Paying Off Debt Before Mortgage Closing
Compare the effect of a mortgage debt payoff condition on debt-to-income ratio, cash to close and required reserves.
In this guide
Quick answer
Ask your lender which debt payment it can exclude, who should send the payoff and what proof will clear the condition. Recalculate both debt-to-income ratio (DTI) and cash remaining after closing. A payoff can improve one measure while leaving you short on the other.
Worked example
Gross monthly income is $6,000. The proposed housing payment is $1,800, the auto payment is $300 and the card payment is $200. With $24,000 verified funds and $19,000 cash to close before card payoff, compare both outcomes.
| Measure | Keep card balance | Pay $4,000 separately |
|---|---|---|
| Monthly debt | $2,300 | $2,100 |
| DTI | 38.3% | 35.0% |
| Cash remaining | $5,000 | $1,000 |
This example assumes the lender excludes the card payment after payoff. With a $2,000 reserve requirement, the payoff scenario falls $1,000 short. If the closing figure already includes the payoff, count the payoff once.
Confirm the condition in writing
Fannie Mae’s Selling Guide distinguishes revolving balances, installment loans and other liabilities. Its revolving payoff provision does not require closing the account merely to exclude the payment from DTI. Confirm which program and lender conditions apply to your file.
- Identify the exact account, payoff deadline and amount.
- Confirm who sends funds and whether the closing figure includes them.
- Ask which funds the lender can verify and how much must remain in reserves.
- Obtain a current payoff figure and confirm what evidence underwriting accepts.
Frequently asked questions
Will a partial payment remove the monthly obligation?
Ask the lender whether the revised payment qualifies. Treatment can depend on the debt type, remaining term and loan program.
Does my report need to show zero?
Ask what proof the lender accepts and when underwriting needs it.
Should I close the card?
Confirm the lender’s written conditions before changing the account.
Fannie Mae Selling Guide · FinToku closing costs guide
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Read related guides
- Inherited Home With a Mortgage: Successor Status vs Debt
- Mortgage Affordability With Car Payments: How Debt Changes the Budget
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Further reading
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