Alabama Real Estate Practice Exam

What is the significance of prorations in the context of closing costs?

1. They determine the credit score needed for loan approval

2. They are penalties for late payment of the loan

3. They indicate items that have been prepaid or owed at the time of closing

4. They are discounts given based on the time of month the closing occurs

The correct answer is: They indicate items that have been prepaid or owed at the time of closing

Prorations in the context of closing costs refer to the allocation of expenses between the buyer and seller at the time of closing. This is typically done for expenses that have been prepaid or are owed at the time of closing, such as property taxes, homeowner’s insurance, or utility bills. Options A, B, and D are all incorrect because they do not accurately describe the purpose of prorations and are unrelated to closing costs.