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Understanding and Preparing for Prorations at the Closing Table

Understanding and Preparing for Prorations at the Closing Table


Understanding and Preparing for Prorations at the Closing Table

Once you’ve found a property that’s in your budget, negotiated with the sellers, and gotten approved for a mortgage loan, you may think the hardest part of the homebuying process is behind you. While you’re definitely making progress, you need to be ready for what comes next: Closing.

Preparing for closing means you should expect some terms that don’t float around in your everyday life. An important one is proration. Prorations will come up in closing and will affect both the buyer and seller. Let’s dive into what this means for you.

What are prorations?

Prorations are credits and debits that show up on the closing statement and are assigned based on which person owned the home at the time the cost occurred. They help make sure the mortgage transaction between the buyer and seller is fair. For example, if the seller already paid the property taxes for the entire year, it wouldn’t be fair for him or her not to receive money back, since they won’t own the house the entire year. In this situation, the buyer must credit that expenditure back to the seller on a prorated scale.

What types of prorations will you typically encounter at closing?

Outlays of cash that were paid up front for the entire year, like property taxes mentioned above, are prorations. Mortgage interest is another such proration, since it’s often paid upfront. Homeowner’s association fees and insurance premiums are other prorations that may need to be addressed at closing.

Will prorations affect a buyer’s mortgage loan?

Prorations shouldn’t negatively impact a buyer’s ability to secure a mortgage loan. It’s important, however, to be aware of additional costs that are the buyer’s responsibility to cover during closing, so there aren’t nasty surprises. Buyers should talk to their real estate agent and mortgage loan officer about the specific prorations they should expect.

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How are they figured and by whom? 

Prorations assigned to buyers and sellers can vary depending on the state they live in. For example, some states require property taxes to be paid a year in advance. In this scenario, the buyer would need to credit the seller a prorated amount for the taxes the seller paid after the home was sold. In states where property taxes are paid in arrears, the buyer would be credited the amount of tax money that occurred when the seller still owned the home. Mortgage lenders usually set up an escrow account to accumulate payments such as taxes and insurance for the borrower.

Understanding prorations and how they will be assigned to both the buyer and seller is important in preparation for the closing table. Both buyers and sellers should discuss the specifics of prorations with their real estate agents and ask questions to fully understand the process.

Are you interested in a first-time home loan, a loan refinance, a reverse mortgage purchase, or a VA loan? Contact MIG today to get started on taking advantage of the great low rates available.

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Mortgage Investors Group, based in Tennessee, offers residential financing in a number of states in the southeast, See MIG Service Areas. Terms and conditions to apply to home financing. We want to share with you the loan terms vary based on several characteristics and your financial profile. These include but are not limited to loan program, loan purpose, occupancy, credit history, credit score, assets, and other criteria per loan type. The repayment terms and interest rate may vary from time to time. The terms represented here are based on certain assumptions outlined below and/or noted on the loan outline page. Additional details concerning privacy, program disclosures, licensing specifics may be found at migonline.com Legal Information.

MIG Loan Officers will help gather the information needed for an individual assessment to provide home financing which matches the loan characteristics with your home financing needs based on your financial profile, when you are ready to begin a full loan application. For estimates and general information before that step, the basis for which the mortgage financing information are as follows:

  • Rates are subject to change at any time.
  • Rate locks are available at current terms for 30 to 180 days based on program type, credit profile, property location, etc. which will affect the available rate and term.
  • Rate locks are available at current terms for 30 to 180 days based on program type, credit profile, property location, etc. which will affect the available rate and term.
  • Payments will vary based on program selection, current rates, property location, etc.
  • Not all programs are available in all states.
  • Some loan programs may not be available to first time home buyers.
  • Terms and conditions apply, which may include restrictions or limits per loan program.
  • Information is generally based on primary residence occupancy with no cash out when refinancing.
  • Unless otherwise stated, terms shown are estimates based in part on credit score of 700 or higher; owner occupancy, escrow account is established for taxes and insurance(s); debt-to-income ratio no higher than 43.0%; PMI applies to conventional loan programs over 80.0% LTV; VA,FHA & RD require insuring fees included in loan and/or payment; fixed rate, 30 year term.

An MIG Loan Officer is available to help with your financial details to determine which characteristics apply to your situation for a personalized look into which loan program best fits your home financing needs. Please use the Find a Loan Officer link or reach out to Mortgage Investors Group at 800-489-8910. Equal Housing Lender 1.2020