Let's talk about Debits and Credits. Show
The real estate closing statement is a vital part of the home buying process. Every licensee should understand the basics, which is why you will see it on your real estate exam. Let’s begin with some basic definitions. A debit is money you owe, and a credit is money coming to you. The debit section highlights items that are part of the total dollar amount owed at closing. This includes the amount due for closing and title costs, which are generally split between the buyer and the seller- who pays how much is generally negotiable. The good news for the buyer is that there are often credits on the closing statement that reduce the amount of the check they need to write for closing. For example, if a buyer has put down a good faith deposit to hold the house, they will be credited for this. The seller’s debit section includes the cost of all the items they are responsible for covering. This includes things like past due taxes, second mortgages on the home, and repairs or upgrades that need to be made before the buyer will purchase the home. Charges that show up on a closing statement as debits for the buyer and credits for the seller will increase the seller’s net profits, as well as reimburse them for prepaid items and services that will now be the buyer’s responsibility. On a closing statement, a debit for one side is usually balanced by a credit on the other side. For example, if a seller is credited for prepaid taxes they have already paid, there will be a debit for the buyer in the same amount. The closing process may seem complicated, but it often boils down to signing a series of papers that protect the seller, buyer, real estate licensees, and financial institution that provides the loan. Here are some other items that can appear on a typical closing statement. First let’s talk about loans. If a buyer is moving in halfway through the loan period- mid-month, for instance- the buyer’s mortgage interest and other fees will be prorated to cover the period of time they’ll be in possession of the house. Unlike rent, which is paid in advance, mortgage interest is paid in arrears. For example, when you pay a mortgage payment on January 1, it pays the interest for December. Taxes Join the 167,000+ students who chose PrepAgent for their real estate exam prep!Every state bases its property tax calendar year differently. Some states collect property taxes in advance, some collect in arrears, and some collections depend on the time of year. If taxes are prepaid and you’re the seller, you’ll receive a credit. If taxes are prepaid and you’re the buyer, you’ll receive a debit. The opposite is true if taxes are not yet due and payable-sellers receive a debit proration and buyers receive a credit proration. Insurance Prorations At the time of closing, sellers may find that they'll get money back for prepaid insurance. If the seller has paid insurance on your home through the end of June, for example, and closing is taking place in mid-May, the seller will get a refund for the amount of time remaining. They get a credit on the closing statement while the buyer gets a debit. Buyers typically take out a new hazard/fire insurance policy when buying a home. However, if the buyer is assuming the seller's existing loan or buying on a land contract, a buyer might ask the seller to transfer the existing insurance policy. In that case, the seller would get a credit and the buyer gets a debit. Homeowner Association Dues Prorations Since most homeowner associations collect dues upfront, if a seller has not yet paid the dues, they will be paid from the seller's proceeds. The seller will receive a credit for the unused portion of dues, and the buyer receives a debit. Rent Prorations Rent is generally paid in advance. Buyers who purchase an investment property can expect to receive a credit for that portion of the rent which covers the time period the buyer will own the property. For example, a sale that closes on November 15 and involves a tenant-occupied property which rents for $1,000 a month would result in the buyer receiving credit for 15 days of prepaid rent, or $500, while the seller receives a debit of $500. Security deposits held by the seller are also transferred to the buyer as a credit to the buyer and a debit to the seller. I hope that helps you understand debits and credits a little bit more! PrepAgent.com © Copyright 2022 PrepAgent LLC All of the following Closing Costs are generally charged to the Buyer, EXCEPT: a. Owners title insurance premium a. Owners title insurance premium An owner's title policy premium is charged by the title insurance company to insure the buyer of marketable title up to the date the conveying instrument is recorded. It is generally a seller's cost. All of the following closing costs are generally charged to the Seller, EXCEPT: a. Termite inspection fee b. Tax and insurance reserves required for a new budget mortgage. Tax and insurance reserves are required when the purchase is financed with a budget mortgage. The