It is actually quite common that you may be asked to pay down some of your debt during the escrow process. It may be a car, or credit cards, or other personal loans. Don’t consider this a bad thing! In a way, it’s a lot like consolidating your debt. If you’re wondering how the process works in that some (or all) of your debt is eliminated during the escrow process, read on!
By this point, you are probably acutely aware of the term “debt to income ratio.” Your mortgage lender uses this equation to determine how much money you are able to borrow. The more debt that you have, the less money you will likely be able to borrow. This is why mortgage lenders often request that borrowers pay down certain debts as a condition of loan approval.
And often, these debts are paid by escrow. This all has to do with timing. If you were to simply mail in your credit card or car payment, or even pay them online, it could take weeks before your lender could verify that these debts were paid in full. On the flip side, when escrow makes these payments, they are recorded on the buyer’s final escrow settlement statement, which is official enough for a mortgage lender to consider the debt paid as requested.
In order to help things move along smoothly, here are some other things to keep in mind when you are asked to pay debts in escrow:
Correct Account Numbers
Often times, your mortgage lender is pulling this information from your credit report, and that may mean they only have access to a partial or redacted account number or abbreviated company name. Make sure you provide your most recent statement with the correct payment mailing address and your full account number to escrow. This will ensure your account is credited properly and in a timely manner.
The last thing you need when you’re buying a home is a late payment, and that can happen when escrow is handling a debt payment. Make sure you keep close tabs on your escrow closing date and your normal monthly payment due date because debt paid via escrow will not be paid until the day escrow closes. It’s customary that physical checks are mailed, so allow time for this to avoid late fees. This may mean that you need to make a normal payment, and any overpayment will be returned to you.
Make Sure To Provide the Correct Statements
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.
Need to Change Amounts?
Because the dollar amounts are taken from your credit report, a living and ever-evolving document, you may find that you need to change the amount paid to your debtors (this can be higher or lower). Keep in mind that your Escrow Officer is required to abide by the written instructions of your mortgage loan company, so if you need to change the amount, contact your loan officer to find out what is required to make this happen.
This is just another instance where communication is key during the home buying process. Be sure to stay in close contact with both your Escrow Officer and your Loan Officer to ensure that the payments of your debt during escrow goes smoothly.
If you have questions about this topic or need assistance with an escrow, please reach out! It would be our pleasure to assist you with any and all of your escrow needs.