Question: My lender is requiring that I pay off my car and some credit cards in escrow, how does that work?
Answer: As you may be aware, one part of home loan qualification is determining your “debt to income ratio”. For this reason, a mortgage lender will frequently require that a buyer pay certain debts, in order to receive approval of their home loan. These debts are typically paid through escrow. If a buyer were to pay the credit card company or other lender directly, it may be weeks before the lender can verify the debts are paid in full. The fact that the payments are reflected on the buyer’s final escrow settlement statement, is all the evidence a mortgage lender needs to be confident that a debt is paid.
These debts may include credit cards, car, boat or RV financing, or any other miscellaneous consumer debt.
Here are a few notes and pointers, to help make this process go smoothly:
- Present the most recent statement, including the correct payment mailing address and COMPLETE account or loan number to escrow. The information escrow receives from the mortgage lender is often only a partial account number, or abbreviated company name, as it is taken from your credit report.
- Pay attention to the escrow closing date, and when the normal monthly debt payments become late. Consumer debt being paid through escrow, doesn’t get paid until the day of closing. That is, the check is issued on the day of closing, but it may not be mailed that day. If the close of escrow is past the due date of a monthly payment, the credit card or car loan company will charge your account any applicable late fees. For this reason, even though the debt is being paid off in escrow, you may want to go ahead and make minimum monthly payments, to avoid late charges. Any overpayment you make to your consumer debts will be refunded by the credit card company directly to you.
- At the close of escrow, the original checks payable to the credit card or other loan company will be mailed to the addresses on the latest statements that you have provided to the Escrow Holder. You want to make sure to provide the correct statements so that you can be confident that the checks are mailed to the appropriate company.
- Your Escrow Officer is required to follow the written instructions of your mortgage loan company (these instructions come with the final loan documents, just prior to closing). Frequently the amounts to be paid for these miscellaneous debts are incorrect (too high or too low). The amounts may be wrong because the numbers are taken from your credit report. Credit reports tend to be a few weeks or even months behind in reporting. In order to pay an amount different from what is on the lender’s instructions, escrow will need your lender’s approval. Speak to your loan officer about what the lender will require to change the amounts to be paid.
A little planning and communication with escrow and your mortgage loan company should make the payment of debts in escrow go smoothly. As always, Glen Oaks Escrow is ready to help!