What Is a Debit in Real Estate Transactions?

Real estate transactions involve a flow of funds. Understanding each party’s financial obligations is necessary for a smooth closing. Clear financial accounting ensures all costs and payments are properly allocated, helping buyers and sellers prepare for transferring property ownership.

Debits in Real Estate Transactions

A debit in a real estate transaction represents an amount of money a party owes or pays. It signifies a charge or expense that adds to the total amount due from either the buyer or the seller. For instance, a fee you pay is a debit to you. Conversely, a credit represents money coming to a party, reducing the amount they owe or increasing what they receive. An earnest money deposit, for example, appears as a credit to the buyer. Debits highlight charges, while credits reflect financial adjustments, balancing the transaction.

Common Buyer Debits

Buyers typically incur several debits during a real estate transaction, contributing to their total “cash to close” amount. Common debits include the loan origination fee, a charge from the lender for processing the mortgage application, often ranging from 0.5% to 1% of the loan amount. The appraisal fee covers the cost of a licensed appraiser evaluating the property’s value, usually paid by the buyer. Inspection fees, covering various checks like home or termite inspections, are also buyer debits.

Buyers are often responsible for the premium for the lender’s title insurance, which protects the mortgage lender’s investment against title defects. This cost typically ranges from 0.1% to 2% of the home’s purchase price. Escrow fees, paid to a neutral third party for managing the transaction and handling funds, can range from $500 to $2,000 or more, and are sometimes split between buyer and seller. Property taxes are prorated at closing, meaning the buyer is debited for their share of taxes from the closing date through the end of the tax period, reimbursing the seller for any prepaid amounts. Recording fees, charged by local government agencies to register the change of ownership and mortgage, are also typically debited to the buyer and can vary by county.

Common Seller Debits

Sellers also have various debits that reduce their net proceeds from a home sale. Real estate agent commissions are a major debit for sellers, typically ranging from 4% to 6% of the property’s sale price, often split between the listing agent and the buyer’s agent. Attorney fees, if a lawyer represents the seller, are another debit. The premium for the owner’s title insurance policy, which protects the seller against claims on the title prior to the sale, is commonly paid by the seller in some areas.

Property taxes are prorated, with the seller debited for the portion covering their ownership period up to the closing date. Transfer taxes, also known as excise or documentary stamp taxes, are imposed by state or local governments on the transfer of property ownership and are often paid by the seller, though this varies by jurisdiction. These taxes are typically calculated as a percentage of the purchase price. Any outstanding mortgage balance on the property must be paid off by the seller at closing, appearing as a debit.

Understanding the Closing Disclosure

The Closing Disclosure (CD) is a standardized federal document that provides a detailed breakdown of all financial aspects of a real estate transaction, including all debits and credits for both the buyer and the seller. It clearly itemizes all costs and shows how they are allocated between the parties.

The CD presents a comprehensive summary, allowing both parties to see what they owe and receive. For the buyer, the document details the “Cash to Close,” which is the total amount of money needed at closing. This figure includes the down payment, closing costs, and prepaid expenses like property taxes and insurance, minus any credits received, such as an earnest money deposit or seller credits. For the seller, the CD calculates the “Cash to Seller,” representing the net amount received after all debits, like agent commissions and mortgage payoffs, are deducted from the sale price and any credits. Reviewing this document ensures all figures align with the agreed-upon terms.