In some states, after you pay off a home loan, your lender issues you a document known as a deed of reconveyance. This means that the title to your home is no longer being held as collateral.
Here’s what you should know about deeds of reconveyance and how they work.
What Is a Deed of Reconveyance?
A deed of reconveyance is a legal document that returns a property’s title to the borrower after they pay off their home loan.
Not all states use deeds of reconveyance. These documents are only required in deed of trust states, where a trustee holds the title to a borrower’s home as collateral for the lender while the borrower repays the loan. When the loan is paid off, the trustee’s job is done, and they relinquish the title to the borrower.
“The deed of reconveyance then becomes a necessary instrument in a deed of trust state, because when the loan has been repaid, there needs to be a mechanism by which title is returned to the homeowner. And that’s the deed of reconveyance,” says Matthew Rossman, professor of law at Case Western Reserve University.
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How a Deed of Reconveyance Works
The process of getting a deed of reconveyance generally follows these steps:
1. You pay off your home loan balance.
2. Your servicer sends a notice that your loan has been paid in full and a deed of reconveyance is being issued. If you don’t hear from the servicer, you should reach out to them to request the deed of reconveyance.
3. A title company or attorney writes the deed of reconveyance on behalf of the trustee. The document includes the legal description of the property and identifies the trustee and the borrower. It also says that the debt has been paid and that the trustee is returning the title to the borrower.
4. You receive a copy of the deed of reconveyance and check it for errors. If everything is correct, both you and the trustee sign the document. A notary confirms the identities of all parties signing the document and witnesses the signatures.
5. The trustee files the deed of reconveyance with the local records office.
6. You receive a final copy of the recorded deed of reconveyance.
If the trustee doesn’t complete the process within a reasonable time frame, you should reach out to your servicer.
“I would generally say you should have something recorded within 45 to 60 days after your loan has been paid off,” says Rebecca Secord, real estate attorney and owner of Your Home Legal.
If you refinance your home loan, the title company initiates the process of getting a deed of reconveyance and ensures that the new lender is in first-lien position. Similarly, if you sell your home while you have a balance on your home loan, the title company uses the proceeds of the sale to pay off your loan, and the trustee then files a deed of reconveyance.
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What Other Documents Act Like a Deed of Reconveyance?
Depending on your state, there might be a different document to remove a lender’s legal claim to your property when you pay off your home loan.
In California, the relevant document is often called a substitution of trustee and full reconveyance. This document designates someone new as the trustee.
“In a lot of cases, the original trustee doesn’t exist or they’ve transferred the loan. So they have to substitute that person in,” Secord says.
If the trustee has not changed, the document is simply called a full reconveyance. In either case, it returns the title to the borrower, just like a standard deed of reconveyance.
In Georgia, which uses security deeds, a cancellation of security deed states that the loan has been repaid and removes the lender’s legal interest in the property.
And in mortgage states, a satisfaction of mortgage document clears the borrower’s title once their home loan is paid off.
“The satisfaction of mortgage is the lender saying to the homeowner, ‘You’ve repaid your loan, and therefore we’re no longer going to maintain the lien on the property,'” Rossman says.
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Deed of Reconveyance: Problems to Watch Out For
According to Secord, trustees didn’t always file deeds of reconveyance when borrowers paid off their home loans. This led to serious title quandaries following the 2009 financial crisis.
“In the early 2000s, it was an absolute dumpster fire where they would send those reconveyances back to the homeowner with no instruction that the homeowner actually had to go record that. So a lot of times it ended up in the bottom of a drawer or in the trash because nobody knew what to do with this thing,” Secord says.
Today, trustees are typically required by law to file a deed of reconveyance with the local government. However, there are still some things that can go wrong with a deed of reconveyance, including:
— Inaccuracies in the property’s legal description, such as an incorrect lot number.
— Typos in names or other misspellings.
— Mistakes in the ordering of remaining liens on the property.
— Delays in filing the document.
If a problem with the deed of reconveyance goes unaddressed, you might not be able to sell the home or be approved for a home equity loan or HELOC until the title issue is resolved.
Here’s what you can do to get ahead of these types of issues:
— Be proactive. If the trustee doesn’t file the deed of reconveyance promptly, call your servicer. “It’s something that the trustee is obligated to do once the terms of the original loan had been satisfied. So it’d just be a matter of prompting them to do what they’re already legally required to do,” Rossman says.
— Thoroughly check for errors. Read the deed of reconveyance carefully to spot any errors. Make sure that names and dates are correct and that all the information about the property checks out.
— Perform a title search. You’ll want to confirm that the trustee’s interest in the property is removed and that other liens on the property are subordinated correctly.
The county recorder’s office usually administers property records, and many of them maintain online databases that you can search.
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Deed of Reconveyance: Understand This Critical Document originally appeared on usnews.com
