Why does my mortgage lender want to pay off my car loan at closing?

Can someone explain how this works? My lender says they want to pay off my car loan at the time of closing. I had to look this up, but I’m still confused—if the title company pays off my car loan at closing, when and how do I pay the title company back? What’s the benefit of having them handle it instead of me paying the car loan myself now?

This probably means your debt-to-income ratio (DTI) is too tight to qualify for the loan, but they know you have the funds to pay off the car loan. I went through this when I bought my house.

Here’s how it works: Escrow (or the title attorney, depending on your state) collects the money to pay off your car loan and sends the payment directly to the car lender. Just make sure the car lender sends the title to the correct address once the loan is paid off.

@Denver
When and how do I pay the title or escrow company if they’re handling my car loan payoff?

Kirin said:
@Denver
When and how do I pay the title or escrow company if they’re handling my car loan payoff?

You’ll provide a check to the title company at closing. The total amount includes your closing costs plus the remaining balance on your car loan. After closing, the title company sends a check to your car lender, who will then mail you the title for your car.

Check your closing disclosure or loan estimate—you should see the auto loan listed as a debt to be paid off. It won’t show up under closing costs but will be accounted for separately.

@Vick
Got it, thanks so much!

If you pay off the car loan yourself now, it could create a lot of extra paperwork. You’d need to show proof of payment, funds transfer, etc.

When it’s done through escrow at closing, the lender trusts the title company to handle it, and it’s simpler for everyone involved. Plus, if your loan doesn’t go through for some reason, you won’t be stuck with a fully paid-off car and no house.

I went through this recently when I closed on my house. The process worked smoothly—no issues at all.

This is all about your debt-to-income (DTI) ratio.

Your lender is asking for this because your current DTI ratio is too high. Paying off the car loan reduces your monthly obligations, which helps you qualify for the mortgage.

Here’s how it works: You bring the necessary cash to closing, usually via wire transfer. The title company has a fiduciary responsibility to send the payment to your car lender, so your mortgage lender can assume the debt is resolved.

If you pay off the car loan yourself beforehand, your mortgage lender will require proof, which could delay closing.

Our closing attorney paid off our truck loan when we sold our house. Since we had enough funds from the sale, we were fine with it.

It usually means your DTI is too high, and paying off the car loan is a condition for the loan to work. The lender incorporates this payoff into the closing process so the debt can be excluded from your obligations. Let me know if you need more details!