For many aspiring real estate professionals, the math and closing procedures portion of the licensing exam is the most intimidating. A significant part of this section revolves around understanding and calculating figures on a closing disclosure or settlement statement. To ensure you are fully prepared, this comprehensive settlement statement walkthrough will break down the essential debits, credits, and Michigan-specific calculations you need to know. For a broader overview of everything you need to study, be sure to bookmark our Complete Michigan Exam Guide.
What is a Settlement Statement?
A settlement statement is a comprehensive, itemized document that details all the financial transactions involved in a real estate closing. Historically, the HUD-1 Settlement Statement was the standard. Today, under the TILA-RESPA Integrated Disclosure (TRID) rule, residential transactions involving a mortgage use the Closing Disclosure (CD). Additionally, title companies often use an ALTA Settlement Statement to summarize the costs for both the buyer and the seller in a single, easy-to-read document.
For the Michigan real estate exam, you are less likely to be tested on the exact formatting of these forms and more likely to be tested on the mechanics of how money moves between the buyer, the seller, and third parties.
The Core Concept: Debits vs. Credits
To master settlement statement questions, you must fundamentally understand the difference between a debit and a credit.
- Debit (Charge): Money that a party owes or must pay at closing. It increases the amount the buyer must bring to closing or decreases the amount the seller takes home.
- Credit (Receivable): Money that a party receives or has already paid. It decreases the amount the buyer must bring to closing or increases the amount the seller takes home.
Double-entry accounting is common on settlement statements. For example, the purchase price is a Debit to the Buyer (they owe this money) and a Credit to the Seller (they are receiving this money).
Michigan-Specific Closing Costs and Taxes
The Michigan exam will test your knowledge of state-specific laws and customary practices regarding closing costs. For a deep dive into all potential fees, review our Michigan Closing Costs Breakdown.
Michigan Real Estate Transfer Taxes
In Michigan, the seller customarily pays the real estate transfer tax when transferring the deed. This tax is split into a State tax and a County tax. The formula is calculated based on the purchase price, rounded up to the nearest $500.
- State Transfer Tax: $3.75 per $500 of value (or $7.50 per $1,000)
- County Transfer Tax: $0.55 per $500 of value (or $1.10 per $1,000). Note: While Wayne County charges $0.75 per $500, the standard state exam uses the $0.55 rate unless specified otherwise.
Property Tax Prorations
Michigan has a unique property tax system where taxes are typically billed twice a year: Summer taxes (usually due July 1) and Winter taxes (usually due December 1). Because taxes are often paid in advance, the seller will typically receive a credit at closing for the portion of the taxes they paid for the time the buyer will own the home, resulting in a corresponding debit to the buyer.
Typical Seller Debits on a $300,000 MI Home
Step-by-Step Settlement Math Scenario
Let’s walk through a typical exam scenario. Scenario: A home in Grand Rapids, MI sells for $200,000. The closing date is September 15. The buyer puts down a $5,000 earnest money deposit and secures an 80% conventional loan. The annual property taxes are $2,400, which the seller already paid in full on January 1 for the calendar year. The seller agreed to pay a 6% broker commission.
Step 1: Purchase Price and Earnest Money
The purchase price is the starting point.
- Debit Buyer: $200,000
- Credit Seller: $200,000
The earnest money was already paid by the buyer into an escrow account.
- Credit Buyer: $5,000 (Reduces what they owe at closing)
Step 2: Loan Amount
The buyer is getting an 80% loan. To practice more scenarios like this, check out our guide on Michigan Loan-to-Value and Down Payment Calculations.
$200,000 × 0.80 = $160,000
- Credit Buyer: $160,000 (The bank is providing this money on their behalf)
Step 3: Calculating Michigan Transfer Taxes
The seller pays the transfer tax based on the $200,000 sales price.
Divide by 500: $200,000 / $500 = 400
- State Tax: 400 × $3.75 = $1,500
- County Tax: 400 × $0.55 = $220
- Total Transfer Tax: $1,720
- Debit Seller: $1,720
Step 4: Property Tax Proration
Using a standard 360-day statutory year (30 days per month), let's calculate the proration. The seller lived in the home from January 1 to September 15 (8 months and 15 days = 255 days). The buyer owns the home for the remaining 105 days of the year.
Daily tax rate: $2,400 / 360 days = $6.666 per day
Buyer's share: 105 days × $6.666 = $700.00
Because the seller already paid the full year, the buyer must reimburse the seller for those 105 days.
- Debit Buyer: $700
- Credit Seller: $700
Step 5: Broker Commission
The seller pays the 6% commission on the $200,000 sale price.
$200,000 × 0.06 = $12,000
- Debit Seller: $12,000
Exam Strategies for Closing Math
When you sit for the exam, don't let the word problems overwhelm you. Read the question carefully to determine exactly what is being asked. Are they asking for the total cash the buyer needs to bring to closing? Or are they asking for the seller's net proceeds? Draw a simple "T-chart" on your scratch paper with "Buyer" on one side and "Seller" on the other, separating Debits and Credits.
Many students struggle with the math portion of the exam, which contributes to the overall failure rate. To understand the metrics and how to prepare, review the Michigan Pass Rate Statistics and Difficulty guide.
Frequently Asked Questions (FAQs)
Who customarily pays the real estate transfer tax in Michigan?
In Michigan, it is customary and standard practice for the seller to pay both the state and county real estate transfer taxes at closing. The amount is deducted from the seller's proceeds as a debit.
Is the earnest money deposit a debit or a credit on the settlement statement?
The earnest money deposit is a credit to the buyer. Because the buyer has already paid this money into an escrow account when the contract was accepted, it acts as a credit toward their total cash needed to close.
Does the Michigan real estate exam use a 360-day or 365-day year for prorations?
Unless the exam question specifically states to use a 365-day actual calendar year, standard real estate exam math typically relies on a 360-day statutory year (also known as a banker's year), which assumes 12 months of 30 days each. Always read the question carefully for specific instructions.
How are unpaid property taxes handled on the settlement statement?
If property taxes are paid in arrears (meaning the seller lived in the home but the tax bill hasn't been paid yet), the buyer will eventually have to pay the full bill. Therefore, at closing, the seller's portion of the unpaid taxes is a debit to the seller and a credit to the buyer.
What is the difference between the Closing Disclosure and the ALTA Settlement Statement?
The Closing Disclosure (CD) is a federally mandated form under TRID provided by the lender to the buyer, detailing the exact costs of the mortgage. The ALTA Settlement Statement is a document created by the title or escrow company that provides a comprehensive breakdown of all fees, debits, and credits for both the buyer and the seller in a single view.
---