reserves are a buyer's cost. Loans covered by RESPA must comply with the following: a. A Uniform Settlement Statement must be used as the closing statement. The RESPA statute considers the term settlement services as: a. Loan origination services only c. Any service provided in connection with a real estate settlement. Under RESPA settlement services are any service provided in connection with a real estate settlement. What would be violated if a bank required that title insurance be obtained from a particular provider? a. Federal Fair Housing Act c. Real Estate Settlement Procedures Act The Real Estate Settlement Procedures Act (RESPA) prohibits a lender from requiring that the title insurance be acquired from a specific title insurer. A penalty for violating the kickback section of RESPA is: a. A fine of $10,000 and 6 months in prison or both d. A fine of $10,000 and 1 year in prison or both The penalty for violating the kickback section is a fine of $10,000, one-year imprisonment or both. The primary responsibility for RESPA disclosures rests with the: a. Buyer c. Lending institution The lending institution has primary responsibility for compliance with the RESPA disclosure requirements. Conduct prohibited under RESPA includes all of the following EXCEPT: a. Referral to a loan originator in exchange for free office rent at the brokerage b. Referral to an escrow office at a company in which the licensee owns 5% of the company Under RESPA regulations, a referral by someone who owns a 1% or greater interest in the company receiving a referral, such as an escrow or title company, must make a disclosure to the buyer/borrower. These referrals are not prohibited under RESPA, but the buyer must be furnished with a disclosure of the ownership interest among other disclosures. In a transaction closing September 10th, how much interest will be prorated to the seller from a $30,000 second trust deed with a quarterly interest only payment of $750 due October 1. a. $175 Which of the following MOST likely would be prorated on a closing statement? a. Income tax liens c. Homeowner Association monthly fee Homeowner Association fees are collected in advance and would need to be prorated on the closing statement. The loan being assumed would not be prorated, but the interest on the loan assumed would. Income tax liens and title insurance are not prorated items. For which of the following items would there NOT be a proration charge at closing? a. Recording fees a. Recording fees A proration is an allocation of a total amount, which is the case for the Assessments, Taxes and Fire Insurance Premium. The Recording Fees are an expense that is paid by either the buyer or the seller depending on who is benefiting from the recording. Jack is selling his small apartment complex with 12 units that rent for $450 per month. The sale closes on April 18th. His vacancy is 25% but all rent due April 1st is paid. How much rent will be charged to Jack at the closing? a. $2,295 b. $1,755 Jack will be charged for rent paid in advance for 13 days at $135 per day. All of the following would be debits on a seller's closing statement EXCEPT: a. Prepaid rents b. The purchase price The purchase price to be received by the seller is always a credit on the seller's closing statement. Anything that increases the amount that the seller is to receive at the close of escrow is also a credit. Anything that decreases the amount the seller is to receive at the close of escrow is a debit. A mortgage assumption on a settlement statement would appear as a: a. Debit to the buyer d. Credit to the buyer A mortgage assumption means that the seller is no longer responsible for the mortgage debt and the buyer is responsible for the debt. Therefore the seller's relief of the obligation for the debt reduces the amount of cash that the seller will receive from the sale and is therefore a Debit to the Seller, which is not an answer choice. The assumption of the debt by the buyer reduces the amount of cash that the buyer must pay at the closing so it is a Credit to the buyer. In the settlement of the sale of commercial property, which of the following statements is CORRECT? a. The seller is credited with security deposits d. The seller is charged with prorated property taxes The seller is charged with the amount of property taxes for the period of the year that the seller owned the property. Property taxes in Arizona are paid in arrears. The other answer choices are incorrect. Marketable Title is free from all of the following EXCEPT: a. Taking under Eminent Domain a. Taking under Eminent Domain Title insurance does not and cannot protect an owner from taking under eminent domain, a government power. The amount of earnest money appears on closing statements as a: a. Debit to the buyer d. Credit to the buyer The earnest money that has been deposited in escrow reduces the additional funds that the buyer must deposit by the closed of escrow. Any amount that reduces the amount of funds required at closing is a credit to the