Chapter 17 · National foundations
Closing, Escrow, and Settlement Accounting
4 min read · 1 checkpoint
On this page
What happens at settlement?
A typical closing coordinates documents, funds, satisfaction of conditions, payoff of existing Lien A security claim or charge against property for an obligation. See Chapter 5. Glossary, transfer instruments, Recording Placing an instrument in the authorized public record system. See Chapter 7. Glossary arrangements, and delivery of possession as agreed. Participants can include a settlement agent, Title The legal ownership interest or rights in property, distinct from the deed documenting transfer. See Chapter 7. Glossary company, attorney, lender, and broker. Who may perform each function and whether an attorney must be involved are jurisdiction-specific. S07 S01
An Escrow Holding funds or documents subject to authorized conditions. See Chapter 17. Glossary arrangement places money or documents with a holder who acts according to authorized conditions and law. The escrow holder's duties are not identical to a buyer's or seller's advocate. A settlement agent should not release funds simply because an impatient party requests it before required conditions are satisfied.
Good funds Funds meeting applicable legal and settlement requirements for disbursement; not merely an unverified promise that money will arrive. Glossary rules, recording priorities, wire deadlines, and local closing customs differ. A signed stack of documents does not necessarily mean funding or recording has occurred. S07
Debits and credits
In a simplified closing statement, a Debit A charge to a party on a settlement statement. See Chapter 17. Glossary is an amount charged to a party; a credit is an amount allowed in that party's favor. The sale price is generally a buyer debit and seller credit. A buyer's deposit already held is generally a buyer credit. A new loan's proceeds are generally a buyer credit toward the funds needed.
A seller's existing loan payoff is a seller debit. A negotiated seller-paid buyer expense may appear as a seller debit and buyer credit, while the underlying cost must be handled consistently. Avoid double counting a concession by both removing the cost and crediting the same amount.
Not every entry has an equal entry on the other party's statement. An Appraisal An opinion of value developed for a defined assignment. See Chapter 14. Glossary charge paid to a third party or a payoff sent to a lender is not automatically a credit to the other participant. S01 S27
Buyer funds example
Price is $350,000. New loan proceeds are $280,000. A $10,000 deposit is already held. Buyer closing costs and prepaids total $8,000, and the seller provides an allowed $3,000 credit. Ignoring all other adjustments:
$350,000 + $8,000 − $280,000 − $10,000 − $3,000 = $65,000 cash due.
The buyer's total Contribution The value a component adds to the whole, not necessarily its cost. See Chapter 14. Glossary is not only the $65,000 delivered at closing; the $10,000 earlier deposit also came from the buyer.
Prorations: ownership of time
A Proration Allocation of a recurring amount between parties or periods. See Chapter 17. Glossary allocates a recurring amount between parties. Before calculating, identify the item, billing period, whether it has been paid, who receives its benefit, who is responsible for the closing day, and the required day-count convention.
Accrued or unpaid expenses: If the buyer will pay a bill covering time partly attributable to the seller, the seller ordinarily gives the buyer an adjustment for the seller's share: seller Debit A charge to a party on a settlement statement. See Chapter 17. Glossary, buyer credit.
Prepaid expenses: If the seller already paid an assignable expense covering time attributable to the buyer, the buyer ordinarily reimburses the seller for the buyer's share: buyer debit, seller credit.
Prepaid rent: If the seller collected rent for a period partly after the buyer becomes entitled to rent, the seller ordinarily credits the buyer for that portion: seller debit, buyer credit. Do not classify rent as an expense simply because the arithmetic is similar. S01
Proration example
Assume annual property taxes of $3,600 are unpaid, the tax period is a calendar year, the problem requires a 360-day year with twelve thirty-day months, closing is April 11, and the buyer owns the closing day. The seller is responsible through April 10: 100 assumed days. At $10 per day, the seller's share is $1,000. The buyer receives a $1,000 credit and the seller a $1,000 debit.
This answer would change under another day-count convention or closing-day allocation. Never silently import a convention from another state's custom.
Prepaids, reserves, and payoff amounts
Prepaid interest, insurance premiums, and lender Escrow Holding funds or documents subject to authorized conditions. See Chapter 17. Glossary deposits are not all the same thing. An escrow reserve for future taxes or insurance is not itself a lender fee merely because it appears among closing funds.
A mortgage payoff can include Principal In agency, the represented client; in finance, the loan balance apart from interest. See Chapter 8, Chapter 15. Glossary, accrued interest, authorized charges, and applicable adjustments. The balance on last month's statement may not equal the payoff for next week's closing. Payoff validity dates and per-diem interest matter.
A seller's mortgage escrow refund is not automatically available in time to reduce the funds required at settlement. Avoid assuming a later refund has already been credited unless the problem says so. S27 S07
Review and fraud prevention
Review legal names, property identification, contractual allocations, credits, payoffs, tax periods, loan terms, and the final cash requirement. Question unexpected changes. Verify wiring instructions through a previously established trusted contact method, not by replying to the same suspicious message. Changing account instructions and urgent secrecy are reasons to stop and independently verify.
This workflow is risk management, not a claim that one phone call eliminates every fraud risk. Follow the brokerage and settlement provider's security procedures, and promptly escalate a suspected compromise.
Unpaid seller-period property taxes will be paid later by the buyer. Which adjustment ordinarily applies?