Will paying off an installment loan before you apply for a mortgage help you qualify? It usually will, as long as the money comes from an account the underwriter can already trace. The payoff also has to leave you enough cash to close.

When you finish this page you will have two things: a payoff the lender can verify, and a debt that no longer counts against you. Expect a few days, most of it spent waiting on the payoff letter. Before you start, check one thing. You may not need to pay the loan off at all. Under Fannie Mae's rules, a loan with 10 or fewer payments left usually drops out of the math without a payoff.

What you need

  • A current statement for the installment loan

    It should show the balance, the monthly payment and how many payments remain.

  • Your two most recent statements for the account you will pay from

    Lenders review the last two months of asset statements, according to Shining Star Funding.

  • Your loan officer's figure for cash to close plus required reserves

    Reserves are the savings a lender wants left over after closing. Payoff money cannot double as reserves.

  • Your gross monthly income

    Half of this figure is the size at which a deposit gets questioned.

The steps

  1. Count the payments left on the loan

    Read the remaining term off the statement. Fannie Mae's Selling Guide lets a lender leave out an installment loan paid down to 10 or fewer payments. It has worked when you have a number. If it is already 10 or under, ask your loan officer whether the lender will exclude the payment as it stands.

  2. Run your debt-to-income ratio with and without the payment

    Debt-to-income (DTI) is your monthly debts divided by your gross monthly income. Fannie Mae caps it at 50% for loans run through its automated system. For manually underwritten loans the cap is 36%, which can stretch to 45% with strong credit and reserves. It has worked when you can see whether the payoff moves you from over the limit to under it. If it does not, skip the payoff.

  3. Subtract the payoff from your savings and compare it to your cash-to-close figure

    Lenders want money left after closing, not only a lower ratio. It has worked when the balance after payoff still covers your down payment, closing costs and reserves.

  4. Pay the loan from an account already on your statements

    Use money that has sat in that account through the two-month review window. The underwriter will only question it if it arrived recently as a large deposit, meaning more than about 50% of your monthly gross income, per AmeriSave. Do not deposit cash to cover it. Do not shuffle money between accounts first. It has worked when the withdrawal is the only new line on the statement.

  5. Get a payoff confirmation from the installment lender

    Ask for a letter or statement showing a zero balance. It has worked when you hold a document dated after the payment.

  6. Send the confirmation and the bank statement to your loan officer

    This pair is the whole trail. The confirmation proves the debt is gone and the statement shows where the money came from. Fannie Mae says payoffs made "solely to qualify" get a closer look, so send both together. The lender may also order a credit supplement, which is an update to your credit report. Lenders use it because the bureaus may not show the payoff yet. It has worked when the condition clears without a follow-up request.

On timing: these sources do not name a payoff date that loan officers prefer. What they do give is the two-month statement window. So the cleanest payoffs come from money that was already sitting in your account before that window began. Which document clears an open loan versus a retired one is covered in how underwriters verify the loan.

If it did not work

The underwriter is allowed to. Fannie Mae's rule keeps the payment in the ratio if it would "significantly affect the borrower's ability to meet their credit obligations." That usually means a large payment or thin reserves. To fix it, pay the loan off in full rather than down, and send the zero-balance letter.

The money likely came from a deposit made during the review window. Send the paper trail for that deposit, such as a gift letter, sale receipt or transfer record. Gustan Cho Associates notes that lenders usually drop unverified money from your counted assets rather than deny the loan. That only works if enough verified money is left.

The payoff took more cash than the file could spare. On multi-unit or investment properties, falling below the minimum reserves can disqualify you even with a better ratio. Ask your loan officer whether a partial paydown would have been enough. Before adding new money, read about large unsourced deposits, because new money creates its own sourcing problem.

With the payoff documented, the debt is out of your ratio and the withdrawal is explained. There is one check worth doing next if the loan came from a West Virginia lender: confirm it was legal under the state's rate rules in the first place.

Was the loan you just paid off legal in West Virginia?

The state guide sets out what West Virginia law lets an installment lender charge.

Read the West Virginia guide