When loan is paid, make sure lender files required paperwork

Q: My wife and I are finally about to realize the longtime dream of paying off the mortgage on our house. Before we “burn the mortgage,” we want to know what paperwork constitutes legal ownership of a home? Do we require a title? If so, what steps do we take in applying for it? – M.G., Everett

A: When you get a loan to buy a car, the bank typically holds the title to the car until you pay off the loan. The title to the car is then transferred into your name.

But that is NOT how it works with real estate. You often hear people say “the bank owns my house,” by which they mean that they are still making payments on a mortgage. In reality, they “own” the house from the moment the deal closes and the deed is recorded with the county because Washington is a “lien theory” state. When you bought your home, the deed was recorded in your name. Check your title insurance policy and you will see that you are listed as the legal owner of the property. When a bank loans you the money to buy a house it acquires a lien against your home, but it does not appear as a legal owner of the property. The lender’s lien interest only comes into play if you fail to make your mortgage payments on time. The lender then has the legal right to seize control of your property and sell it at auction to pay off the loan. But as long as you make your mortgage payments on time, the lender has no rights to your property.

Once your mortgage or “deed of trust” is paid in full, the lender will record a “satisfaction” document to release the lender’s lien on the property. You don’t have to do anything to gain legal title to the property because you already have it. And when the lien is released, you own the property “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 a few 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 all lenders act this way, but “stuff happens,” so you need to protect yourself.

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 several years ago. 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 $50 to handle the payoff for you, to make sure it is handled correctly. If you want extra peace of mind, you can buy a title insurance policy to verify that the title to your property is free and clear, but there is no requirement to do so.

Steve Tytler is a licensed real estate broker and owner of Best Mortgage, Inc. You can visit the Best Mortage Web site at www.bestmortgage.com.