When buying and selling property, you’ll hear a lot of technical jargon thrown around. One word that often comes up is “prorations.”

Prorations are fees split by the buyer and the seller, and these fees are often calculated by someone else, making prorations the most simple concept of property buying.

Many homes and properties have regular or monthly fees attached, like property taxes, homeowners association fees, and mortgage interest. Prorations make sure that those fees are paid on closing day when the buyer and seller each only pay for the property and expenses associated with the property on the days they own the property.

Since a sale doesn’t usually close on the first or last day of the month, the costs for the buyer and seller must be “prorated” or shared between the buyer and seller until the month ends.

For instance, the seller likely paid the property taxes for a year. Credit for those taxes would show up for the seller on closing day. It’s a debit for the buyer. Meanwhile, if the seller pays the property taxes after they’ve been incurred, the debit and credit would be flipped. A buyer gets the credit, and the seller gets the debit.

Both sides should check the contract to verify that the terms and total costs are explained.

First-time property buyers are sometimes surprised by prorations and don’t understand what they’ll pay or what will be credited. It helps to understand some of the terms you’ll hear while discussing prorations with your escrow agent.

PAYING IN ARREARS: This payment covers anything that has already occurred. For instance, if you pay your mortgage and taxes on Oct. 31, you are paying for coverage that has accrued.

PAYING IN ADVANCE: This payment is coverage for fees that are about to happen. For example, the property tax deadline in Texas is Jan. 31. If you sell a property in mid-January and the taxes have already been paid, this is an “advance payment.”

CREDITS AND DEBITS: A buyer will get credits at closing for anything that the seller is paying in arrears at the closing (like property taxes after Jan. 31), and they’ll get a debit for anything that was paid in advance by the seller. Conversely, the seller gets a debit for expenses in arrears and a credit for expenses paid in advance.

There are several types of prorations and monthly fees that are associated with property ownership.

Homeowners Association (HOA) Dues

If the seller hasn’t yet paid that month’s Homeowners Association Dues, the buyer receives credit for the amount that was due at the time of closing. For instance, if the closing occurs on April 10, the buyer wouldn’t have to pay for the first nine days of dues in April. So, if an HOA costs $400 per month, the buyer would have a credit of $133.30 or 33% of the cost of the dues. The rest of the dues are paid by the buyer.

Utility Prorations

Occasionally, utilities are prorated at closing. Frequently, buyers and sellers find that the costs of utilities are rolled into the tax assessments, and the buyer receives a credit there.

Real Estate Tax Prorations

If the property’s state and local taxes are paid in advance, the seller receives a credit. If they are paid in arrears, the buyer gets a credit.

Sometimes, a buyer can request no tax prorations in the contract as part of the final terms of the contract. It’s a tool that a buyer can use in a hot market. In this case, the seller would pay the taxes for a limited period of time. For instance, a buyer could purchase the home on April 10 and ask the seller to pay the taxes until the end of the month.

Insurance Prorations

Buyers usually take out their own insurance policy, but sometimes a buyer will purchase a property loan from the seller. If that happens, the buyer could ask the seller to purchase hazard insurance. In this instance, the seller gets a credit for the prorated amount of hazard insurance they have already paid for.

Mortgage Interest

One expense that is often paid in arrears is mortgage interest. For instance, lenders will collect mortgage interest on Nov. 1 for October. If a buyer bought the house on Oct. 15, the seller would have to pay the interest through Oct. 14.

For a new mortgage, sellers like to collect interest up to 30 days before the interest is due. This means that for a closing on June 15, the lender will likely collect 15 days of interest on Aug. 1. That’s interest from June 16 to June 30.

That same example works for a seller who has to pay interest at the closing. The seller would have to pay for 15 days of interest, and the buyer would get a credit. A debit would be charged to the seller.

So, where does your title company come in?

Consider mortgage interest for a closing that occurs on June 15. The amount of interest is calculated by dividing the annual interest by 12 months to compute the monthly interest rate, then dividing by the number of days in the month during which the contract is closed. Multiply the daily number by the number of days left in the month. That gives you the interest that you’ll owe at closing.

Patten Title agents handle these calculations, plus all of the calculations for other prorations for both the buyer and seller, as the contract instructs. The breakdown of these prorations will be sent to both parties at least 10 days before the closing, as well as how they fit into other closing costs. (Closing costs from your lender will come separately and will arrive within three days of closing.)

The best part of prorations is that these are figures that someone else is handling for you. Patten Title has been a part of thousands of closings, and our “Very Intense Individualized Professional” service ensures your confidence that your escrow agent keeps your needs — and numbers — focused on you.