Reading settlements statements requires understanding a little accounting. Credits and Debits ensure proper accounting of funds during a transaction, but can get very confusing. Here are two helpful tips to remember and some examples to illustrate how they work.
1) Debit = Debt
Debit whoever agreed to pay the bill! (if you take the "i" out of the word "debit" you have a debt)
2) Credit = Owed
Credit the person who is owed money. A buyer would be credited for money deposited or a down payment. A seller would be credited for the sales price or prepaid insurance.
Handling Purchase Price
1) If the purchase price on a property was $94,000, how would the purchase price appear on a full settlement statement? ***Remember the seller is selling and the buyer is buying. Whenever you debit one person and the other person is involved, you must debit and credit each of them the same amount.
a) Debit the seller $94,000; credit the buyer.
b) Credit the seller $94,000; debit the buyer.
c) Debit the seller $96,000; credit the buyer.
d) Credit the seller $96,000; debit the buyer.
Correct Answer: B – The seller sold the house so the seller gets a credit, and the buyer bought the house so the buyer is charged. Always be sure to use the purchase price, never the asking (or listed) price.
Handling Loan Balance
2) How would a seller's loan balance to be paid off at closing be recorded on closing (settlement) statement?
**Remember here that the buyer is not involved in the seller's paying off an old loan.
a) As a credit to the buyer
b) As a debit to the seller
c) As a credit to the buyer and seller
d) It is not recorded at all.
Correct Answer: B – The seller must be charged for what is still owed on the loan balance. However, if the buyer assumed the loan to be paid off, in the question above, by the seller, than that amount would be a credit to the buyer and a debit to the seller on the
closing (settlement) statement.
Handling Interest Solution
3) How would the interest due from the seller for the time used in the current month of settlement appear on a settlement statement? ** Assume for the test that all mortgages are paid on the first of the month in arrears! That means if a payment is made on Jan.1, the payment was for the month of December (principal and interest). So if a mortgage is paid off in the middle of the month, the loan balance remains the same, but the seller owes interest back to the first of the month.
a) Debit the seller.
b) Credit the seller.
c) Debit the seller and credit the buyer.
d) The seller does not have to pay interest for the month of settlement.
Correct Answer A - If the seller owes interest, it is a debit (charge) to the seller. So of the closing takes place on the 15 th of the month the seller would owe interest back to the first of the month for 15 days. If the buyer were assuming the loan, then the buyer would receive a credit for 15 days, owe interest for the rest of the month and pay the mortgage payment on the first of the following month just like the seller would have done if the property were not sold.
Handling Fees Solution
4) How would a deed preparation fee, title search fee and/or a home inspection fee be recorded on the closing statement?
Remember to debit (if you take the "i" out of the word "debit" you have a debt) whoever agreed to pay the bill!
a) As a debit to whomever agreed to pay the charges
b) As a credit to the buyer
c) As a debit to the buyer and a credit to the seller
d) As a debit to the seller and a credit to the buyer
Correct Answer A – Debit (charge) whomever agrees to pay the deed preparation fee.
Handling Earnest Money Solution
5) A buyer deposited $1,500 with the listing broker as earnest money. How is earnest money recorded on a closing statement?
Any money that someone else is bringing to the closing for the buyer is always a credit to the buyer. So earnest money, would always be ____ to the buyer.
a) Credit $1,500 to both buyer and seller.
b) Credit $1,500 to the buyer; debit the seller $1,500.
c) Credit the buyer only $1,500.
d) Debit the seller only $1,500.
Correct Answer C – Credit the buyer because the broker, Title Company, or whoever are holding the money will bring the money to the closing table.