Mortgage & Wealth Strategies

Debt Paydown and Proof of Payment Guide: What Lenders Require for Mortgage Approval

January 2, 2026 | Posted by: Matt Broom-Hall

When you apply for a mortgage, your lender reviews more than just your income and credit score. They also assess your existing debt obligations and how those debts impact your ability to qualify. In many cases, lenders issue an approval condition that requires you to pay down or pay off certain debts before your mortgage can be finalized.

This is a common underwriting requirement. It is not a setback, but it does require you to provide the right documentation in the right format. If this condition is not documented properly, it can cause delays, additional document requests, and in some cases, re-qualification.

This guide explains exactly what lenders require and how to provide proof of debt payout and proof of source of funds in a lender-ready format.

 

Why Lenders Require Debt Paydowns

Lenders may require debt paydowns for one of three reasons:

1. To Improve Debt-to-Income Ratios

If your current payments cause your debt ratios to exceed the lender’s allowable threshold, paying down debts reduces your monthly obligations and brings your ratios within acceptable guidelines.

2. To Confirm Financial Stability

Underwriters need to see that you have sufficient funds available and that you are not relying on short-term credit to qualify.

3. To Validate Your Liabilities

Lenders want to ensure the debt has actually been paid down and that the payment did not create a new, undisclosed debt elsewhere.

What the Lender Needs (Two Requirements)

When lenders require a debt paydown, they typically want two things for each debt:

1. Proof the debt was paid or reduced (the updated balance)

2. Proof of source of funds (where the payment money came from)

Both components matter. Showing one without the other is one of the most common reasons lenders come back asking for more documents.

Part 1: Proof the Debt Was Paid Down (Updated Balance)

For each debt that must be paid down, the lender needs evidence that the balance has been reduced or paid in full.

Preferred Document Options

These are the most commonly accepted forms of proof:

Updated Creditor Statement (Best Option)

An updated statement dated after the payment is made that clearly shows:

• • The account holder name (or your name)

• • The account number (partial is fine)

• • The updated balance showing the reduction or a $0 balance (whatever the lender's condition states)

Paid-in-Full Letter or Confirmation

A letter, receipt, or confirmation from the creditor stating:

• • The account has been paid off, or

• • The remaining balance (if reduced but not paid off)

Screenshot from Online Creditor Portal (Sometimes Accepted)

If a statement is not immediately available, a 'desktop' screenshot (not mobile/app) may be accepted if it clearly shows:

• • Your name

• • Account number

• • Payment date and amount

• • Updated balance

If the screenshot only shows the payment confirmation and not the new balance, the lender will likely request additional proof.

Part 2: Proof the Payment Left Your Bank Account

In addition to the updated creditor balance, lenders usually require proof that the payment actually left your account.

Acceptable Documents

Provide either:

• • A bank statement showing the payment transaction, or

• • A transaction history report that includes the payment details

The bank record should show:

• • The account the payment came from

• • The payment amount

• • The payment date

• • The payee or creditor name (if available)

PDF statements are preferred whenever possible. 'Desktop' screenshots (not moblie/cell/tablet) can be acceptable, but only if they show identifying information and transaction details clearly.

Part 3: Proof of Source of Funds (Where the Money Came From)

This step is often the most important and the most misunderstood.

Underwriters must confirm that the funds used to pay down the debt are legitimate, not borrowed, and not creating an undisclosed liability. Depending on the lender and the file, they may require 30 to 90 days of bank history to establish the source.

Below are the most common sources of funds and what documentation is typically required.

Source of Funds: Most Common Scenarios and Required Documentation

Paying from Chequing or Savings

If you paid the debt using funds already held in your bank account, lenders typically want:

• • Recent bank statement(s) showing the funds were in the account before the payment

• • Proof of the payment leaving the account

If the account includes large deposits shortly before the payment, the lender may require documentation explaining those deposits.

Funds from Selling an Asset (Vehicle, Investments, Other Assets)

If you sold an asset and used the proceeds to pay down debt, lenders typically require:

1. Proof of sale or withdrawal (bill of sale, investment trade confirmation, withdrawal receipt)

2. Proof of deposit into your bank account (bank statement showing the deposit)

3. Proof of payment leaving the account (bank statement or transaction history)

Underwriters generally want to see the full paper trail: sale or withdrawal, deposit, and payout.

Gifted Funds

Gifted funds are acceptable for many mortgage transactions, but must be documented properly.

Lenders often require:

• • Signed gift letter (lender-specific template)

• • Donor bank statement showing the gift funds leaving their account (if the donor is still in receipt of the funds when signing the gift letter)

• • Recipient bank statement showing the deposit

• • Proof of payment leaving the recipient account to pay the debt

The lender needs to confirm the funds are a true gift and not a loan.

Borrowed Funds (LOC, Credit Card, Private Loan)

This is where many borrowers run into issues.

If the debt was paid down using borrowed funds, the lender may:

• • Treat the new borrowing as a liability

• • Recalculate your ratios

• • Determine that the condition has not been met

If you used borrowed funds or plan to use borrowed funds, it is important to confirm acceptability with us (your mortgage broker) before submitting documents.

Funds from Mortgage Proceeds (Refinance or Debt Consolidation)

When the lender’s mortgage proceeds are used to pay debts directly, the documentation often includes:

• • Payout statements from each creditor

• • Confirmation that payouts were issued (lawyer trust statement or lender payout confirmation)

• • Updated creditor statements showing the new balance or $0 balance

Best Practice: How to Submit Documents for the Fastest Approval

Underwriters approve conditions faster when documents are well organized and easy to follow. The most effective submission format is:

1. Bank statement showing funds and the payment leaving your account

2. Updated creditor statement showing the reduced balance or paid-off status

3. Supporting source-of-funds documentation (gift, sale of asset, withdrawal) if applicable

When these documents are submitted together and in a clean sequence, it reduces the chance of follow-up requests.

The Five Most Common Lender Re-Requests (And How to Avoid Them)

Even when a payment is made, lenders often ask for more documentation because something is missing or unclear. These are the five most common re-requests we see.

1. Payment Proof Provided, but No Updated Balance

A bank record shows a payment, but there is no updated creditor statement showing the balance has been reduced.

Solution: Always provide a creditor statement or confirmation letter showing the new balance.

2. Source of Funds Not Verified

The payment is shown, but the lender cannot see where the money came from, especially if there was a recent deposit.

Solution: Provide bank statements showing the funds were available, or provide supporting documents explaining the deposit.

3. Screenshots Are Missing Key Details

Screenshots are cropped or incomplete and do not show the account holder name, account number, or updated balance.

Solution: Submit PDF statements whenever possible. If using screenshots, include the full page with identifying information.

4. Money Was Moved Between Accounts Without the Full Trail

Funds were transferred between accounts, but only part of the trail is shown.

Solution: Provide statements for each account involved so the underwriter can follow the full flow of funds.

5. Debt Was Paid Using Borrowed Funds

The lender learns the debt was paid using a LOC, credit card, or private borrowing, which may still count as debt.

Solution: Confirm with your broker first. In many cases, borrowed funds cannot be used to satisfy a debt paydown condition.

Final Notes: If You Are Unsure, Ask Before Submitting

Debt payout conditions can be approved quickly when documentation is complete, but they can also delay a file if the paperwork is missing key details. If you are uncertain about what to provide, it is always better to ask in advance rather than submit incomplete documents.

If you are working with us, we can tell you exactly what to send based on the lender’s conditions and help you package it in a way that underwriting can approve in one review.

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