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Understanding the Credit vs. Debit System in a Colorado Real Estate Closing

Navigating a real estate closing can be complex, especially when it comes to understanding the financial aspects involved. In Colorado, like in many other states, the credit vs. debit system is a crucial part of the closing process. This system helps ensure that all parties—buyers, sellers, and other stakeholders—are accurately compensated for their respective costs and contributions. Here’s a breakdown of how the credit and debit system works in a Colorado real estate closing.

What Are Credits and Debits?

Credits: These are amounts that reduce what a party owes. For the buyer, credits might include things like earnest money deposits or loan amounts. For the seller, credits can include the sale price of the home and prorated amounts for prepaid expenses.
Debits: These are amounts that increase what a party owes. For the buyer, debits can include the purchase price, closing costs, and prorated amounts for unpaid expenses. For the seller, debits might include paying off existing mortgages, real estate commissions, and prorated amounts for unpaid property taxes.

How Credits and Debits Work in a Colorado Closing

During a real estate closing in Colorado, a settlement statement (often referred to as a Closing Disclosure or HUD-1 form) is prepared. This statement lists all credits and debits for both the buyer and the seller, ensuring that each party pays and receives exactly what they are supposed to.

1. Buyer’s Side:
Credits: These can include the loan amount, any earnest money deposit, and prorated amounts for property taxes or HOA fees that the seller has already paid.
Debits: These typically include the purchase price of the property, any closing costs (such as appraisal fees, inspection fees, and title insurance), and prorated amounts for property taxes or HOA fees that have accrued but not yet been paid.

2. Seller’s Side:
Credits: These usually include the sale price of the property and prorated amounts for property taxes or HOA fees that have accrued but not yet been paid by the buyer.
Debits: These can include existing mortgage payoff amounts, real estate agent commissions, any outstanding utility bills, and prorated amounts for prepaid property taxes or HOA fees.

Prorations: A Special Consideration

Prorations are adjustments made to ensure that both the buyer and the seller pay their fair share of costs and expenses that straddle the closing date. Common prorations in Colorado include:

Property Taxes: If property taxes are paid in arrears (meaning for the previous year), the seller will owe the buyer for the portion of the year they owned the property. Conversely, if taxes are prepaid, the buyer will owe the seller for the remaining portion of the year.
HOA Fees: Homeowners Association (HOA) fees are often prepaid. If the seller has paid the HOA fees for the month in which the closing occurs, the buyer will owe the seller a prorated amount from the closing date to the end of the month.

Example Scenario

Imagine a property closing on June 15th:

Buyer’s Credits:
– Earnest money deposit: $5,000
– Loan amount: $250,000
– Prorated property taxes for 15 days (if taxes are $3,600 per year): $150

Buyer’s Debits:
– Purchase price: $300,000
– Closing costs: $6,000
– Prorated HOA fees for 15 days (if HOA fees are $300 per month): $150

Seller’s Credits:
– Sale price: $300,000
– Prorated HOA fees for 15 days: $150

Seller’s Debits:
– Mortgage payoff: $200,000
– Real estate commission (6%): $18,000
– Prorated property taxes for 15 days: $150

Conclusion

The credit vs. debit system in a Colorado real estate closing ensures a fair and accurate settlement for both buyers and sellers. By understanding how credits and debits work, parties can better prepare for closing and avoid any surprises. Whether you’re a first-time homebuyer or an experienced seller, knowing the ins and outs of this system can help you navigate the closing process with confidence.

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Brandon Lyon

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