What Happens When a Loan Shows Unpaid on a Preliminary Title Report?
When a home is being sold and the title company creates a Preliminary Title Report, it should show all open liens against the property – including old mortgages and loans. Ideally, the only loans that would show up are the mortgages that the owner currently has and that will be paid off during the escrow process.
Of course, this is not always what happens – so what do you do if there is an old loan showing up on the PR? Keep reading to get the details and know that your escrow officer is aware of the issue.
There is a Simple Explanation
What is supposed to happen is that when you get a loan that uses the property it is being taken out for as collateral, then a mortgage document (in California, it is called the Deed of Trust) is recorded outlining the loan. Once the loan is paid off, the lender is required to record a statement identifying the loan as paid off. This is what’s known as a release or reconveyance. When recorded correctly, it releases the borrower from the obligations within the Deed of Trust. The simplest explanation for this not happening is that the lender did not file it.
The Lender is Not Always at Fault
An institutional lender that handles thousands of payoffs each year will generally follow all requirements and file the reconveyance. However, in some cases they will automatically send it to be recorded and in other cases they will send it to the borrower and require that the borrower file it with the county. Unfortunately, many people do not realize that there is this additional step to take and they simply file the document away.
In the case of private, smaller lenders, they might not remember that they need to file this document when the loan is paid off.
The Steps to Get this Issue Resolved
Ideally, you would have the lender sign and notarize the reconveyance and then record it. Unfortunately, it is not always that simple. For example, the lender might have been bought out by another lender, the lender might be out of business, or any number of other things can have happened. The good news is that as the buyer or seller, this is rarely your problem. Your Title Officer and/or Escrow Officer should handle it for you.
If there is one thing that is true of every real estate transaction it is this: nothing ever goes as planned. In our many years of experience, we have seen every issue you can imagine but we’ve also seen a wealth of creative solutions.
