California Revocable Living Trust

How Does a Mortgage Work With a Living Trust?

How Does a Mortgage Work With a Living Trust?

Trusts are usually thought of as something that is created while the grantor is living and then enacted once their death. A living trust, however, is slightly different. It is made and goes into effect during the lifetime of the trust maker. It is essentially a private contract between grantor and trustee.

Can a Mortgaged Property be Placed in a Trust?

So how does this come into play with a mortgage? A mortgage that you get on your house while you are living, and continue to pay off? Putting a house which has a mortgage into a trust may not be on the top of your list of things to do. However, you can fund your living trust by transferring ownership of your property into your living trust. In doing this, the rules of your living trust will apply to your real property, even if it has a mortgage on it.

This means that, upon your death, the real property will not pass through probate. Instead, your successor trustee will determine the appropriate distribution of the real property, even if it has a mortgage on it. Certainly, the mortgage will need to be paid off during the trust administration, but at least the cost and burdens of probate will be eliminated.

What if you don’t own your home? Technically, even if your house is mortgaged, it is still owned by you, however, the mortgage is a loan that you pay back until the entirety of the loan is repaid. Many people believe that you can only put property into a trust that is completely paid for, however, this is not accurate. You are able to fund a trust with a mortgaged property, but in some cases, the bank will require prior notice. You should check with your lender. Additionally, in case you wish to refinance your currently mortgaged property, and if your property is already in your trust, your lender may first require that you take the property out of the trust. Once the refinance is complete, you can then fund the property back into the trust. This is accomplished with trust transfer deeds.

With that said, you can transfer property to trust that has an existing mortgage, and it is in fact required to avoid probate, plan for incapacity and effectuate your wishes. Speaking to an estate planning attorney is crucial to understand your situation, as well as the benefits of an estate plan, as it relates to a property that is mortgaged.

Important Fine Print

So, you have decided you may want to transfer your mortgage into your living trust for estate planning purposes. There are a few things to make sure to keep in mind:

  1. You still have to pay your mortgage. Transferring this into a living trust does not negate that obligation. Your house is still subject to foreclosure if payments are not made. You are also unable to avoid any other debt on the house by putting it into the trust. All financial obligations are still valid and intact.
  2. You cannot automatically take out a new loan or refinance the loan on a property that is in the trust. This is important in an age where interest rates can change, and property owners may want to refinance to secure a better rate. The housing market continues to ebb and flow, and as a property owner, you want to take advantage of the best interest rates possible. Many banks will not refinance your home if it is in a living trust. You may have to transfer the property out of the trust and back to the grantor before you can refinance. The good news is, that once the refinancing is over, ownership can easily be transferred back into the trust. While the multiple transfers, cost, and time may add up, it is important to know that it is possible.
  3. But it is still possible. The Federal National Mortgage Association has recently made changes in their guidelines. As a result, there are occasions in which the title transferring does not have to occur in order to refinance. For this to occur, there is criteria that must be met:
    • You must create the trust during your lifetime.
    • The trust you create must be revocable.
    • You must remain a primary beneficiary of your revocable living trust throughout the entirety of your lifetime.
    • You must hold the position of trustee in your revocable living trust (though you may also name additional trustees).
    • The property in question, or at least a portion of the property in question, must constitute your primary residence or a second home.
    • The trust documents must provide the trustees with the authority to take out a mortgage on the property in the trust.
    • You must sign the promissory note for the mortgage or refinancing and must also sign the deed of trust and any riders of the promissory note or deed of trust which must indicate that the trust is liable for the debt and that the promissory note and deed of trust are given by the trust to secure the mortgage or refinancing in question.
  4. Transferring your property to a revocable living trust is not the same as selling or gifting the property or selling it to another individual. There is a “Due on Sale” clause that is in every mortgage agreement. This clause is not enacted with the transfer of a mortgage into a revocable living trust. As a result, your mortgage will not be due in full immediately upon transfer to the trust. If you were selling or gifting your property, it would be, making the two actions different in that way.


A mortgage in trust may be something that you have never previously considered, but it may be appropriate. Anyone who owns property can put their mortgage in a revocable living trust so as to not deal with the probate process after death and utilize other estate planning benefits. You should discuss your situation with an estate planning attorney, who can determine if a revocable living trust and placing your mortgaged property within it is appropriate. While you may have to refinance your property later on down the line, you can still put your mortgage in trust in spite of that.

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Mortgage and Living Trust

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