Proration Explained

The technique of dividing various property expenses between the buyer and seller such that each party only pays for the days he or she holds the property is known as proration. Property taxes, homeowner’s insurance, HOA dues, and mortgage interest are among the fees that are prorated at closing.

Proration Process

Prorations are typically charged to buyers. They appear on the buyer’s closing statement as a debit and on the seller’s closing statement as a credit. This is because many of the essential expenditures have already been paid by the vendor. The credits boost the seller’s net earnings and repay them for stuff they’ve pre-paid for the time they won’t be owning the property.

On the seller’s closing statement, prorated amounts will appear as a credit, while on the buyer’s closing statement, they will appear as a debit.

Finally, the direction of credit and debit will be determined by when each type of expenditure in your area is paid.

Insurance Prorations Explained

Insurance premiums are paid in advance, and when purchasing a property, buyers often purchase a new hazard insurance policy. If the buyer is taking over the seller’s existing debt or purchasing on a land contract, the seller may be asked to transfer the current insurance policy.

Proration Summary

You should study a purchase contract before signing it to see how prorations are handled. You want to make certain that they are distributed fairly. Otherwise, you and your real estate agent should talk about changing the language in the contract.

Prorations can be for costs such as:

• Homeowner’s association fees
• Insurance premiums
• Property taxes