How are Expenses Prorated at Closing?
How are property taxes transferred in a home sale? Who pays HOA dues at closing? How are those fees calculated? This post will explain all of this and more.
There are a number of transferable fees due at closing, like property taxes and HOA fees, that need to be calculated. Proration is the process of dividing various property expenses between the buyer and seller in a way that allows each party to only pay for the days he or she owns the property. There are several expenses prorated at closing, include property taxes, homeowner’s insurance, HOA dues and mortgage interest.
Paying in Advance vs. in Arrears:
Prorated or not, some real estate expenses are prepaid in advance and some are paid in arrears (meaning "after the fact"). Here are a couple of examples:
- In advance:
When you pay your homeowner’s insurance on April 30, you are paying for coverage that will happen in May.
- In arrears:
When you pay your mortgage on April 30, you are paying the principal and interest that already accrued in April.
Splitting the Bill:
Since escrow closings don’t always conveniently happen at the end of a month, expenses often need to be prorated for partial months or partial years. For example, if a sale closes on April 10th, the seller will pay for property expenses - like property taxes and HOA fees - from January 1 through April 9, and the buyer would pick up any expenses beginning April 10. Rental income from a tenant may also be divided between the seller and buyer at closing (i.e. prorated), if the closing occurred sometime other than the end of the month.
The escrow agent typically figures out what expenses are paid in advance vs. in arrears, and separates charges and any tenant income accordingly, between the buyer and seller.
Balancing Who Owes What:
If a seller has already prepaid her property taxes through some date after the close of escrow, they may receive a credit at closing for a prorated portion of that prepaid amount. In this case, the buyer would be charged the prorated amount at closing.
By contrast, if the seller’s tax payment for the period was not yet due, then she would be charged the appropriate (prorated) tax amount at closing, and the buyer would pay the remainder of the tax bill for that tax period.
Don't worry about doing all the math - your buyer's mortgage broker and your escrow and title company will work together to sort all the details. Have questions? Ask us!
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