How to Read a Settlement Statement, Line by Line

A settlement statement is the itemized accounting of where every dollar in a closing went, prepared by a title company or closing attorney. Debits, credits, payoffs, commissions, cash to seller, and more.

Here's how to read yours properly.

What Is a Settlement Statement and Who Prepares It?

The settlement agent prepares settlement statements. You'll see it under a few names. ALTA Settlement Statement is the current standard form, and HUD-1 is the older version people still refer to. Different forms, same job: one document that reconciles every dollar in and every dollar out.

How Does an Assignment Fee Appear on a Settlement Statement?

An assignment fee appears as a debit to the buyer, and a disbursement out to the named assignor. It is compensation for assigning a contract, and on a statement that follows the deal it gets described as exactly that, with the assignor named rather than buried in a fee line.

That matters because many mortgage lenders will refuse to fund assignment fees. From an underwriter's chair the line raises questions about an inflated price, and they don't want to mess with overpriced homes. So rather than evaluate each one, they simply refuse to fund deals with assignment fees.

"So can't the title company just call it something else?" Only if it is something else.

When someone holds a recorded lien or encumbrance, that's listed as a lien payoff. A novation often has a recorded memorandum of contract, or a deed of trust securing improvement costs, and the holder of that lien agrees to release it for a fee so the buyer can have clear, insurable title.

Never ask a settlement agent to describe money as something it is not. If you want to show up on a settlement statement as a lien release, structure your deal so you are a lien release.

What Gets Credited Back to the Wholesaler at Closing?

Anybody who fronts fees that count toward closing should ensure those things are credited back on the settlement statement. For example, the wholesaler may have put up earnest money, and may have prepaid a transaction coordination deposit the end buyer owes back.

Party B is the middle party rather than the ultimate buyer, so that money belongs back in their pocket rather than funding Party C's purchase.

A missing earnest money credit is the single most common thing I see people discover a week after closing, when getting it back is a phone call and an awkward conversation rather than a line item.

How Does Wrap or Seller Financing Show on a Settlement Statement?

Seller financing is just like any other loan. The seller is credited the full purchase price (like normal), then debited the amount they are financing (just like any other loan). The debit is a reduction of the cash to seller at the closing. The debit to seller is a credit to the buyer. Essentially, the seller is fronting the cash to themselves on behalf of the buyer/borrower.

Some wraparound mortgage transactions are all-inclusive: one debit to seller and credit to buyer for the combined balance of the underlying loan and any seller financing. And other wraps can show up as 2 discrete entries. If the seller financing has different terms than the underlying loan, they'll generally show up as 2 separate entries on the settlement statement rather than one blended number.

Should a Subject-To Closing Include a Tax Proration?

A tax proration exists to make up for the fact that taxes are paid in a lump sum once or twice a year. Title companies calculate the buyer's and seller's share of the year's taxes, then add a credit or debit to the appropriate side to ensure nobody pays taxes for when they didn't own the property.

However, on a subject-to transaction, the underlying loan's impound account is already a proration of annual taxes and insurance. Since you're not asking the mortgage company to empty out that account for you on a subto transaction, just leave it and call it even. The seller paid their months. You pay your months. And the mortgage company pays the lump sums from the escrow/impounds balance when the bills come due. Done.

It's actually simpler this way. But this is quite a problem in some transactions because the buyer and seller never discussed it and can't agree on what to do with the funds in the escrow account. People are used to seeing tax prorations, so they're confused when it doesn't show up like they're used to.

Who Owes the Mortgage Payment for the Closing Month?

The mortgage payment does get prorated, even though the taxes stay untouched, and those two things get confused constantly. Mortgage payments have a mix of prepaid vs arrears, so the parties have to agree on how to break it down. The simplest method is to treat the whole PITI payment as paid in arrears. That way you can prorate based on how many days the seller owned it, and the buyer receives a credit for that amount because the buyer is making the upcoming payment for the current month. <-- that's really hard to write in a way that can be understood. Ping me if you're still confused and maybe we'll be able to explain it better.

The Takeaway

A statement you can't explain to a stranger is a statement you shouldn't sign.

Want your statement looked at before you sign it? Book a call and we will walk the file with you. Send your contracts to [email protected] and let us handle it.

This article is general information, not legal advice. Closing forms, disbursement practices, lender requirements and state law vary and change over time. Consult a qualified attorney in the relevant state before acting. Creative Title is a licensed title and settlement services provider in Colorado and Tennessee.

Read next: Who Makes the First Mortgage Payment After a Sub-To?