Do you ever wonder about the fate of mortgage loans during a tax deed sale? For those who are considering buying or selling property by way of tax deed, it pays to understand how mortgages impact transactions.

After all, if a mortgage isn’t handled correctly, the entire transaction could be invalidated! Fortunately, understanding the specifics of mortgages and their relation to tax deeds is not as difficult as one might assume – especially when paired with a knowledgeable professional.

In this blog post – for real estate investors, tax deed investors, lenders and realtors alike – we will delve into the unique relationship between mortgages and tax deed sales so that everyone can navigate these tricky processes successfully.

The majority of tax deed sales occur in what are known as non-judicial states. Non-judicial states have unique laws governing tax deed sales, which can make the process more confusing for those unfamiliar with it. During a tax deed sale, properties delinquent on their property taxes are auctioned off to the highest bidder.

This means that the previous owner’s rights to the property are terminated, and the new owner immediately takes possession. The sale proceeds are then used to pay off any outstanding tax liabilities.

Because the sale is non-judicial, there is no court oversight involved. As such, the process can be quite lucrative for savvy investors and lenders or realtors looking to acquire properties at a relatively low cost. However, tax deed sales can also be risky without proper due diligence. 

For anyone involved in the world of real estate, the terms “tax deed” and “mortgage” are most likely very familiar. But what happens when the two intersect? Specifically, what does it mean for a mortgage to be extinguished during a tax deed sale? For realtors, investors, and lenders alike, understanding the consequences of such a situation is crucial.

When A Mortgage Gets Wiped Out From a Tax Deed Sale

Although a tax deed sale is a non-judicial method of selling a property to settle delinquent taxes, under certain conditions, a mortgage can be extinguished.

This means that any lien on the property held by the lender is erased, leaving the buyer of the tax sale with clear title. It’s important for anyone exploring real estate investment to be aware of the potential risks and rewards of tax deed sales and the impact they can have on mortgages.

In order for a mortgage to be extinguished through a tax deed sale, there are several conditions that must be satisfied:

    1. The property must be auctioned off to the highest bidder at a tax sale to satisfy the unpaid taxes.
    2. The lender must have received notice of the tax sale and also have failed to remedy the tax delinquency.
    3. The lender must have not redeemed the property within a specific period called the redemption period.

Assuming all these conditions are met, the property’s ownership transfers to the new owner free and clear of the mortgage. This implies that it’s as if the mortgage no longer exists, and the property is free for the new owner to enjoy, make use of or sell without having to worry about the previous mortgage payments.

While investors in non-judicial tax deed states can face challenges related to title marketability after a tax deed sale, a quiet title action is not always the only path forward. Traditionally, many investors have relied on quiet title lawsuits to resolve potential title defects and improve insurability before refinancing or selling a property.

However, an alternative solution now exists:  The Tax Title Services Certification program helps investors avoid lengthy court proceedings and expensive legal fees while still obtaining title insurance for their properties.

Here is a breakdown between the two options:

Title Clearance Options After a Tax Deed Sale

Traditional Quiet Title Action Tax Title Services (TTS) Certification
Requires filing a lawsuit in court Non-judicial review process
Often involves attorney fees and litigation costs Designed to help reduce legal expenses
Timeline can extend for months Streamlined review and certification process
Court judgment used to support title insurability Accepted by 8 out of the top 10 national title insurance underwriters as part of their qualification process
Costs ranging between $3-5K Often costs less than half of a quiet title action (varies depending on property)

Tax Title Services specializes in reviewing tax deed files for procedural accuracy and helping investors pursue title insurance eligibility after a tax deed purchase. Because 8 of the top 10 national title underwriters accept TTS certification as part of their qualification process, investors may have more flexibility when seeking title insurance for tax deed properties.

For many investors, this creates an opportunity to pursue financing, resale, or long-term ownership strategies without immediately resorting to a quiet title lawsuit. Of course, every property and title situation is unique, and in some cases a quiet title action may still be necessary depending on the condition of the title and underwriting requirements.

Tax Title Services, Inc. is a member of the American Land Title Association (ALTA). TTS is not a law firm. Its services do not constitute legal advice or create an attorney-client relationship.