We converted a construction loan to P&I payments last week. Upon review of the loan, it was discovered that the customer made a scheduled payment on the loan the same day, rendering our payoff incorrect on the CD. The lender would like to correct the CD using a principal reduction instead of cutting a check. Our cash to close was $0 on the original CD. Using the alternate form, would we show the amount as Principal Reduction to Borrower? What should this do to our cash to close?

We would leave the CD as is since it was accurate at the time it was prepared and refund the overpayment to the borrower like we would any other loan payoff overpayment.

Dan's method is by far simpler than reissuing the CD and posting a principal payment. And when I put my consumer hat on, it's easier to explain to the consumer, too.

Let's suppose we were instructed to do it this way since a note was signed for the higher amount. What do the entries look like? If the principal reduction is entered in Payments/Payoffs and the original cash to close was $0, what should the new cash to close be? Can someone help me with concept/math?

You correct the actual payoff to the correct amount and then it requires an entry made in the Payoffs and Payments table. Title would be “$XX.XX Principal Reduction to (Lender Name)”. $XX.XX would also be placed in the amount column and would impact closing costs which then remain $0 for the cash to close.