Deed of Reconveyance
The Document That Shows Your Loan Is Paid Off
A reconveyance deed is an official document from a mortgage holder releasing the debtor from the mortgage. It is documentation that the mortgage has been paid in full and that the lender has acknowledged the full payment.
The mortgage note is marked paid, the original mortgage is returned and a deed of reconveyance is issued to the homeowner showing the mortgage has been paid off.
It is important to ensure the document is accurate, to keep it and record it properly by submitting it to the county registrar or records office. This is the official action required to publicly declare the deed clear of any liens or outstanding encumbrances. If a reconveyance is not recorded in the public records, or there are errors, records searches in the future may show the title as not clean.
Recording a Reconveyance Deed
A deed of reconveyance must be recorded in the public records of the county where the property is located. If the deed of reconveyance is lost or destroyed, it creates a title issue and creates a clouded title (claims to the title that disputes the actual ownership) because there is nothing to show that the loan or other encumbrances have been paid.
Situations in which the reconveyance is not recorded are more common than you might think. It can happen when someone makes a mistake during the transfer of funds, or during the preparation of the beneficiary demand (the amount on a loan to be paid to pay in full).
The lender may have thought the reconveyance was delivered, or another would have been responsible for drawing up the reconveyance but forgot to. The reasons for not recording a reconveyance are as numerous as the mistakes that are made by humans every day.
Title Company Mistake
Sometimes the title company that handles the title for the house and mortgage might be the title insurance company. If that happens, then that title company is generally the entity the lender and owner will need to entrust to ensure the title is transferred properly.
A title company handles the search and verification for title legitimacy and cleanliness (no other claim to the title). These companies then generally issue a title insurance policy for the lender while the mortgage is being paid, and for the owner when the mortgage is fully paid and the title is transferred.
Mortgage Subordination Mistakes
Mortgage subordination is a situation where there are multiple liens against property, resulting in priority statuses being assigned to each lien. Sometimes loan subordination happens due to a mistake, and the newer loan is recorded in a lower priority instead of first priority.
This happens more in short sales when the first lender who is not in the first priority position gets shorted by a junior lien payoff that is far less than that lender would ever agree to accept. This can cause a short sale to stall or stop the process of short sale approval. That's because the second lender is now in the first priority position and may refuse to budge (doesn't want the additional amount added onto the loan).
One of the most common problems that occur with reconveyance deeds are minor mistakes made in the document itself, such as misspelling the borrowers' or lender's names or incorrectly entering the property's legal description. While this takes more time to resolve, it can be done by recording a correction deed.
Refinancing Can Result in a Reconveyance
Today, most reconveyances occur because the homeowner has elected to refinance the existing loan, and in doing so, pays off the existing loan. This initiates a reconveyance, which needs to be sent to the new lender. This adds another fork in a home's financial road that could cause complications when a mortgage is paid in full.
Your Due Diligence
These are some aspects that will help you avoid reconveyance problems when you are getting closer to paying off your home. When you are purchasing a home, be sure to inquire about existing liens, and ensure the title company has conducted a thorough investigation of the title.
You could also initiate your own title search by visiting your county's register of deeds or records office, and conduct a title search to establish the chain of title of the property from you back to the original owner, if possible.
Go back through all of the issues discussed here, and make sure you receive a clean title to your home when you have finally paid it off.