Question: I was fortunate enough to pay my mortgage in full last year. Now I am selling my house, and Escrow is asking for proof of payment. Unfortunately, my records are packed away in boxes, do I have to do this?
Answer: The short answer is, yes.
Home loans are secured by recorded documents called Deeds of Trust. The Deed of Trust is recorded with the County Recorder in the County where the property is located. The recorded Deed of Trust makes a home the collateral for the loan, by creating a lien on the title. It is the Deed of Trust that enables the lender to foreclose on a property, if payments are not made.
When a home loan is paid in full, the lender releases their lien by recording a Reconveyance, removing their Deed of Trust.
When a home goes into escrow, one of the first steps is for the title company on the transaction to search the County Records, to find if there are any home loans, and other types of liens on the title.
As I am sure you are aware the United States has just been through a roller coaster of a real estate market. Over the last ten years, banks were hit with huge losses in foreclosures and short sales. Title companies are extremely cautious about fraud, as unfortunately, there was also a lot of that going on during the challenging market.
When a title company searches the county records to issue a report on a home, and sees that a Reconveyance has been recorded, they look further to see if there was a sale or refinance of the property at the same time. Generally, home loans are paid off in connection with sale transactions or refinances. When a Reconveyance shows up without one of those events, it raises a bit of a red flag to the title company. In order for the title company to accept the legitimacy of the Reconveyance, they will require supporting evidence, such as a letter from the mortgage company acknowledging payment, or confirming that the loan now has a “zero balance”.
Since your loan was paid off in the past year, escrow may be able to contact your lender request proof on your behalf. Escrow will need the name and contact information for your lender, and the complete loan number to do so. If you loan has been paid off for a longer period of time, it may be a little more difficult to obtain proof, and in that case, you may have to search those boxes!
Keeping good financial records is, without saying, very important. Your Escrow Officer can assist you if you need help clearing any lien that may be recorded on the title to your home. If we aren’t able to obtain what you need for you, we can give you suggestions for the best way to clear up the matter.