We’ve paid off our house — now what?

Question: My wife and I want to know what paperwork forms constitute ownership of a home?

We have a “Satisfaction of Mortgage” document.

The house is all paid off. Do we require a title? If so, what steps do we take in applying for it?

Answer: Washington is a “lien theory” state

, which means that when a bank loans you the money to buy a house, it acquires a lien against your home, but it does not have legal title to the property.

When you bought your home, the deed was recorded in your name. Your escrow company should have given you a copy of all the documents that you signed when you purchased your home.

If you pull out the papers and look at the deed and title insurance policy, you will see that you were listed as the legal owner of the property as of the date that your purchase transaction closed.

The bank holds a “deed of trust.” which is a legal document that gives a third-party “trustee” (usually a law firm or title insurance company) the right to seize your property and sell it at auction to pay off the loan balance if you don’t make your mortgage payments.

That is known as a “lien interest” in the property. But keep in mind that as long as you make your mortgage payments on time, the lender has no legal right to your property whatsoever. The lender’s lien also protects the mortgage holder in the event that you sell your home before the loan is paid off.

Whenever there is an underlying loan on a property, the escrow company pays off that lender first before giving the remaining sale proceeds to the seller.

Once a mortgage or deed of trust is paid in full, a “satisfaction” document is recorded at the county records department to release the mortgage holder’s lien on the property. You don’t have to do anything to gain legal title to the property because, as I explained above, you already have it.

However, it is important to note that lenders occasionally fail to record the proper satisfaction documents to clear title to the property after a loan has been paid off.

This can create serious problems down the road. For example, one of my mortgage clients was once 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 more than 10 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 hard work by the title insurance company to straighten out the mess in order to prevent the deal from falling apart at the last minute.

Since you already have a copy of the recorded satisfaction document, it sounds like you are in good shape. You do not have to purchase title insurance at this time because the purpose of title insurance is to prove to a home buyer that they are getting clear title to your property without any hidden liens.

However, it may be a smart idea to do a “title search” on your property just to make sure that all the mortgage satisfaction documents were properly recorded and all liens were released so that you do in fact own your home “free and clear” of any mortgage liens. That way you can rest assured that you will not run into title problems if and when you sell your house in the future.

For the benefit of other homeowners reading this column, please make sure you receive a copy of the recorded satisfaction documentation whenever you pay off a mortgage loan so that you don’t have problems of your own when you sell your home.

A friend of mine paid off the mortgage on his home a few years ago, and he had to call his mortgage company repeatedly for six months before they finally filed the paperwork to release their lien on his home.

Fortunately, he took care of it in a timely manner so that it did not become a “cloud on his title” in the future.

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