Some expenses paid at closing must be prorated or divided proportionately between the buyer and the seller. The most common items that fall into this category include:
- Taxes
- Insurance
- Mortgage interest
- Utilities
Any item that is prorated is shown on the settlement statement as a debit to one party and a credit to the other party for the same amount.
Some items are those that were paid for in advance, so the buyer will owe the seller part of the payment.
For example, let's say the seller paid insurance for the entire year in advance and the transaction will close on September 18. The buyer will owe the seller the portion of the insurance payment that applies from September 19 to December 31.
Or if the seller paid for the rental of a propane tank for the calendar year, the buyer will owe the seller the prepaid rent on the tank from September 19 to December 31.
For items paid in advance, the buyer will receive a debit, and the seller will receive a credit.
Other items are those expenses that the seller incurred but have not yet been billed for at the time of closing. These items are paid in arrears.
For example, the buyer will receive the sewer bill for September. The charges from September 1-18 belong to the seller, but the buyer will be paying the bill. On the settlement statement, the buyer will get a credit, and the seller will get a debit.
