Settlement math: prorations, debits and credits, net to seller, cost to buyer, and closing fees

Follow the money

Settlement math reconciles what each party owes with what has already been paid or funded. A debit is a charge to a party. A credit is an amount in that party's favor. The purchase price is a buyer debit and a seller credit. Loan proceeds and earnest money applied at closing reduce the buyer's remaining cash requirement. A seller's mortgage payoff reduces seller proceeds; it is not the buyer's new loan.

Allocate shared expenses

A proration divides an expense or income between ownership periods. Use the convention stated in the question or contract; actual allocations and fee responsibilities depend on the agreement and applicable rules. A 360-day, 30-day-month method uses twelve 30-day months. An actual-day, 365-day method counts actual calendar days. Identify who owns the closing day before counting.

For unpaid annual taxes of $3,600, assume a 360-day year, 30-day months, an April 11 closing, and the buyer owning closing day. Seller days are 90 plus 10, or 100. The daily charge is $3,600 divided by 360, or $10. The seller's share is 100 times $10, or $1,000. If the buyer will pay the full bill later, debit the seller and credit the buyer $1,000.

If the seller instead prepaid a transferable expense, the buyer reimburses the seller for the buyer's share: buyer debit, seller credit. If the seller collected rent in advance, the buyer's share of that income produces a seller debit and buyer credit. Follow who paid or collected the money, not just the expense's name.

Calculate the bottom line

Seller net equals sale price plus seller adjustments in the seller's favor, minus mortgage payoff, negotiated brokerage compensation, seller expenses, and seller charges. A $300,000 price minus a $180,000 payoff, $15,000 agreed compensation, and $5,000 other charges leaves $100,000. That is cash proceeds, not taxable profit.

Buyer cash to close equals purchase price plus buyer closing costs, prepaids, reserves, and debit adjustments, minus financing, deposits already paid, and credits. With a $300,000 price, $9,000 costs, $240,000 loan, $6,000 deposit, and $3,000 seller credit, the calculation is $309,000 minus $249,000, or $60,000. Do not subtract the down payment again.

One discount point equals one percent of the loan amount. Two points on $240,000 cost $4,800: $240,000 times 0.02. Prepaid insurance buys coverage; escrow reserves fund future bills. Include each charge once and keep deposits already paid separate from money still due.