Table of Contents
This case illustrates the key concepts involved in the escrow closing statement and clarifies some important points.
Stage
The escrow closing status in a typical purchase transaction establishes the debits and credits for both the buyer and the seller. The correct answer is that a credit to the seller could include the sale price of the property. Let's see why:
Debits and Credits in Escrow Closing Status
- Debits: Debits are what a party must pay to successfully complete the purchase transaction. This can include various costs, such as taxes, closing fees, and other expenses related to the purchase.
- Credits: Credits are what a party will receive before the closing of the transaction. This may include income such as deposits, loans and other financial adjustments.
Examples of Debits and Credits
A) Credit for the Seller: The sales price of the property is typically a credit that the seller will receive before escrow closes. For example, if the buyer is purchasing a condominium for $1,000,000, the seller will receive this amount as a credit before escrow closes.
B) Credit for the Buyer: A new mortgage loan, whether from an institutional lender or through seller financing, is considered credit to the buyer. In this case, if ABC Mortgage Lending, Inc. lends the buyer $800,000, the buyer only needs to pay $200,000 to complete the purchase of the $1,000,000 condo.
C) Credit for the Seller: Prepaid property taxes are a credit to the seller. For example, if the seller has paid property taxes for the entire tax year, and the buyer moves out before the end of the tax year, the buyer must refund a portion of those prepaid taxes to the seller.
D) Debit for the Buyer: A discount point is an initial fee paid to the lender to lower the interest rate on a new loan. If the buyer pays one or more discount points to the lender, this is considered a debit to the buyer as it increases his or her closing costs.
Conclusion
This case provides concrete examples of what elements may constitute credits or debits for the parties involved in a real estate transaction. This knowledge is essential to providing professional and accurate service to clients during the escrow closing process.
