The June 12 Closing: Prorations, Payment, and a Tax-Bill Disagreement
Closing is set for Thursday, June 12. Sale price is $367,500, financed with 20% down and a 30-year fixed loan at 6.25%. The seller's county property taxes of $3,285 for the year are billed in the fall and are still unpaid at closing; the parties agree to a 365-day proration in which the seller owns the day of closing. The seller pays a 5.5% commission (split 70/30 to the listing and selling brokers), Georgia transfer tax of $1.00 per $1,000 rounded up, and a $214,000 payoff of the existing loan. The buyer will pay $1,860 a year for hazard insurance, and the lender will escrow taxes and insurance. The buyer's gross monthly income is $7,400 with $520 in other monthly debts.
1. Compute the seller's net proceeds. Show each item and explain the direction of the tax proration.
Read the worked answer
Step by step:
- Commission: $367,500 × 5.5% = $20,212.50 (split $14,148.75 listing / $6,063.75 selling).
- Georgia transfer tax: $1.00 per $1,000 of consideration, rounded up → $367,500 rounds to $368,000 → $368, customarily a seller (grantor) charge.
- Tax proration: taxes are paid in arrears, so at closing the seller has used the property for part of the year but paid nothing. Seller owns closing day, so the seller's period is January 1 through June 12 = 31 + 28 + 31 + 30 + 31 + 12 = 163 days. $3,285 ÷ 365 = $9.00 per day. 163 × $9.00 = $1,467.00 debited to the seller and credited to the buyer. If closing day were the buyer's, the count would be 162 days and $1,458.
- Loan payoff: $214,000.
Net to seller: 367,500.00 − 20,212.50 − 368.00 − 1,467.00 − 214,000.00 = $131,452.50.
The recurring exam trap is direction: with taxes in arrears and unpaid, the seller owes the buyer - a debit to seller, credit to buyer. If the seller had already paid the full year, the entry reverses. The buyer's intangible recording tax on the new security deed is a buyer charge and does not appear in this computation.
2. Compute the buyer's PITI and assess whether the buyer fits standard underwriting.
Read the worked answer
Loan and payment:
- Loan amount: $367,500 × 80% = $294,000 (20% down = $73,500). At 80% LTV, no mortgage insurance.
- At 6.25% for 30 years the payment factor is about $6.16 per $1,000. 294 × 6.1576 ≈ $1,810.33 principal and interest.
- Taxes: $3,285 ÷ 12 = $273.75.
- Insurance: $1,860 ÷ 12 = $155.00.
- PITI ≈ $2,239.08
Qualifying ratios:
- Front end (housing only): 2,239 ÷ 7,400 = 30.3%
- Back end (housing + $520 debts): 2,759 ÷ 7,400 = 37.3%
Assessment: the back-end ratio is comfortably under the 43% threshold that defines a qualified mortgage under the ability-to-repay rule, so the buyer is a reasonable approval through automated underwriting. The front end exceeds the old 28% rule of thumb, which matters only if the loan is manually underwritten or the guideline is FHA-style 31/43 - at 31% the file is right at the edge. The judgment point: do not tell the buyer 'you're approved' based on ratios; the lender's underwriting, credit, reserves, and appraisal decide that. Your job is to flag the escrow increase risk - taxes and insurance can and do rise, raising the monthly payment after closing.
3. The seller's attorney argues the proration should use last year's tax bill of $2,920 because this year's bill has not been issued. How do you handle it?
Read the worked answer
This is a negotiation and documentation problem, not a math problem.
- Both figures are defensible. Using the prior year's bill ($2,920 ÷ 365 = $8.00/day × 163 = $1,304) is common when the current bill has not been issued; using the current year's assessed amount ($1,467) is more accurate. The difference is $163 - small, but it is the buyer's money and it is the buyer's closing credit.
- The contract governs. If the contract or the closing instructions specify which year's taxes to use, that controls and the argument is over. If they are silent, the parties negotiate.
- The professional solution is a re-proration agreement in writing: prorate on the best available number now and adjust when the actual bill issues. That eliminates the loser in the transaction and is a routine, attorney-drafted addendum.
- Boundary to observe: you may explain the math and propose the concept to both agents, but you may not draft the re-proration clause or advise either party on its legal effect - that is the attorney's work, and drafting contract language is unauthorized practice of law.
- Also confirm who is escrowing: the lender will collect taxes monthly, so the buyer's escrow account should be funded consistent with the proration credit or the buyer will face a shortage at the first escrow analysis.