What Is a Reduction Certificate?

A reduction certificate is a document provided by a lender that clearly outlines and breaks down the remaining balance on a mortgage loan.

Key Takeaways

  • A reduction certificate is a document provided by a lender that clearly outlines and breaks down the remaining balance on a mortgage loan.
  • In most instances, these certificates will also contain information referencing the original loan amount and the current balance due, including any fees or expenses that are required to be paid before the loan can be closed out.
  • In the case of mortgages, reduction certificates can be requested to determine the existing balance on a mortgage that is going to be paid off through a refinance. However, reduction certificates are usually unsuitable for determining a payoff amount since it doesn't include all fees.

How Reduction Certificates Work

A reduction certificate, also known as a payoff statement, is generally requested when a borrower is in the process of attempting to pay off their mortgage debt. The certificate is obtained directly from the servicer of the loan and often must be requested by a borrower or a third-party agent working on their behalf. The information that is provided in the pay off statement is assumed to be true by all parties in the transaction and will be used to secure an exact remaining balance.

In most instances, these certificates will also contain information referencing the original loan amount and the current balance due, including any fees or expenses that are required to be paid before the loan can be closed out. These fees could vary from a minimal cost for the processing of the certificate to more costly prepayment penalty fees. The certificate will also include any legal fees that may have been incurred during the life of the loan.

Additional costs and fees associated with paying off a loan would not show up on a borrower’s credit report, which is why the figure listed there as the remaining balance is unsuitable for determining a payoff amount. The certificate will often list the terms of the loan, including the interest rate, and the date that the statement is good through. Many lenders provide a per diem interest rate as well so that the balance can be accurately calculated down to the date.

Uses for a Reduction Certificate

In the case of mortgages, reduction certificates can be requested to determine the existing balance on a mortgage that is going to be paid off through a refinance. The lender working with the borrower on their refinance would obtain a copy of the certificate as part of the verification that the borrower has the equity in their home to refinance the property. The new loan amount would need to cover the outstanding balance on the mortgage, or the borrower would need to provide the extra funds at closing.

A borrower may even request the statement on their own if they were looking for the exact amount that would be required to pay their mortgage off in full.

In some instances, such as with an assumable FHA mortgage, a potential borrower may be looking for proof of the remaining terms of the mortgage before they take ownership of the debt.

Auto loans and other high balance accounts provide payoff statements upon request to make sure that any early payment being made on a debt satisfies it in full.