How to Read a Settlement Statement

The settlement statement typically arrives one to three days before closing. By that point, the transaction has been underway for weeks. Inspections are complete. Financing is approved. Moving trucks may be scheduled. Both parties are emotionally committed to completing the sale, and the psychological pressure to proceed without complications is real.

That timing is the problem. The settlement statement is not a formality. It is a complete financial accounting of the transaction, showing every dollar that flows between buyer, seller, and third parties at closing. Errors in it are correctable before signing. They are essentially irreversible after. And yet most buyers and sellers receive the document under time pressure, scan it quickly, and sign it without fully understanding what they have agreed to.

This post is a guide to what the ALTA Settlement Statement contains, how to read it, and what questions are worth asking before the closing table.

 

What the ALTA Settlement Statement Is

The ALTA Settlement Statement is the standard closing document used in most California real estate transactions. ALTA stands for the American Land Title Association, which developed the form. It is prepared by the escrow officer and shows a complete accounting of every financial item in the transaction for both the buyer and the seller in side-by-side columns.

The fundamental organizing principle of the document is the distinction between charges and credits. A charge is a debit, money leaving a party. A credit is money coming to a party or reducing what they owe. Every line item on the statement is one or the other, and the net result of all charges and credits for each party determines the cash due at closing or the net proceeds received.

If there is a mortgage involved in the transaction, the buyer may also receive a Closing Disclosure from their lender, which covers the loan-specific costs in detail. The two documents work together, but the ALTA Settlement Statement is the master accounting document. This article focuses on the ALTA.

 

The Sections and What They Contain

The ALTA Settlement Statement is divided into lettered sections. Not all sections appear in every transaction, but the following are the ones most relevant to buyers and sellers on the Monterey Peninsula.

 

The summary: The top of the document shows the parties, the property, the settlement date, and the bottom-line figures: gross amount due from the buyer and gross amount due to the seller. Most people go here first. It only makes sense once you understand the sections that produce it, so resist the urge to evaluate the summary before reading the rest.

Sales price and adjustments: The agreed purchase price, any personal property included in the sale, and any adjustments negotiated during the transaction. This is where a repair credit, a price reduction after inspection, or any other agreed modification to the purchase price appears. Verify that the figure matches your fully executed purchase agreement, including any amendments signed after the original offer.

Settlement charges: The most detailed section and the one where most questions arise. It includes lender origination fees (for buyers with a mortgage), title insurance premiums, escrow and settlement fees, government recording fees, transfer taxes, prepaid homeowner's insurance and interest, and any other closing costs. Each line should correspond to a service or obligation that was disclosed earlier in the transaction. A buyer who received a Loan Estimate at the start of the mortgage process can compare the final charges here against that earlier estimate. Significant increases in certain categories require explanation.

Prorations: Property taxes, HOA dues, and similar periodic charges are divided between buyer and seller based on the closing date. If the seller has already paid taxes for a period that extends beyond closing, the buyer credits the seller for that overpayment. If taxes are owed for a period the seller occupied but has not yet paid, that amount is debited to the seller. Proration calculations are among the most common sources of minor discrepancies on settlement statements. Verify the underlying figures, including the actual property tax bill and the current HOA payment amount, against the prorated amounts shown.

Payoff figures: For sellers carrying an existing mortgage, the payoff figure appears as a debit in the seller's column. This number should match the payoff quote provided by the lender, which includes the principal balance plus interest accrued to the closing date. Payoff quotes expire and are recalculated if closing is delayed past the quote's expiration date. A delay of even a few days can change the payoff figure. Verify the payoff amount against the most current quote from the lender before signing.

 

A Practical Sequence for Reviewing the Document

Reading a settlement statement is not a complicated skill. It requires a clear sequence and enough time to follow it. Here is the approach The Ruiz Group uses with clients.

Start at the bottom. The net figures at the bottom of the buyer and seller columns are the conclusions of the document. Confirm that the cash due from the buyer and the net proceeds to the seller are approximately what you expected based on your purchase agreement and the estimates you received earlier in the transaction. If the bottom-line numbers are significantly different from your expectations, work backward through the document to find why before proceeding.

Work section by section from the top. For each line item, ask: do I know what this is? Does the amount match what I was told or agreed to? Is this charge assigned to the correct party? A charge that appears in the buyer's column should be the buyer's obligation, and vice versa. Assignment errors occur occasionally and are straightforward to correct before closing.

Flag what you do not recognize. A line item you cannot explain is a question, not an accusation. The escrow officer is the right person to explain it. Most unrecognized items have straightforward explanations. Occasionally one does not, and that is worth knowing before you sign.

 

The settlement statement is not a document you sign because everyone else has agreed. It is a financial accounting of a transaction that involves your money. Reading it should not feel optional.

 

Pushing Back 

Pushing back on a settlement statement does not mean disputing every fee or treating the escrow officer as an adversary. It means exercising the basic diligence that a significant financial transaction warrants.

Practically, it means three things. First, asking a question when something is unclear. The appropriate response to a charge you do not recognize is to ask for an explanation, not to assume it is correct or to move on without understanding it. Second, verifying that agreed adjustments appear correctly. If a repair credit was negotiated after the inspection, confirm it appears as a credit to the buyer and a debit to the seller in the amount agreed. If a price reduction was negotiated, confirm the purchase price reflects the amendment. Third, comparing final charges to earlier estimates. Significant unexplained increases in fees that were disclosed earlier in the transaction are worth questioning.

The escrow officer prepared the document and is the right person to answer questions about it. Questions raised before signing are handled as corrections. Questions raised after signing are handled as disputes, which is a different and more difficult process.

 

Request the Document Before Closing Day

Both buyers and sellers can request a preliminary settlement statement from the escrow officer before the formal closing package is prepared. Doing so gives time to review the document, ask questions, and correct any discrepancies without the time pressure of an imminent closing date.

The Ruiz Group routinely requests preliminary settlement statements for clients as part of the standard closing process. Reading the settlement statement the day before closing is better than reading it at the closing table. Reading it three days before closing is better still. The time to raise a question is before you sign, and creating the conditions for that review is one of the practical things an experienced agent does on a client's behalf.

If you are approaching a closing and want to talk through the settlement statement before the signing appointment, The Ruiz Group is available for that conversation.

 

Related reading: What Your Net Sheet Actually Tells You  ·  What Does an Escrow Company Actually Do?  ·  Title vs. Escrow: What's the Difference?  ·  Transfer Taxes