A mortgage can still be an issue even after it's paid. While this isn't often the case, certain situations can arise in which you need to prove your loan is paid. This most often occurs when your prior lender fails to properly cancel the mortgage. To protect yourself in these situations, keep certain documents.
After you pay your mortgage in full and the check clears, the lender will stamp the note as “paid in full” and return the original to you. This document is essentially the contract between you and the lender, so it is important that you retain it after it has been paid. This way, if the bank tries to come back after the fact and claim that you still have obligations under the note, you can refute that claim by producing the cancelled note. Lenders typically retain documentation on paid loans for seven to 10 years. At minimum, you should do the same.
Your mortgage is the bank’s lien instrument against the property. This document, recorded with the county, gives the bank the right to claim your home in the event you don’t abide by the terms of the note. Once the note is paid, the bank will mark the mortgage as cancelled and send it to the county clerk to remove the lien. Once the clerk removes the lien, it will mark the mortgage and return it to the bank. It will then forward the mortgage to you. Even if the loan is paid, it's possible for the lien to stay on your property, preventing you from getting future financing. This is why it is important to receive the cancelled mortgage.
Assignment of Leases and Rents
An assignment of leases and rents is common with investment mortgages. The document, like the mortgage, is recorded with the county clerk. It states that, in the event of nonpayment, the bank has the right to collect all rent from any tenants in the property. The bank will send this document for cancellation along with the mortgage. Like the mortgage, it possible for it to stay in place even though the loan is paid. While it is not enforceable, you will still have to go through the trouble of getting it removed before you obtain future financing.
A personal guaranty is common with commercial mortgages where the primary borrower is a business entity. Most lenders require the owners of the company to personally guarantee the loan. This means that if the business doesn’t have the ability to repay, you will pay out of your own funds. So if you form a real estate holding company for the purpose of owning the property, the bank will approve the loan based on the financial strength of both the business and your own income. It is important to keep a copy of this personal guaranty as it is a contract similar to the note. Like the note and other documents, the guaranty should be retained for a minimum of seven to 10 years.