buyer. A transaction involving a commercial office building will close on June 13th. The building has 24 leases with total annual rentals of $2,256,000. Monthly rentals are current as of June 1st. Security deposits total $1,804,800. The leases begin to expire in August; all of them must be rewritten by October 1st. How much will be charged to the seller at closing for rents collected and security deposits? a. $917,600 d. $1,917,600 The seller is to be charged with the amount of the rent that is paid in advance for the month of June plus the security deposits. The rent per day is computed by dividing the annual rent of $2,256,000 by 360 days. The rent per day is$6,266.666. The rent that is due the buyer and should be charged to the seller is computed by multiplying the days the building belongs to the buyer in June which is 18 days (30 days in June les 12, remember the day of closing belongs to the buyer). The June rent that is to be a charge to the seller and credited to the buyer is $112, 799.99 computed by multiplying $6,266.666 times 18 days. Then add the $1804,800 of security deposits to the rent amount of $112,800 to get the total amount of $1,917,600 A buyer assumed a seller's existing 7%, $180,000 first deed of trust on the settlement date of June 13. The seller made the monthly payment due on June 1 with interest in arrears. Which of the following is a CORRECT settlement entry for the interest? a. $630 seller's credit d. $420 seller's debit The buyer by assuming the loan will make the next payment that is due on July 1st and since interest is paid in arrears that payment will include the interest for the month of June. In the closing statement, the interest expense for the portion of
June that the seller owned the property must be computed and charged to the seller. The buyer will obtain credit for the same amount because the buyer pays the total interest for the month and is reimbursed for the seller's portion in the closing statement. When completing a debit/credit closing statement, an amount that decreases the amount of funds required from the buyer and decreases the cash to be received by the seller would be: a. A credit to the buyer and a debit to the seller a. A credit to the buyer and a debit to the seller An amount that decreases the amount of funds required from the buyer is a credit. An amount that decreases the cash to be received by the seller is a debit. A property is sold for $100,000 with 5% being paid with the offer as a good faith deposit and then 20 days later an additional $10,000. How much does he pay at closing? a. $95,000 c. $85,000 The buyer is purchasing the property for $100,000 and has paid into escrow 5 percent of the purchase price, which is $5,000 ($100,000 times 5%). The purchaser paid into escrow an additional $10,000, so the amount due at closing is $85,000 ($100,000 less $15,000). A buyer is to assume a seller's existing loan with an outstanding balance of $120,000 as of the date of closing. The interest rate is 9% and payments are made in arrears with the last payment made on October 1. Closing is set for October 11. What will be the entry in the seller's closing statement? a. $900 debit d. $300 debit The buyer by assuming the loan will make the next payment that is due on November 1st and since interest is paid in arrears that payment will include the interest for the month of
October. In the closing statement, the interest expense for the portion of October that the seller owned the property must be computed and charged to the seller. The buyer will obtain credit for the same amount because the buyer pays the total interest for the month and is reimbursed for the seller's portion in the closing statement. What is a debit to the buyer?A debit is money you owe, and a credit is money coming to you. The debit section highlights items that are part of the total dollar amount owed at closing. This includes the amount due for closing and title costs, which are generally split between the buyer and the seller- who pays how much is generally negotiable.
Which of the following charges will appear as a debit to them on the settlement statement?The premium for a title insurance policy purchased by the seller would appear on the settlement statement as: a debit to the seller. A title insurance policy purchased by the seller will appear only as a debit to the seller.
What is a debit on the closing statement quizlet?Debits. Money to be paid by buyer or seller as listed on a closing statement. Proration.
Which document spells out for buyers all settlement costs?The HUD-1 lists all costs related to closing the transaction. Federal law requires the form to be used as a standard real estate settlement form in reverse mortgage and mortgage refinance transactions. Most buyers and sellers review the form with a real estate agent, attorney, or settlement agent.
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Which of the following would be a debit to the buyer on the settlement statement?
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