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We have a family member who had their father cosign a student loan for them that was recently paid off post their credit check on the father who is attempting to refinance their mortgage.

The lender is asking for verification of who actually paid the loan, the father or the child. The child did in this case but I'm curious why that matters to them since the debt that would affect the debt to loan ratio is no more and they have been given documents that prove so much.

Does it only matter because of the fact that it was paid off recently from the time of the credit check? Say the debt was paid off a week before the credit check would they still care about such information? How does this all appear from a risk perspective of the lender?

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    You need to state your country. I can think of at least two where this kind of inquiry is illegal. And it is rude to the rest of the world to just assume its US.
    – Mindwin Remember Monica
    Commented Mar 1, 2018 at 18:26
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    @Mindwin "rude to the rest of the world" seems a little extreme on a US-based website. I know we are a global community here, and country is a good, important detail, but no one's being rude.
    – JPhi1618
    Commented Mar 1, 2018 at 19:04
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    What does "post their credit check" mean?
    – Acccumulation
    Commented Mar 1, 2018 at 21:52
  • "post" as in "after"
    – jxramos
    Commented Mar 1, 2018 at 23:33
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    @JPhi1618 Where the website is based is not obvious at the first glance and does not matter for the format of the site whose target audiencnce is the world. Thus, yes, this assumption is at least pre-mature.
    – glglgl
    Commented Mar 2, 2018 at 10:40

2 Answers 2

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The lender is concerned that the loan was paid off with borrowed money and thus the borrower has a debt that they are hiding from the lender. It is absolutely routine for a lender to investigate any recent significant financial changes of a borrower to look for ways they might be hiding debt.

It's not unusual for people to receive gifts to help them afford a mortgage. However, this does need to be disclosed to the lender so they can ensure that they are in fact gifts and not an attempt to present a better financial picture than the borrower really has.

Their fear is that you might pay off debt to a family member and default on your mortgage. They need to evaluate that risk.

Imagine if someone had $30,000 in credit card debt and mysteriously paid it off right before borrowing money to buy a house. The lender might reasonably fear that they owe some family member $30,000 and if money gets tight, might continue to pay off that debt to avoid strife in their family and thus have reduced ability to pay off the loan. Or they might put routine expenses on their credit cards to pay off the debt to the family member and run up credit card debt again.

The point is, the lender has to know whether that $30,000 credit card payoff is real (because it came from the borrower's own funds) or fake (because they just borrowed money to do it and have to pay that back). If the lender has a $30,000 debt to a family member that they're not disclosing, created specifically to make their financial situation look better than it really is, that definitely increases the risk the lender is taking.

The same thing is true of any significant recent event that makes the borrower's financial situation appear better. The lender has to determine if it's real or fake.

By the way, if you are going to do something to significantly improve your financial situation, like pay off a debt or receive a gift, it's probably easiest to do it at least 60 days before applying for a mortgage. If it's cash you're receiving (say as repayment on a personal loan you made to someone) ideally have it in your bank account on two statements. That way, there's no issue.

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    Also, as is in the news a lot lately due to a high profile money laundering scheme, loans can be used to launder money or provide kickbacks. If you used loaned (laundered) money to pay off your debt. The bank wants to know if 1) they're dealing with a shady individual who is likely to default on the debt when they get arrested and 2) if they might be considered complicit in the scheme and need to protect themselves. Innocent people have nothing to hide, right? Right?!
    – corsiKa
    Commented Mar 1, 2018 at 18:03
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    @corsika sarcasm... but I have tons of thing to hide, none of them illegal, all of them not anyone else's business. Like a mole in some embarassing place.
    – Mindwin Remember Monica
    Commented Mar 1, 2018 at 18:28
  • @Mindwin: that's true, but unfortunately if you want to borrow money from a bank or similar, and they say that where you get your money from is their business, then (within reason) it's their business until you withdraw your loan application (or it's rejected). Literally so: assessing whether or not they think you have the means to sustain the credit and repay the loan is actually the business they're in.
    – Steve Jessop
    Commented Mar 2, 2018 at 17:28
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The lender wants to make sure that the borrower has not incurred additional debt to a third party. That debt might affect the borrower's cash flow and jeopardize their ability to service the lender's loan.

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