A deed of reconveyance is used in title theory states that employ a deed of trust as the security instrument for the loan. Once the loan is paid in full, the deed of reconveyance is recorded to release the lien from the property. About half of the country records deeds of trust and the other half records mortgages, but both types of documents protect the lender's interest in the property.
In a lien theory state, the new homeowner receives the deed after it is recorded. In return, if there is a mortgage, it is recorded and creates a lien on the property. When the loan is paid off, the lender will send the borrower a recordable satisfaction of mortgage letter that releases the lien from the property. If the borrower defaults on the mortgage, the lender must go through the court system to foreclose because the borrower has legal title to the property.
In a title theory state, the borrower receives title at closing, but then signs a deed of trust that makes the lender the beneficiary. The deed of trust is recorded which creates a lien on the property. The borrower has possession of the home, but title is subject to the stipulations in the deed of trust. After the loan is paid, the lender will record a deed of reconveyance that releases the lien from the property.
Deed of Trust
A deed of trust is normally held in trust by a third party (trustee) who works on behalf of the lender (beneficiary). The trustee is usually a title company or an attorney, and state law may prohibit it from being the lender. The trustee has the power to foreclose if the borrower defaults on the loan, and this authority allows the foreclosure to be completed without intervention by the courts.
Deed of Reconveyance
A deed of reconveyance transfers all rights back to the property owner. This will only occur after the note is completely paid off. The title company will record the deed of reconveyance and then forward the deed and note to the borrower. This deed is also called a release deed because it releases the deed of trust lien from the property, allowing the homeowner to have a clear title.