Closing Statement

What is a Closing Statement?

A closing statement, also known as a settlement statement or Closing Disclosure (CD) for residential transactions, is a comprehensive document detailing all financial transactions between the buyer and seller in a real estate deal. It itemizes all credits and debits for both parties, ensuring transparency and accountability for every dollar exchanged during the closing process. This critical document is prepared by the closing agent, typically an escrow officer or attorney, and must be reviewed carefully by all parties before signing. It reconciles the purchase price with all associated costs, adjustments, and funds disbursed, providing a final financial snapshot of the transaction. For residential properties, the TILA-RESPA Integrated Disclosure (TRID) rule mandates the use of the Closing Disclosure, which replaced the HUD-1 Settlement Statement for most transactions after October 2015.

Key Components of a Closing Statement

A closing statement is structured to clearly present the financial obligations and benefits for both the buyer and the seller. Understanding its various sections is crucial for verifying accuracy and identifying any discrepancies.

• Purchase Price and Loan Details: This section confirms the agreed-upon sale price of the property and outlines the specifics of the buyer's loan, including the principal amount, interest rate, and any loan-related fees.
• Buyer's Debits and Credits:
• Debits (Amounts Due from Buyer): These are costs the buyer must pay. Common debits include the purchase price, loan origination fees, appraisal fees, inspection fees, title insurance premiums (buyer's portion), recording fees, and prepaid property taxes or homeowner's insurance.
• Credits (Amounts Credited to Buyer): These are funds that reduce the amount the buyer needs to bring to closing. Examples include the earnest money deposit, the principal amount of a new loan, and any seller credits for repairs or closing costs.
• Seller's Debits and Credits:
• Debits (Amounts Due from Seller): These are costs the seller must pay. Common debits include the outstanding mortgage payoff, real estate agent commissions, transfer taxes, title insurance premiums (seller's portion), and prorated property taxes or HOA dues for the period they owned the property.
• Credits (Amounts Credited to Seller): These are funds the seller receives. The primary credit is the purchase price of the property.
• Prorated Expenses: Many expenses, such as property taxes, homeowner's association (HOA) dues, and sometimes utilities, are paid in advance or arrears. The closing statement prorates these costs, meaning they are divided between the buyer and seller based on the closing date. For example, if property taxes are paid annually in January and closing is in July, the seller will owe the buyer for the portion of the year they occupied the property after January.
• Closing Costs: These are the various fees and expenses incurred by both the buyer and seller during the real estate transaction. They can include lender fees, title fees, government recording fees, prepaid items (like property taxes and insurance), and real estate commissions. These costs can significantly impact the net proceeds for the seller and the total cash needed by the buyer.

How to Review Your Closing Statement

Thoroughly reviewing your closing statement is a critical step to ensure accuracy and prevent costly errors. Follow these steps:

1. Compare with Loan Estimate (for Buyers): If you are a buyer, meticulously compare your Closing Disclosure with the Loan Estimate you received earlier in the process. Federal regulations limit how much certain fees can increase. Check for any significant discrepancies in loan terms, interest rates, or closing costs.
2. Verify Personal Information and Property Details: Confirm that all names, addresses, and property legal descriptions are accurate. Even minor errors can cause significant delays or legal issues later.
3. Examine All Debits and Credits: Go through each line item. Understand what each charge is for and ensure it aligns with your purchase agreement, loan documents, and any prior agreements. Pay close attention to the purchase price, loan amount, earnest money, and any seller concessions.
4. Check Prorations: Verify that property taxes, HOA dues, and other prorated expenses are calculated correctly based on the closing date and the agreed-upon payment schedule. Ensure that you are only paying for the period you will own the property.
5. Review Closing Costs: Confirm that all closing costs are accurate and reflect what was agreed upon. Look for any unexpected fees or charges. If you have questions, ask your closing agent for clarification.
6. Confirm Funds to Close/Net Proceeds: For buyers, ensure the "Cash to Close" amount is what you expect and have prepared. For sellers, verify the "Cash to Seller" (net proceeds) after all debits are accounted for.

Real-World Example: Residential Property Sale

Let's consider a residential property sale closing on June 15th, 2024, with a purchase price of $400,000. This example illustrates how the closing statement meticulously accounts for all financial aspects, leading to the final cash required from the buyer and the net proceeds received by the seller.

• Buyer's Side:
• Purchase Price: $400,000 (Debit)
• New Mortgage Loan: $320,000 (Credit)
• Earnest Money Deposit: $10,000 (Credit)
• Loan Origination Fee (1%): $3,200 (Debit)
• Appraisal Fee: $600 (Debit)
• Title Insurance (Buyer's Policy): $1,200 (Debit)
• Recording Fees: $150 (Debit)
• Prepaid Property Taxes (July-Dec): $2,400 (Debit, assuming annual tax of $4,800 paid in January)
• Seller Credit for Closing Costs: $2,000 (Credit)
• Cash to Close (Buyer): $75,550
• Seller's Side:
• Purchase Price: $400,000 (Credit)
• Outstanding Mortgage Payoff: $250,000 (Debit)
• Real Estate Commission (6%): $24,000 (Debit)
• Transfer Tax: $800 (Debit)
• Title Insurance (Seller's Policy): $800 (Debit)
• Prorated Property Taxes (Jan 1-June 15): $2,200 (Debit, for the portion of the year seller owned, assuming annual tax of $4,800)
• Seller Credit to Buyer: $2,000 (Debit)
• Net Proceeds to Seller: $120,200

Commercial Property Closing Statements

While the fundamental purpose remains the same, closing statements for commercial real estate transactions can be significantly more complex than their residential counterparts. They often involve more intricate financing structures, environmental reports, specialized surveys, and a wider array of legal and due diligence fees. Commercial transactions are not subject to the TRID rules, meaning they do not use the Closing Disclosure. Instead, they typically use a standard settlement statement, often prepared by a title company or attorney, which may be more flexible in its format but still provides a detailed accounting of all funds. Investors in commercial properties must be prepared for a longer and more detailed review process, often involving their legal counsel.