Avoid Prepaying Debts Before Closing Your Loan

When it comes to closing on your loan, it's critical to follow the lender's instructions regarding any debts that need to be paid off. If paying off a specific debt is a closing requirement, DO NOT PAY IT OFF AHEAD OF TIME! Here's why:

Let the Title Company Handle It

The title company or closing attorney receives detailed instructions from the lender to pay off any debts required at closing. These payments are added to the settlement statement as line items. Your responsibility is to ensure the title company has the correct payoff statement so they can process the payment accurately.

Risks of Paying Off Debts Early

If you decide to prepay a debt yourself before closing, you’ll face additional hurdles:

1. Transaction History: You’ll need to provide a detailed transaction history showing the payment.
2. Zero Balance Proof: You must obtain proof that the account has a zero balance and no pending charges. This can be especially tricky if it’s a revolving account, like a credit card, where charges can appear even after you’ve paid it off.
3. Asset Verification Gap: The assets used to pay off the debt must also be verified. However, the lender’s asset verification process doesn’t directly link your accounts to the debts being paid, creating a gap that needs to be reconciled.

A Real-Life Example

To illustrate, I had a client this week who sold their home on Monday, used the proceeds to pay off some debts on Tuesday, and planned to close on a new loan on Wednesday. Unfortunately, this caused a 48-hour delay. We had to scramble to provide proof that all the debts were paid and ensure there were no pending charges. Some creditors take several days to update their systems and reflect a zero balance, further complicating the process.

Best Practice: Follow the Process

To avoid unnecessary delays and complications, let the title company handle any debt payments required for closing. Provide them with the necessary payoff statements so they can include these payments in the settlement process. This ensures everything is documented correctly and avoids last-minute issues.

By sticking to this process, you’ll save yourself time, stress, and the risk of delaying your loan closing.

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