What Is a Settlement Statement in Real Estate?

A settlement statement in real estate serves as a comprehensive financial record, detailing all monetary transactions that occur during a property’s closing. This document provides a clear overview of funds exchanged for both buyers and sellers. By itemizing every charge and credit, it ensures transparency and helps parties understand how their money is allocated. The settlement statement is essential for finalizing a real estate transaction, confirming the agreed-upon financial terms.

What a Settlement Statement Is

A settlement statement is an itemized list of all fees and credits associated with a real estate transaction, summarizing its complete financial picture. A settlement agent, such as a title company, escrow firm, or real estate attorney, typically prepares this detailed statement.

Historically, the HUD-1 form was the standard settlement statement. However, as of October 3, 2015, the TILA-RESPA Integrated Disclosure (TRID) rule replaced the HUD-1 with the Closing Disclosure for most residential mortgage transactions. While the Closing Disclosure is now the prevalent form, “settlement statement” is still broadly used to refer to this final financial summary. For cash transactions or specific scenarios, a settlement statement may still be used instead of a Closing Disclosure.

Key Components of a Settlement Statement

A settlement statement provides a detailed breakdown of various financial elements involved in a real estate transaction. It includes the purchase price, which is a primary debit to the buyer and a credit to the seller. Beyond the sale price, numerous fees and adjustments are itemized to reflect the true financial exchange.

Loan charges

Loan charges represent costs associated with securing the mortgage. These can include origination fees, often a percentage of the loan amount, or discount points paid to reduce the interest rate. Other common loan-related fees are for appraisal and credit reports. Additional charges may encompass flood determination fees, tax service fees, and underwriting fees, which cover the lender’s administrative costs. Interest adjustments cover the interest accrued from the closing date to the first payment due date.

Impound or escrow account items

Impound or escrow account items involve initial deposits collected by the lender to cover future property taxes and homeowner’s insurance premiums. Lenders often require several months’ worth of these expenses paid upfront at closing to establish a reserve, ensuring funds are available when recurring bills are due. Mortgage insurance premiums, if applicable, might also be collected for an initial period.

Title charges

Title charges are fees for services that ensure the property’s legal ownership is clear and transferable. These include a title search to investigate the property’s history for any liens or claims. Title insurance premiums, both for the owner and the lender, protect against future challenges to the property’s title. Escrow fees cover the cost of the neutral third party managing the transaction’s funds and documents. Notary fees and recording fees, for registering the deed and mortgage, are also included.

Government recording and transfer charges

Government recording and transfer charges involve fees imposed by local and state authorities. Recording fees are paid to the county to officially record the deed and mortgage documents. Transfer taxes are levied by state, county, or municipal governments on the transfer of real property. These taxes are typically a percentage of the sale price and vary widely by location.

Prorations

Prorations involve dividing expenses such as property taxes and homeowner association (HOA) dues between the buyer and seller based on the closing date. For example, if property taxes are paid in arrears, the seller credits the buyer for their portion of the year. Conversely, if the seller has prepaid expenses like HOA dues beyond the closing date, the buyer reimburses the seller for the unused portion. This ensures each party pays only for the period they owned the property.

Other charges

Other charges can include home inspection fees, paid by the buyer to assess the property’s condition. Survey fees ensure boundary lines and property features are accurately documented. The first year’s homeowner’s insurance premium is often paid at closing. Real estate commissions, typically paid by the seller, are also detailed on the statement.

Credits

Credits reduce the amount of money a party needs to bring to closing or increase the amount they receive. A significant credit for the buyer is the earnest money deposit, the initial payment made when the purchase agreement is signed. The loan amount from the mortgage lender is another credit for the buyer. Seller credits, such as concessions for repairs or closing costs, also reduce the buyer’s financial obligation.

Understanding Debits and Credits

The settlement statement organizes all financial transactions into debits and credits for both the buyer and the seller. Debits represent amounts owed by a party, increasing the money they need to pay at closing or decreasing the money they receive. Conversely, credits are amounts received by a party, reducing the funds they owe or increasing their payout. This system ensures a balanced accounting of all money flows.

For the buyer, common debits include the purchase price of the home, loan origination fees, appraisal fees, and any prepaid interest or escrow account deposits. Property taxes and homeowner association dues are debited to the buyer for the period they will own the property from the closing date onward. Credits for the buyer include their earnest money deposit, the loan amount from their mortgage, and any seller concessions or credits agreed upon in the purchase contract.

For the seller, the primary debit is typically the real estate commission paid to agents. Other debits include the payoff of any existing mortgage, their portion of prorated property taxes up to the closing date, and potentially title insurance premiums or transfer taxes. The main credit for the seller is the purchase price of the property. The final calculation determines the “cash to close” for the buyer, which is the total amount they must bring to complete the transaction. For the seller, it calculates the net proceeds they will receive after all expenses and payoffs are deducted. Buyers should compare the charges on the final Closing Disclosure to their initial Loan Estimate to identify any significant discrepancies.

The Settlement Statement and Your Closing

The settlement statement, or more commonly the Closing Disclosure for financed transactions, plays a key role in the final stages of a real estate transaction. Federal regulations require that borrowers receive the Closing Disclosure at least three business days before the scheduled closing date. This review period allows buyers to examine all loan terms, fees, and costs, comparing them against the initial Loan Estimate.

Reviewing this document before the closing appointment is important to identify any errors or unexpected changes. Should discrepancies arise, the buyer can address them with the lender or settlement agent before signing. At the closing table, the settlement statement serves as the final financial summary, which all parties sign to confirm their agreement on every financial aspect of the transaction. Once signed and funds are disbursed, the property transfer is complete, and the deed is recorded with the local authorities.