Mortgage documents further clarified

Published 6:26 pm Friday, March 2, 2012

Question: I was able to pay off my mortgage last October and read in your column that I should have a “satisfaction” document. What I received is a paper called “Substitution of Trustee &Deed of Reconveyance.” Is this the same thing?

Does this constitute proof of ownership and that the house is “lien free?”

It was suggested that as a widow I add my only son’s name on the deed to my small house as he is on my bank account and investments. If this is a good idea, how do I go about it?

Answer: That document you have received from the bank indicates that your mortgage has been paid in full and the lien has been removed from the title to your property.

So congratulations, you own your home “free and clear” of a mortgage lien.

To make sure your property is totally lien free you would have to pay a title company to do a title search and issue a title insurance policy on the property. But that’s probably not necessary if you have owned the house for many years because you should know if there are any other liens against the house, such as tax liens.

Many people are confused about the process of paying off a mortgage, so I’m glad to get this opportunity to once again clarify what the legal documents are and how they work.

Contrary to popular belief, in this state most of us do not actually have a “mortgage” on our home. A mortgage is a type of legal document that requires the lender to go to court to foreclose on the borrower if they fail to make their loan payments as agreed.

It is a very long and expensive process to foreclose on a mortgage. So to make it easier, cheaper and faster to foreclose on a homeowner who is not making his or her loan payments, a document called a “deed of trust” was developed to be used in place of a mortgage.

Unlike a mortgage, a deed of trust is foreclosed outside the court system and the whole process can be completed in as little as 120 days, though it typically takes longer than that. The foreclosure process is handled by a neutral third party called the “trustee” (often a title company) who takes care of all the legal notices and handles the auction of the property at the courthouse. The auction is called a “trustee sale.”

So the trustee on the deed of trust is the person or company responsible for making sure that the terms of the home loan are met by the borrower. If you don’t make your loan payments, the trustee has the legal authority to sell your house at auction to pay off the lender.

And if you make all of your loan payments as agreed, the trustee has the duty and responsibility to file a document called a “reconveyance” to remove the lender’s lien on your house and “reconvey” full and clear title to you.

Most companies that operate as trustees are in the foreclosure business, there’s very little money to be made processing a reconveyance. So when you pay off your loan in full, the lender often uses a document called a “substitution of trustee and full reconveyance,” which substitutes a new trustee who simultaneously executes the reconveyance to release the lien against your home for the loan. So what happens is the trustee is typically transferred from a title company to a department of the bank that handles processing reconveyance documents.

It’s a little confusing, but this has the same effect as a stand-alone “full reconveyance” document showing that your loan has been paid in full and the lien has been removed. Therefore, as I said at the beginning of this column, you’re home free.

As to whether it’s a good idea to add your son to the title of your property, I suggest you seek advice from an attorney or professional estate planner to discuss the pros and cons. You could do it by simply executing a quit-claim deed adding your son to the title as “joint tenants with rights of survivorship.” That means when you die, he would automatically be the sole owner of the property, there would be no will or probate issues involved.

The least expensive way to do that is to go to an attorney-owned escrow company where you can get legal advice and have the proper documents prepared and filed all in one place.

Again, please seek professional advice before you make a decision, this is intended for general information only.

Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at features@heraldnet.com.