|
Prorations
(Click Here to Print PDF)
Proration is defined as the act of dividing property taxes, interest,
insurance premiums, rental income, etc., between buyer and seller
proportionately as to time of use or the date of closing. In a typical
sale/purchase closing, the item most routinely prorated is the ad
valorem taxes for that year. Since ad valorem taxes are paid at the
end of the year in which they are due (they can be paid as early as
October 1st or as late as January 31st of the next calendar year
without penalty in most Texas counties), any closing taking place
before October 1st will generally show a charge to the seller from
January 1st to the closing date and a credit to the buyer for the same
period. Unless negotiated otherwise, this allows the seller to pay
taxes for the time that he or she actually had ownership, use and
enjoyment of the property. Around October 1st, tax notices will be
sent to the new owners for the year. They will be expected to pay
taxes (usually through their mortgage company escrow account) for the
full year. Taking into account the credit that they received at
closing, the new owners actually pay taxes only for the time during
which they had ownership, use and enjoyment of the property. Title
companies use the best information available when prorating taxes
prior to October 1st (when official figures are released by the tax
authorities). This best-available information is usually the tax
amount paid for the prior year.
In closings that
occur after official tax figures are released (generally October 1st),
title companies will normally charge each party their prorata tax
amount and pay the taxing authorities directly. This allows title
companies to insure that taxes have been paid when issuing their
mortgagee title policies.
Loan assumptions
usually involve several prorations, such as taxes, interest and escrow
accounts. Most hazard insurance companies do not allow existing
policies to be assumed. Consequently, the buyers must provide and pay
for a new policy at the closing. The seller can cancel his or her
policy after the closing and receive a refund of the unearned premium
directly from their local insurance agent.
A loan assumption
closing involving prorations is usually handled in the following
manner. The escrow account is purchased by the buyer and credited to
the seller. The account must be "sufficient" at the time of transfer
(any shortages must be collected from the seller and added to the
existing balance). Unless negotiated otherwise, the tax proration is
handled in the same way. Interest on the mortgage must also be
prorated at the time of closing. Since interest is paid in arrears (a
May payment covers April interest), the buyer is usually credited with
the interest from the first of the month in which the closing occurs
to the closing date; the seller is charged with this same amount. For
example, if a closing occurs May 21st, the buyer's first payment will
be due June 1st. The June payment covers interest for the month of
May, so the buyer is reimbursed for the time the seller still had
ownership and use of the property (from May 1st to May 21st).
This discussion
assumes that the buyer will take possession of the property at
closing. Obviously, if a buyer is allowed to take possession of the
property prior to the actual closing, the contract should reflect this
fact and stipulate whether or not the proration-date is changed
accordingly. Whenever the contract contains specific requirements
regarding prorations, the title company will follow the instructions
of the contract. |