Escrow settlement agents and attorneys performing real estate closings use closing statements, also called settlement statements, for itemizing funds received and disbursed during real estate sales and title transfers. The Real Estate Settlement Procedures Act prescribes the use of settlement statement HUD-1. Debits are costs and credits represent funds deposited, or credited to and from buyers and sellers. Closing fees, document recording fees and other costs are customarily shared by buyers and sellers, and are prorated and debited from their accounts accordingly.
Real estate commissions, home repairs, past due property taxes and assessments, amounts credited to buyers for repairs, upgrades and landscaping are examples of seller payments or debits. Sellers are required to pay for clearing title to the property they're selling. Sellers must pay off second mortgages, home equity loans and tax liens. These items appear as seller debits on a closing statement. Sellers' contributions to buyers' closing costs are also shown as debits to sellers on form HUD-1. Seller debits may include seller cash contributions required from the seller's mortgage lender on short sales.
Funds payable to sellers are shown as seller credits on a closing statement. Seller credits include payment for the property sold and rents due if buyers occupied property prior to closing. Adjustments for paying shared costs between buyer and seller may be shown as seller credits, and payment of taxes and insurance premiums paid beyond the closing date are shown as credits to sellers. Real estate closings vary; arrangements and negotiations between buyers and sellers impact how items are debited and credited on HUD-1.
The amount required for completing the purchase of the property and buyer's closing costs are debited from the buyer's account. The buyer's portion of shared closing and title costs, typically 50 percent, are prorated and debited to the buyer. Rents owed to the seller by buyers prior to closing are debited from the buyer. The buyer's mortgage company debits prorated mortgage interest from the date of closing until the due date for the buyer's first mortgage payment. Buyer's lenders prorate and debit amounts for paying property taxes, hazard and mortgage insurance between the date of closing and the first mortgage payment if required by the buyer's mortgage loan terms.
Credits to buyers include their earnest money deposit toward purchasing the property, cash down payment, seller contributions to buyer's costs, and adjustments for buyers' overpayment of estimated attorney fees and closing costs. Sellers may agree to credit buyers with amounts for repairs and upgrades, such as window treatments, painting and floor coverings. Credits for repairs may result from mortgage lender requirements or negotiations between buyers and sellers. Sellers may prefer to credit buyers with cash rather than performing repairs themselves. This benefits buyers by allowing them to choose replacement materials.