7.4 Settlement, Closing Statements, and Prorations

Debits and credits

A closing (settlement) statement reconciles what each party owes and receives. The two words you must master are:

• Debit = a charge — money a party must pay (it reduces what they walk away with).
• Credit = money received or applied in a party's favor.

Each party has a column. The buyer's debits and credits balance to the cash the buyer must bring; the seller's balance to the seller's net proceeds.

Where the big items land

The sale price is the buyer's largest debit and the seller's largest credit. The buyer's earnest money and new loan are credits that reduce the cash the buyer brings to closing. The seller's loan payoff and commission are debits that reduce net proceeds.

Prorations: dividing shared costs

Some expenses span the closing date and must be split. Proration assigns each party its fair share based on the days each owned the property. The standard exam method uses a 360-day banker's year (each month = 30 days) unless the problem says to use actual calendar days.

Two categories:

• Accrued items — expenses the seller used but has not yet paid (e.g., property taxes paid in arrears). The seller owes their share, so it is a seller debit / buyer credit; the buyer will pay the bill later and is reimbursed now.
• Prepaid items — expenses the seller paid in advance covering time the buyer will own (e.g., taxes paid ahead, prepaid HOA dues). It is a seller credit / buyer debit; the buyer reimburses the seller.

Worked tax proration: Annual property taxes are $3,600, unpaid and owed in arrears. Closing is September 15; the seller owns Jan 1 through closing. Using 30-day months: 8 full months (Jan-Aug) = 240 days + 15 days = 255 days. Daily rate = $3,600 / 360 = $10/day. Seller's share = 255 x $10 = $2,550. Because taxes are unpaid (accrued), this is a seller debit / buyer credit of $2,550.

Rent and prepaid proration

When an income property sells mid-month, rent already collected by the seller for days the buyer will own must be credited to the buyer.

Worked rent proration: Monthly rent is $1,200, collected by the seller on the 1st. Closing is the 20th (30-day month). The seller is entitled to days 1-19 (19 days); the buyer owns from day 20 through 30 (11 days). Daily rent = $1,200 / 30 = $40/day. Buyer's share = 11 x $40 = $440. The seller already holds this rent, so it is a buyer credit / seller debit of $440.

Closing-day and trap reminders

• Read who owns the closing day — the problem will state whether the seller or buyer is responsible for that date. It shifts the count by one day.
• A prepaid item the seller paid ahead (insurance, taxes paid early) is the mirror image of accrued: seller credit / buyer debit.
• Watch the method: 360-day banker's year vs. 365-day actual. Using the wrong divisor changes the daily rate and the answer.
• Items expressed annually must be divided to a daily rate before multiplying by the days owned.

Common closing costs and who pays

Beyond prorations, the settlement statement allocates one-time closing costs. Local custom and the contract decide who pays, but examiners expect the typical defaults:

Remember the balancing principle: the total debits and total credits on the combined statement must reconcile. The buyer's bottom line is the cash to close (the amount the buyer brings); the seller's bottom line is net proceeds (what the seller takes away after payoffs, commission, and prorations).

Working a settlement step by step

Use a consistent routine on every closing problem:

1. Enter the sale price (buyer debit, seller credit).
2. Credit the buyer for earnest money and the new loan.
3. Debit the seller for the existing loan payoff and commission.
4. Compute each proration (taxes, rent, HOA, interest), decide accrued vs. prepaid, then place the debit/credit on the correct sides.
5. Total each party's columns; the difference is the buyer's cash to close and the seller's net proceeds.

Worked seller net: Sale price $300,000; loan payoff $180,000; commission 6% = $18,000; seller's accrued tax proration debit $2,550; other seller costs $1,200. Net proceeds = $300,000 - $180,000 - $18,000 - $2,550 - $1,200 = $98,250. Listing this out prevents the most common mistake — placing a proration on the wrong party or forgetting that an accrued item credits the buyer.

Debits and Credits on the Closing Statement

The settlement statement balances each party's account. A debit is a charge (money owed); a credit is money received or applied in a party's favor.

The buyer's bottom line (cash to close) = total debits − total credits. The purchase price is the buyer's largest debit and the seller's largest credit.

Prorations and the RESPA Closing Disclosure

Prorated items split shared costs at closing. Taxes paid in arrears generate a credit to the buyer and debit to the seller for the seller's days of ownership, because the buyer will pay the full bill later. Prepaid items (insurance, some HOA dues) reverse the direction.

Worked example: $3,000 annual tax, paid in arrears, 365-day year, closing on day 90. Daily = $8.2192. Seller owes 90 days = 90 × $8.2192 = $739.73, debited to the seller and credited to the buyer.

Under TRID, the buyer receives the Closing Disclosure at least three business days before consummation so the figures can be verified against the Loan Estimate.