Real Estate Salesperson · Real estate math calculations · 7 min read
Seller Net Proceeds and Buyer Cash to Close
- Distinguish between debits and credits on a settlement statement for both buyers and sellers.
- Calculate seller net proceeds and determine the required gross sale price using desired-net math formulas.
- Compute the buyer's cash to close by accounting for purchase price, loan financing, deposits, closing expenses, and prorations.
Settlement Statement Basics: Debits and Credits
A settlement statement tracks the financial flow of a real estate closing to make sure every dollar is accounted for. On any settlement statement, all funds received must equal all funds disbursed so the final accounting balances completely. The federal TRID rule governs Loan Estimates and Closing Disclosures for most closed-end consumer mortgage loans secured by real property, subject to exceptions, though state rules may also apply. A real estate salesperson works under a supervising broker and may assist clients in reviewing these closing figures within their professional role, while the lender and settlement agent remain responsible for preparing and finalizing their respective closing documents and figures.
To read a settlement statement, you must understand debits and credits. A debit is an amount owed or a charge assessed against a party. A credit is an amount in that party's favor. For a seller, a credit increases the proceeds received at closing, while a debit reduces those proceeds. For a buyer, a debit increases the total money needed to complete the purchase, while a credit reduces the final cash to close.
The gross sale price serves as the starting contractual purchase price before any deductions or expenses. For the seller, the gross sale price is entered as a credit. For the buyer, the gross sale price is entered as a debit because it is the baseline amount the buyer has agreed to pay. Balancing these figures requires subtracting total debits from total credits for the seller, and subtracting total credits from total debits for the buyer.
| Line Item | Seller Impact | Buyer Impact | General Allocation Principles |
|---|---|---|---|
| Gross Sale Price | Credit | Debit | Baseline contract price agreed upon by both parties. |
| Earnest Money Deposit | No entry | Credit | Paid prior to closing; directly offsets the buyer's remaining balance. |
| New Mortgage Principal | No entry | Credit | Financed loan amount provided by the buyer's lender. |
| Existing Mortgage Payoff | Debit | No entry | Deducted from gross proceeds to satisfy the seller's prior encumbrance. |
| Brokerage Commission | Debit | Usually no entry | Negotiable fee paid per agreement; typically debited to the seller. |
| Loan Origination & Discount Points | No entry | Debit | Lender fees charged to the buyer to process the loan or lower the interest rate. |
Common mistakes
- Confusing the buyer's down payment with the total cash to close, forgetting that cash to close also includes lender fees, title charges, escrow reserves, and prorations.
- Calculating discount points as a percentage of the total purchase price rather than as a percentage of the loan amount.
- Adding a percentage-based commission directly to fixed costs instead of dividing total dollar needs by the complement percentage (1 minus percentage rates) in desired-net problems.
- Misapplying property tax prorations by debiting the seller for advance tax payments instead of crediting them for the prepaid period beyond closing.
Key points
- Seller net proceeds represent the cash a seller receives after required payoffs and other seller debits are subtracted from total seller credits; an encumbrance need not be paid off if it is otherwise handled as permitted by the contract and applicable requirements.
- Buyer cash to close equals total buyer debits minus total buyer credits and is distinct from the down payment because it includes closing costs, prepaids, and escrow reserves.
- On a settlement statement, debits represent charges or amounts owed by a party, while credits represent funds in that party's favor.
- In desired-net math, divide desired net plus fixed costs and payoffs, less any other seller credits, by 1 minus the combined rates of costs calculated on the gross sale price; account separately for costs based on another amount.
- Discount points are prepaid interest debited to the buyer, with each point equal to one percent of the mortgage loan amount, not the purchase price.
- Settlement statements must balance so that total funds received equal total funds disbursed, with lenders and settlement agents holding legal responsibility for their respective closing documents.
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