Closing allocations that divide recurring property expenses or income between buyer and seller according to their periods of responsibility.
Prorations are closing allocations that divide recurring property expenses or income between buyer and seller according to the period each party is responsible for.
Closing rarely occurs at the exact beginning or end of a tax, association-dues, rent, or other billing period. A proration keeps one party from bearing the entire period when ownership changes partway through it.
Prorations can increase or decrease the buyer’s Cash to Close, but they are not new lender fees. They are transaction adjustments between the parties. The direction depends on whether the underlying item was already paid, will be paid later, or represents income collected in advance.
The purchase contract, local custom, billing status, and agreed day-count convention determine the final calculation. An early estimate can change when the closing date moves.
Borrowers usually encounter prorations when the settlement agent prepares final closing figures. The allocations may appear in the transaction-summary portion of the Closing Disclosure or on another settlement statement.
The borrower should confirm the period, annual or periodic amount, day count, responsible party, and whether the line is a debit or credit. A correct amount with the wrong direction can still produce an incorrect settlement result.
One common teaching calculation is:
Here, P is the prorated allocation, C is the charge for the full period, d is the number of days allocated to the party, and D is the number of days in the period.
Actual settlements may use a 365-day year, a 360-day convention, monthly calculations, or another method required by the contract or location.
| Item | Why a proration may appear |
|---|---|
| Property taxes | Taxes may cover a period spanning both owners |
| Association dues | One party may have paid dues covering time after closing |
| Rent | Seller may have collected tenant rent for days the buyer will own the property |
| Assessments or utilities | Contract or local practice may allocate a current billing period |
| Status at closing | Typical settlement logic |
|---|---|
| Seller already paid a charge covering time after closing | Buyer may debit the buyer’s post-closing share and credit the seller |
| Buyer will pay a charge that includes the seller’s ownership period | Seller may debit the seller’s share and credit the buyer |
| Seller collected income covering time after closing | Seller may debit the buyer’s share of that income and credit the buyer |
This table describes common settlement logic, not a universal rule. Contracts and local practices can assign the closing day or use a different convention. Borrowers should verify both the covered dates and which party receives the credit.
Annual property taxes are $7,300, or $20 per day using a 365-day convention. If the agreed calculation allocates 100 days to the seller, the seller’s share is $2,000.
If the buyer will pay the entire tax bill later, the settlement may credit the buyer and debit the seller for $2,000. If the seller already paid the full bill, the direction may reverse for the buyer’s post-closing share. This is why the debit or credit matters as much as the arithmetic.
For each proration, identify four inputs before judging the line:
If those inputs are correct, the debit-and-credit direction should explain who is reimbursing whom. If the closing date changes, ask for the calculation to be refreshed rather than reusing the earlier day count.
Prorations differ from Prepaid Items. Prorations allocate responsibility between buyer and seller; prepaids collect the borrower’s future expenses in advance.
They differ from Seller Concessions. A concession is a negotiated seller contribution toward buyer costs. A proration allocates an underlying expense or income according to time or contract responsibility.
They also differ from Tax Proration, which is the property-tax-specific application of the broader proration concept.