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DEBITS & CREDITS  

Debit - A debit is a charge. A debit also represents money that a buyer must bring to a closing or money that a seller is not going to get at a closing. 

Credit - A credit is money that will be received at a closing. A credit is also money the buyer does not have to bring to a closing. 

Do not try to think back to your high school or college accounting class. If you're a CPA, do not look at this statement like a balance sheet. Accounting classes always teach "Where you debit, you must also credit." Not so on real estate closing statements." 

The purpose of a real estate closing statement is to determine how much the buyer must bring to closing and how much the seller is going to receive at the closing.  

These definitions are better understood by looking at the individual items pro-rated at a real estate closing. 

Make sure you are especially aware of the last two entries, "balance due from the buyer" and "balance due the seller." Their entries do not follow the pattern of all the other entries. 

 

  BUYER  SELLER
ITEM  DEBIT  CREDIT  DEBIT  CREDIT 

purchase price  

The purchase price of a property is money that a buyer is being charged, money he must bring to the closing. From this purchase price, we will add or subtract for certain other items affecting the buyer. The seller is to receive the purchase price. From this purchase price, we will add or subtract for certain other items affecting the seller. The purchase price is, therefore, a debit to the buyer and a credit to the seller. 

X     X

credit report 

The credit report is usually a prepaid item (paid at application time). If it is not prepaid it would be a charge to the buyer, so we debit the buyer. 

x      

mortgagee title insurance 

The buyer must purchase a mortgagee (lender) title insurance policy. It is a charge to the buyer, so we debit the buyer.

x      

owner's title insurance policy

The buyer will almost certainly want to purchase a mortgagor (owner) title insurance policy. It is a charge to the buyer, so we debit the buyer.   

x      

private mortgage insurance (PMI) 

PMI is a charge to the buyer, so we debit the buyer. 

X      

recording the mortgage

Recording the mortgage is a buyer charge, so we debit the buyer. 

X      

earnest money 

The entry for earnest money requires additional thought. The earnest money has already been paid by the buyer. Remember, our definition of a credit - "money that a buyer does not have to bring to a closing." Therefore, since the buyer already paid the money up front to the broker or attorney holding the money, the buyer receives a  credit for the earnest money. This entry does not affect the seller. Many will also want to incorrectly debit the seller. Consider that the purchase price of the property includes the earnest money. Since the seller did not receive any of these moneys, no entry affecting the seller should be made.    

  x    

commission

The seller is responsible for the broker's commission, so it is a charge or a debit to the seller. It has no affect on the buyer.  
    X  

soil tests, percolation tests 

It is often negotiated who pays for a soil or perc test so there is no general rule. For our purposes here, we will assume the seller is paying, so they are a debit to the seller. 

    X  

termite inspection

Some conventional loans and almost all VA and FHA loans will require a termite inspection. The termite inspection is considered a seller expense, so we debit the seller.  

    X  

sale of personal property

The sale of personal property by the seller to the buyer    affects both the buyer and seller and will require a double entry. The buyer is being charged for the personal property, so we must debit the buyer. The seller will be receiving this money, so we must credit the seller.  

X     X

seller's existing mortgage 

The seller must pay off his existing mortgage at the closing. That means the seller will not be leaving the closing with the amount of the mortgage. If you remember our definition of a debit - "it's money that the seller is not going to get at the closing." Since the seller will not be receiving the mortgage balance, we debit the seller. It sounds like the seller is being charged the mortgage balance. Always keep in mind the purpose of a closing statement - to determine how much the buyer must bring to a closing and how much the seller will be receiving at the closing. 

    X  

partial month's interest

The lender charges a partial month's interest to the buyer. In situations where the closing takes place on the 15th of the month the buyer must pay the interest for the days remaining in the month (15 days using a statutory year). The buyer's next payment won't be due until one month later. For instance, a  closing takes place on January 10th, the buyer must pay the interest until the end of the month (20 days using a statutory year). The buyer's next payment will be not be due on February 1st, but rather March 1st. This March 1st payment pays for the month of February. Since this is a charge to the buyer, we must debit the buyer. It does not affect the seller.     

