Mastering the Settlement Statement Walkthrough for the Arizona Real Estate Exam

Last updated: April 2026

For aspiring real estate professionals in the Grand Canyon State, understanding the financial mechanics of a closing is non-negotiable. The settlement statement—often referred to as the Closing Disclosure (CD) or HUD-1 depending on the transaction type—is the financial blueprint of a real estate transfer. Mastering the settlement statement walkthrough is not only critical for passing your licensing exam but also essential for your day-to-day practice. To see how this topic fits into your overall study plan, be sure to review our Complete Arizona Exam Guide.

In this guide, we will break down the anatomy of a settlement statement, explore Arizona-specific closing customs, and walk through practical math scenarios you are likely to encounter on the Arizona Department of Real Estate (ADRE) licensing exam.

Understanding Settlement Statements in Arizona

Unlike some states where attorneys sit at the head of a large conference table to close a deal, Arizona is an escrow state. This means that neutral third-party escrow officers—typically working for title companies—handle the settlement process, prepare the settlement statements, and disburse the funds.

The settlement statement is an itemized list of all the fees, charges, and financial obligations associated with the transaction. Following the implementation of the federal TILA-RESPA Integrated Disclosure (TRID) rule, the traditional HUD-1 settlement statement was largely replaced by the Closing Disclosure (CD) for most residential mortgage transactions. However, you may still see HUD-1s used in cash transactions, commercial deals, or reverse mortgages. The exam will test your understanding of the underlying principles of debits and credits, regardless of the specific form name.

The Anatomy of a Settlement Statement

To succeed on the exam, you must be able to read a settlement statement from both the buyer's and the seller's perspectives. This requires a rock-solid understanding of two main concepts: Debits vs. Credits, and Prorations.

Debits vs. Credits

The fundamental rule of settlement statements is double-entry bookkeeping. Every item is categorized as either a debit or a credit.

Debit (Charge): Money that a party owes or must pay at closing. (Think: Decrease in the party's pocket).
Credit (Receipt): Money that a party receives, is reimbursed for, or has already paid. (Think: Increase in the party's pocket).

For example, the purchase price of the home is a Debit to the Buyer (they have to pay it) and a Credit to the Seller (they are receiving it). Conversely, the buyer's earnest money deposit is a Credit to the Buyer because it is money they have already paid toward the purchase price.

Prorations in Arizona

Proration is the allocation of ongoing property expenses between the buyer and the seller based on their actual period of ownership. In Arizona, the day of closing customarily belongs to the buyer for proration purposes, though the exam prompt will always specify if you should assume otherwise.

The most common prorated items include property taxes, Homeowners Association (HOA) dues, and prepaid rent. The exam will typically ask you to calculate prorations based on either a statutory year (360 days/30 days per month) or a calendar year (365 days). Always read the question carefully to see which calendar method is requested.

Common Arizona Settlement Line Items

Arizona has specific customs regarding who pays for what at closing. While everything is technically negotiable, the ADRE exam often tests on "customary" practices:

Title Insurance: Customarily, the Seller pays for the Owner's Title Policy (protecting the buyer), while the Buyer pays for the Lender's Title Policy (ALTA policy protecting the bank).
Escrow Fees: Typically split 50/50 between the buyer and the seller.
Property Taxes: Paid in arrears in Arizona. Therefore, the seller usually owes the buyer a credit for the time the seller lived in the home during the current tax period before the bill was due.

Below is a visual representation of typical buyer closing costs you might see itemized on an Arizona Closing Disclosure:

Typical Buyer Closing Costs Breakdown in Arizona ($)

Practical Walkthrough Scenario: The Maricopa County Transaction

Let’s walk through a realistic exam scenario to see how these numbers play out on a settlement statement.

The Scenario:
A property in Phoenix is closing on September 15th. The annual property taxes are $2,400. In Arizona, property taxes are paid in arrears. The taxes for the current year have not yet been paid. Using a 360-day statutory year, how will this appear on the settlement statement?

Step-by-Step Solution:

Determine the daily tax rate:
$2,400 annual taxes ÷ 360 days = $6.6667 per day.
Calculate the Seller's days of ownership:
Since the buyer owns the day of closing, the seller is responsible for January 1st through September 14th.
January through August = 8 full months × 30 days = 240 days.
September 1 through September 14 = 14 days.
Total seller days = 254 days.
Calculate the prorated amount:
254 days × $6.6667 = $1,693.34.
Determine the Debit/Credit entry:
Because taxes are paid in arrears, the buyer will eventually have to pay the full tax bill at the end of the year, including the seller's portion. Therefore, the seller must give the buyer the money for the days the seller lived there. This appears as a $1,693.34 Debit to the Seller and a $1,693.34 Credit to the Buyer.

Preparing for Settlement Questions on the Exam

Settlement statement questions often combine reading comprehension, regulatory knowledge, and real estate math. To ensure you are fully prepared, practice calculating prorations multiple times until the formulas become second nature. If you struggle with the math portions of the exam, we highly recommend reviewing our Arizona Practice Test Strategies to learn how to tackle complex word problems effectively.

Furthermore, understanding the ethical obligations of explaining closing costs to clients without stepping into the unauthorized practice of law or accounting is vital. Real estate agents must guide clients through the CD, but should always refer them to the escrow officer or a CPA for legal or tax advice. Brush up on these boundaries in our guide to Arizona Real Estate Ethics and Standards.

Frequently Asked Questions (FAQs)

Who prepares the settlement statement in Arizona?

Because Arizona is an escrow state, the settlement statement is typically prepared by the escrow officer working for the title company, acting as a neutral third party to execute the instructions of the purchase contract and the lender.

How are property taxes prorated in Arizona?

Property taxes in Arizona are paid in arrears (after the fact). Because of this, the seller typically provides a credit to the buyer at closing for the portion of the year the seller owned the property before the tax bill is issued.

What is the difference between a Closing Disclosure (CD) and a HUD-1?

The HUD-1 was the standard settlement form used for decades. Under the federal TRID rule, the Closing Disclosure (CD) replaced the HUD-1 for most residential transactions involving a mortgage. You will still see HUD-1s used in cash sales and commercial transactions.

Who customarily pays for title insurance in Arizona?

While everything is negotiable, it is customary in Arizona for the seller to pay for the Owner's Title Insurance Policy (which protects the buyer's equity), and for the buyer to pay for the Lender's Title Insurance Policy (which protects the bank's investment).

Are escrow fees regulated by the Arizona Department of Real Estate (ADRE)?

No. While ADRE regulates real estate licensees, title and escrow companies in Arizona are regulated by the Arizona Department of Insurance and Financial Institutions (DIFI). However, real estate agents are still expected to understand standard escrow fees to properly advise their clients.