where documents are signed, money moves, and title transfers. The single most-tested fact set is which party executes which document.

Trap: the seller signs the deed (granting title), while the buyer signs the note and security instrument (creating and securing the new debt).

Escrow, Title, and Closing Agents

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

Because escrow is neutral, neither buyer nor seller controls the funds during the process — a frequent distractor on the exam.

The Closing Timeline and the Final Walkthrough

A typical settlement follows an orderly sequence the exam likes to test:

1. Open escrow and order the title search and commitment.
2. Lender clears underwriting conditions and issues a loan commitment.
3. The buyer receives the Closing Disclosure at least three business days before consummation.
4. The buyer completes a final walkthrough to confirm the property's condition and that agreed repairs were done.
5. Documents are signed, funds are wired, the deed is recorded, and the title policy issues.

The walkthrough is not an inspection or a renegotiation; it simply verifies the property matches the contract just before closing. Possession normally transfers at closing unless the contract says otherwise, such as a post-closing occupancy agreement.

Debits and Credits on the Closing Statement

A closing statement is a two-column ledger for each party.

• A debit is a charge — money that party owes at closing.
• A credit is an amount applied to (in favor of) that party.

Learn these anchor entries:

The sale price is a debit to the buyer (they must produce it) and a credit to the seller (they receive it). Earnest money already on deposit is a buyer credit because the buyer paid it earlier.

Prorations: The Concept

Prorations divide a shared expense or income by the closing date so each party pays only for the time they own the property. The first decision is who has already paid:

• If the seller prepaid an item covering days the buyer will own, the seller is credited and the buyer is debited (the buyer reimburses the seller).
• If an item is paid in arrears (not yet paid) and the seller used part of the period, the seller is debited and the buyer is credited (the buyer will pay the full bill later).

Exams usually use a 360-day statutory year (12 months of 30 days) unless told to use the actual 365-day year.

Proration: Worked Tax Example

Annual property tax is $3,600, paid in arrears, and closing is on April 30 (seller owned January 1 through April 30 = 4 months).

• Monthly tax = $3,600 / 12 = $300/month
• Seller's share = 4 months × $300 = $1,200

Because the tax is unpaid and the seller used 4 months, the seller owes their share. The closing statement shows a $1,200 debit to the seller and a $1,200 credit to the buyer, since the buyer will pay the entire bill when it comes due. (Daily method: $3,600 / 360 = $10/day × 120 days = $1,200 — same result.)

Proration: Rent Example, Recording, and Title Insurance

Rent example: A tenant prepaid $1,500 for the full month and closing is on the 15th (30-day month). The seller collected rent for days the buyer will own. Buyer's share = 15/30 × $1,500 = $750, shown as a credit to the buyer and a debit to the seller.

Recording: Recording the deed gives constructive notice to the world and fixes lien priority (generally first in time, first in right). Until recorded, the buyer may hold equitable rights but the public record does not yet show them as owner.

Title insurance: An owner's policy protects the buyer against defects that existed before the policy date (forged deeds, unknown heirs, recording errors). A lender's policy protects the lender for the loan balance. Title insurance does not cover future events — only pre-existing, undiscovered defects.

A Full Buyer's Cash-to-Close Calculation

Closing math often asks for the cash a buyer must bring. Work it as debits minus credits.

A buyer purchases at $320,000 with a $256,000 new loan (80% LTV). They paid $5,000 earnest money. Buyer closing costs (loan fees, recording, title) total $6,400, and prepaid property taxes credited to the buyer are $900.

• Buyer debits: sale price $320,000 + closing costs $6,400 = $326,400
• Buyer credits: loan $256,000 + earnest money $5,000 + tax proration $900 = $261,900
• Cash to close = $326,400 − $261,900 = $64,500

The buyer must wire $64,500 at settlement. Notice the loan, earnest money, and any proration in the buyer's favor all reduce cash needed.

A Seller's Net-Proceeds Calculation and the 365-Day Method

The mirror calculation finds the seller's net. On the same $320,000 sale, the seller owes a payoff of $180,000 on an existing loan, a 6% commission, and $2,200 of seller closing costs; the seller also owes a tax proration of $900 (the buyer's credit above).

• Commission = 6% × $320,000 = $19,200
• Seller debits: payoff $180,000 + commission $19,200 + costs $2,200 + tax proration $900 = $202,300
• Seller credit: sale price $320,000
• Net to seller = $320,000 − $202,300 = $117,700

When a problem specifies the actual 365-day year instead of the 360-day banker's year, compute a true daily rate: $3,650 annual tax / 365 = $10/day, then multiply by the exact number of ownership days. Always read which year the question requires before dividing.