Is it normal to include an auto loan payoff in the escrow process? Why can’t I just pay it off outside escrow?

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I am in the process of getting pre-approved for an FHA loan mortgage and have an auto loan that is preventing that. I have a relative who will be providing the funds, so that part isn’t a problem. The issue is, the mortgage company has only given us two options for payoff of that loan: 1) Fill out a gift letter and put the payoff money into the escrow account, which will then pay off the auto loan at closing OR 2) Fill out a gift letter, get full copies of the bank statement to prove the money is in the account, make a copy of the check (or check #) that is going to the payoff, and then get a receipt from the auto loan company that verifies the check number received on the payoff.

Why can’t we just pay off the loan outside of all the financing? Then we can show the pink slip to verify it’s paid off and move forward. My mortgage person says it’s because they have to establish the paper trail in case of audit and to ward against money laundering. Is this a legitimate demand?

2 Comments
  1. Reply
    JoeJohn
    January 29, 2011 at 3:04 am

    Being a Realtor in Texas, i’ve never seen a loan office ask a borrower to place funds in escrow to pay off a vehicle that’s preventing the loan from funding. If you’re only getting pre-approved, then you’re in the very beginning of the loan process.

    So, i would pay off the vehicle, have a gift letter, and that’s enough of a paper trail for any lender i’ve ever worked with. Try talking to another loan officer. You might find a better one. This lender sounds lazy, and controlling to the extent of annoyance. Before you take this action to pay off the car, i can’t suggest highly enough that you need to talk to another lender. Just because this one has checked your credit, don’t worry about that. FHA is very lenient with respect to credit and income to debt ratios, so that shouldn’t be a problem.

    FHA has weird rules, so if you get this same response from 2 other lenders, then it’s probably legit. I haven’t worked with a buyer in the exact scenario, but I understand the system and, like i said, i’ve never seen a lender ask a buyer to place funds in escrow when you can pay it off right away.

  2. Reply
    Dawni Do Right
    January 29, 2011 at 3:44 am

    It’s assurance to the lender the loan will be paid in full PRIOR TO or AT closing without having to wait for documentation to arrive in the mail from DMV as to clear title to the vehicle or your auto loan lien holder.

    Although a pain in the @ss to you, it will get your home loan closed quicker going this route and it acheives the same end result.

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