Alabama Real Estate Practice Exam

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What is the primary distinction between a credit and a debit in the context of closing costs?

A credit is for the buyer only, while a debit is for the seller
A credit involves payment to another party, while a debit is money owed
Debits are optional charges, while credits are mandatory
Credits increase the loan amount, while debits decrease it

The correct answer is: A credit involves payment to another party, while a debit is money owed

In the context of closing costs, both credits and debits involve financial transactions between the buyer and seller. The primary distinction lies in the direction of the flow of money. A credit involves payment from one party to another, while a debit requires one party to owe money to the other. This means that a credit is a positive amount that will be applied towards the buyer's closing costs, while a debit is a negative amount that the buyer will need to pay. Option A is incorrect because both credits and debits can be applied to either the buyer or the seller. Option C is incorrect because both credits and debits are mandatory costs that need to be settled at the time of closing. Lastly, option D is incorrect because credits and debits do not affect the loan amount, but rather the out-of-pocket expenses for the buyer.