A reconveyance deed is the document that your lender uses to release your property from their interest in it. Whether or not you known it, if you have a mortgage or trust deed, your lender or their representative is a partial owner of your property until you pay them off. A reconveyance lets you sell the property free-and-clear to another buyer or lets you own it without having to worry about the lender foreclosing.
When you take out a mortgage, you actually sign two documents. The promissory note is the document that spells out the terms of your loan, including your interest rate, your payments and the bank's requirements. To back the promise to pay that you made in the note, you also sign a mortgage. A mortgage is a document that gets recorded in the public records against your property's title that gives the bank the right to take the ownership of your property from you by foreclosing if you don't meet your obligations under your note.
In some states such as California, New Hampshire and Texas, real estate loans are structured as trust deeds instead of mortgages. You still sign a promissory note and you still back it up with another document, but instead of giving your bank a right to your property through a mortgage, you set up a trust deed. Under a trust deed, the legal ownership of the property sits in a third party's hands. That third party, called a trustee, doesn't do anything until you either pay off the property or default. If you pay off the property, the trustee conveys the property to you; If you don't pay your mortgage, the lender forecloses and the trustee conveys ownership to the bank.
Technically speaking, you can't pay off your mortgage or trust deed. Instead, you pay off your promissory note. Once you've done that, you don't owe your lender any money, and it doesn't have the right to take your property from you anymore. However, the trust deed or mortgage instrument remains on your property's title since the documents don't automatically go away. Instead, the lender has to sign another document, called a reconveyance, to get rid of its interest in the property. In most cases, your title company or closer takes care of all of this for you if you're selling a house and paying off your mortgage.
Selling Without a Reconveyance
You don't actually have to get a reconveyance to sell your house. In some cases, houses get sold where the mortgage is paid off, and someone forgets to get the reconveyance. At that point, the old mortgage or trust deed is an inconvenience since it has no legal teeth, but it still shows up against the property. While the problem can be fixed, it typically requires additional work on the part of an attorney or a title agency. In other instances, the seller chooses to sell without paying off the mortgage and the buyer takes the property subject to it. For example, if you're thinking about buying a $200,000 property on which the seller owes $150,000, you could pay the seller $50,000 and just pay on their $150,000 balance. Doing this is legal, but could violate the terms of the promissory note, especially if it contains a "due on sale" clause that says the entire balance has to be paid if the property changes hands.
- Nolo.com: What's the Difference Between a Mortgage and a Promissory Note?
- Foreclosed Dreams: Deed of Trust Vs. Mortgage
- Law Offices of Peter N. Brewer: The Deed of Reconveyance
- John T. Reed: The Truth About Getting Around Due-on-Sale Clauses
- Rocket Lawyer: Which States Allow Deeds of Trust?
- American Bar Association. "Commercial Real Estate FAQs: What Is the Difference Between a Mortgage and a Deed of Trust?" Accessed July 31, 2020.
- Cornell Law School. "Deed of Trust." Accessed April 6, 2020.
- Consumer Financial Protection Bureau. "Deed of Trust." Accessed July 5, 2020.
- American Bar Association. "Glossary of Real Estate Terms: Deed of Trust." Accessed July 31, 2020.
- Consumer Financial Protection Bureau. "How Does Foreclosure Work?" Accessed July 5, 2020.
- American Bar Association. "Mortgage Note -- Deed of Trust Note." Accessed July 31, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.