Home paid off? How to ensure title is clear

By Steve Tytler

Question: My wife and I are finally about to realize our lifelong dream of paying off the mortgage on our house. Before we burn the mortgage to celebrate, we want to make sure that we have done everything correctly. I remember reading your column in the past about problems with loans not being properly cleared off the property title. What do we need to do to make sure that doesn’t happen to us? How do we get clear title to our home?

Answer: Congratulations on reaching your goal of owning your home free and clear. Many homeowners today owe more on their mortgage than their home is worth, so you are in a small minority of happy people who don’t have to worry about mortgage payments.

You are also wise to make sure the paperwork is in order before you burn your mortgage.

Let me briefly explain the property title process. The legal title to your house is already in your name. You often hear people say “the bank owns my house,” by which they mean that they are still making payments. However, that’s not true.

When you get a loan to buy a car, the bank typically holds the title to the car until you pay off the loan. But when you buy real estate, you own the house from the moment the deal closes and the deed is recorded with the county. Washington is a lien theory state, which means that your mortgage lender has a lien on your house that gives it the right to seize the property and sell it at auction to pay off the mortgage if you fail to make your payments. But the deed is recorded in your name only.

Check your title insurance policy and you will see that you are listed as the legal owner of the property and your lender is listed as a lien holder, along with your property taxes and other encumbrances.

The mortgage lender’s lien is called a deed of trust. When your loan is paid in full, the lender will record a satisfaction document to release the lien on your property. You don’t have to do anything to gain legal title to the property because as I explained above, you already have it.

When the lender’s lien is released, you will own your home free and clear, which means there are no existing liens against the property.

The only problem is that lenders occasionally fail to record the proper satisfaction documents to clear title to the property after a loan has been paid off. You have to remember that once the bank has all its money, you become an administrative expense rather than a source of income. That drops you to a very low priority.

For example, I have a friend who paid off the mortgage on his home several years ago. He repeatedly called the lender asking for the satisfaction of mortgage document. Finally, after 14 months of constant pressure, he got the required documents to release the lien on his home. Who knows how long it might have taken if he had simply waited for the bank to record the documents on their own?

Now, I don’t want you to think that this happens all the time, but you need to check to make sure the proper paperwork is recorded with the county.

If a mortgage lien is not properly released, it can create serious title problems in the future when you sell your home. For example, one of my mortgage clients was involved in a real estate purchase transaction in which the preliminary title insurance report showed that the sellers still owed $45,000 on a loan that had actually been paid off 20 years earlier.

The bank had been sold since the original loan was made and the lender that acquired the mortgage failed to record a satisfaction document when the loan was paid off. It took a lot of scrambling by the title insurance company to straighten out the mess in order to prevent the deal from falling apart at the last minute.

You can avoid a nasty surprise by making sure that your mortgage lender records the proper satisfaction documents as soon as you make your last payment to pay off your loan. The longer you wait, the more difficult it becomes to track down the appropriate paperwork to clear the title to your property.

It might even be worth paying an escrow company to handle the payoff for you, to make sure it is handled correctly. The fee for such a service should be very modest. If you want extra peace of mind, you could even buy a title insurance policy to verify that the title to your property is free and clear with no mortgage encumbrances, but that would cost a few hundred dollars and it’s really overkill. Just follow up to make sure you get the proper documents to release the mortgage lien.

Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at economy@heraldnet.com.