X      

buyer's new mortgage loan 

The buyer's new mortgage loan requires some thought. Always keep in mind the purpose of a closing statement - to determine how much the buyer must bring to a closing and how much the seller will be receiving at the closing. The buyer does not bring this loan to the closing himself, the lender provides the funds at closing. Since the buyer does not have to bring the funds it is credit to the buyer. The seller is not affected by the buyer's new mortgage loan.   

  X    

assumption of the seller's existing mortgage loan

The assumption of a loan will affect both the buyer and the seller. Again, keep in mind the purpose of a closing statement - to determine how much the buyer must bring to a closing and how much the seller will be receiving at the closing. This loan is not brought to the closing by the buyer, so the buyer receives a credit for the loan. The seller will not be receiving the amount of this loan at the closing so it must be subtracted from his proceeds, or in our words, it is a debit to the seller (money he's not going to receive at the closing). 

  X X  

partial month's interest on an assumed loan 

Residential mortgages are most often paid in arrears. When buyers assumes a mortgage and the closing takes place on, for instance,  May 12, the seller has lived in the property for 12 days. The buyer will be paying the mortgage payment at the end of the month for the entire previous month (including the 12 days the seller lived there). We must credit the buyer for those 12 days, and we must debit the seller for those 12 days. 

  X X  

purchase money mortgage

A purchase money mortgage is a loan where the seller is doing the financing in exchange for a lien on the property. This entry will affect both the buyer and the seller. The amount of the seller's loan does not have to be brought to the closing by the buyer, so the buyer is credited. The seller is not going to be receiving the amount of the loan he has extended the buyer, so the seller must be debited. 

  X X  

real estate taxes (paid in arrears) 

In Illinois, real estate taxes are paid in arrears. The real estate taxes for the year 2000 will not be due until 2001. If a property closes on July 30, 2000, the seller will owe the buyer taxes for the year 2000 up to the date of closing and at least the second installment of 1999. Since the buyer will be getting the tax bill for this period, the buyer must be reimbursed by the seller. It is then, a credit to the buyer and a debit to the seller. 

  X

 

X

 

 
 

real estate taxes (paid in advance)

In some states, real estate taxes are paid in advance. In this situation, the seller has paid the real estate taxes beyond the days he is to own the property. The buyer must reimburse the seller for the time the buyer will own the property, so the buyer will be debited and the seller will be credited.     

X

 

    X

 


security deposits 

When you purchase an investment property like an apartment building, you'd better get all of the security deposits given by the tenant to the landlord. As the owner of the building, it will be your responsibility to return the deposit to the tenant at the end of the tenant's lease. We must then credit the buyer and debit the seller. 

  X X

 

 

partial month's rent

When the closing takes place on the 5th of the month, the seller should have collected the rents for that month already. The buyer needs to get 25 days (statutory year) worth of rent from the seller. The buyer should be credited and the seller should be debited. 

  X

 

X

 

 

balance due from the buyer 

This is one of the most unusual entries. This entry's only purpose is to balance the buyer's debit column with his credit column. One would think that the amount the buyer must bring to the closing would be a debit. It's not. It's a credit. Check this entry on some of the closing statements in the book and see how this entry balances the columns. Many students remember this entry and the next (balance due the seller at closing) to be the opposite of what they think they should be.     

  X

 

   

balance due the seller

This is again is one of the most unusual entries. This entry's only purpose is to balance the seller's  debit column with his credit column. One would think that the amount the seller will be due at the closing would be a credit. It's not. It's a debit. Check this entry on some of the closing statements in the text and see how this entry balances the columns. Many students remember this entry by remembering its the opposite of what they think it should be.   

    X  

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Last updated 10/27/01