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Every Board of Realtors and Real Estate Commissions promulgated contract contains a prorations clause.Before signing any purchase contract, you should read it thoroughly to see if it contains a prorations clause and how the prorations are handled.It may be beneficial for you to negotiate this clause to save a bunch of money.Prorations charges will show up as a debit on the buyer's side of the closing statement (HUD-1) and as a credit on the seller's side.These credits increase the sellers bottom line and reimburses the seller for items the seller has already prepaid for the time period the seller will not own the property.
Mortgage Interest ProrationsMortgage interest is paid in arrears, unlike rent, which is paid in advance.When you pay a mortgage payment on March 1st, for example, it pays the interest for the month of February.On a new mortgage, lenders want to collect interest up to 30 days before the first mortgage payment is due. So if you close on, October 15, your first mortgage payment will be due November 1. The November 1st mortgage payment will pay the interest for the month of October.As the borrower, you will be charged 30 days of interest on your closing statement, from October 1st to November 1st. Property Tax ProrationsEvery state structures its property tax year differently.Some states collect property taxes in advance, some collect in arrears, and some collections depend on the time of year.Taxes are, in most states, paid in two installments. The first thing you need to figure out if the period during which you are closing involves prepaid property taxes. If the property taxes are prepaid, and you are the seller, you will receive a credit for theses pre-paid property taxes. If the taxes are prepaid, and you are the buyer, you will be charged the property taxes for this period. The opposite of this is true if taxes are not yet due and payable, the sellers will receive a debit proration and buyers a credit proration. In some cases, even if the taxes are not yet due and payable, if your closing date is near the date the taxes will be due, your closer will pay the taxes from the seller's proceeds, credit the unused portion to the seller and charge the buyer accordingly. Some educated and aggressive buyers will ask for no tax prorations in the purchase contract, if it is apparent that the buyer will be expected to reimburse the seller for a portion of prepaid taxes. If you are a seller in this situation, and you do not understand the significance of "no prorations," you will pay taxes for a period that you did not occupy the property. Complicated?Yes.Is it something you can benefit from if you understand it?That will be a resounding yes! Homeowner Association Dues ProrationsBecause many homeowner associations, or HOA’s, collect their monthly dues upfront (some HOAs bill quarterly or annually), if a seller has not yet paid theses HOA dues, theses dues will be paid from the seller's proceeds. In this case the seller will receive a credit for the unallocated portion of dues. Example, if the dues are $200 a month, the daily proration is $6.67. When a transaction closes on the 10th of the month, the seller will be charged 10 days of HOA dues or $66.70. The buyer will pay $133.30 for 20 days of HOA dues.If you are selling a property to a company or if you are purchasing a home you may find that their contract is written to take advantage of these prorations.Just by understanding just this one element of the sales contract you can figure out the best way to save, or make, you the most money.Since most people, and many agents, don’t understand prorations and how they work be prepared for a little bit of friction and push back.
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