How Does a Mortgage Work With a Living Trust?

Property owners commonly use living trusts as an estate planning tool to plan for effective management and transfer of real property. Living trusts include specific instructions on how assets, including real property, are managed after death. However, when an existing mortgage is involved, it’s important to make some key considerations.

What you will learn in this article:

Can a mortgaged property be placed in a trust
How to transfer a mortgaged property into a trust
Getting a mortgage with a trust fund
Irrevocable trust lenders

Can a mortgaged property be placed in a trust?

Yes, a mortgaged property can be put in a trust. Once a mortgaged property is transferred into a trust, the rules of the trust would apply to the real property, even if it has a mortgage on it. This process is fairly common in estate planning and can be beneficial for various reasons such as avoiding probate and maintaining control over the property. The bank may require notice of the property transfer.

When placing a mortgaged property in a trust, consider the following:

1. You still have to pay your mortgage.

Transferring a mortgaged property into a living trust does not negate the obligation to pay the mortgage. 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. But you can simply transfer the property out of the trust and back to the grantor for a refinance. Once the refinancing is over, ownership can easily be transferred back into the trust.

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. But if you were selling or gifting your property, it would be due, making the two actions different in that way.

How to transfer a mortgaged property into a trust

How to put a house into a trust if it has a mortgage

1. Create the Trust

Before transferring a property into a trust, you need to establish the trust. This typically involves:

Drafting a Trust Document: An estate planning attorney can help you create a trust document that outlines how your assets will be managed and distributed.
Funding the Trust: Funding involves transferring ownership of assets into the trust. For a house, this means changing the title from your name to the trust’s name.

2.Transfer the Property

Transferring a house into a trust requires changing the title from your name to the name of the trust. This involves:

Preparing a New Deed: A new deed must be prepared to reflect the trust as the new owner. This is usually done through a quitclaim deed or a warranty deed.
Recording the Deed: The new deed must be filed with the local county recorder’s office to make the transfer official and public.

3. Notify Your Mortgage Lender

Due-on-Sale Clause: Most mortgages include a due-on-sale clause, which allows the lender to demand full repayment if the property is sold or transferred. However, under the Garn-St. Germain Depository Institutions Act of 1982, transferring a home into a revocable living trust typically does not trigger this clause, provided the borrower remains the beneficiary and continues to reside in the home.
Lender Approval: While the due-on-sale clause is not usually triggered, it’s advisable to notify your lender of the transfer. Some lenders may have specific requirements or procedures for such transfers.

4. Update Insurance Policies

Homeowner’s Insurance: Ensure that your homeowner’s insurance policy reflects the trust as the property owner. The trust should be named as an additional insured party.
Title Insurance: Update your title insurance to reflect the trust ownership to avoid any coverage issues in the future.

5. Continue Making Mortgage Payments

Obligation Remains: Even after the property is transferred to the trust, the mortgage remains your responsibility. You must continue to make regular payments on the loan.
Loan Terms Unchanged: The terms of the mortgage, including the interest rate and payment schedule, typically remain unchanged after the transfer.

6. Refinancing Considerations

Lender Requirements: If you wish to refinance the property, some lenders may require the property to be transferred back to your name temporarily.
Transfer Back to Trust: After refinancing, you can transfer the property back into the trust by executing a new deed and recording it with the county.

Getting a mortgage with a trust fund

Getting a mortgage when you have a trust fund can be approached similarly to getting a mortgage with other types of assets. Here are some key considerations and steps to keep in mind:

Verify the Trust Fund Details: Mortgage lenders will want to verify the existence of your trust fund, its value, and whether it provides regular income or is accessible for down payments or reserves.
Income Verification: If the trust fund provides regular income, you will need to show documentation of this income. Lenders typically require proof of income for at least two years, which may include tax returns, account statements, or a letter from the trustee.
Credit History and Score: Your credit history and credit score will still play a significant role in the mortgage approval process. A good credit score demonstrates your ability to manage debt responsibly.
Down Payment: Depending on the lender and the type of mortgage you’re applying for, you may need to make a down payment. The source of your down payment, whether it’s from the trust fund or another source, will need to be documented.
Debt-to-Income Ratio: Lenders consider your debt-to-income ratio (DTI), which compares your monthly debt payments to your gross monthly income. Even if you have income from a trust fund, your overall financial picture, including any other debts you have, will be taken into account.
Documentation: Be prepared to provide extensive documentation about the trust fund, including its terms, conditions, and statements showing its value and income.
Consult a Mortgage Advisor: Given the complexity of mortgage applications involving trust funds, it can be beneficial to work with a mortgage advisor who has experience in handling such cases. They can guide you through the process and help ensure that you meet all the lender’s requirements.

In summary, while having a trust fund can potentially strengthen your mortgage application by providing additional assets and income, you’ll still need to go through the standard mortgage approval process, providing documentation and meeting lender requirements.

Irrevocable trust lenders

When you’re seeking a mortgage and you have income or assets from an irrevocable trust, the process can be more complex than with other types of assets or income sources. Here are some key considerations and tips for navigating this situation:

Understand the Nature of the Trust: An irrevocable trust typically means that the assets and income within it are not under your direct control. Instead, they are managed by a trustee for the benefit of the trust beneficiaries. Lenders will need to understand the terms of the trust and how its income and assets can be used.
Documentation: You will need to provide extensive documentation about the irrevocable trust, including the trust agreement, statements showing the trust’s assets and income, and any other relevant legal documents. This helps lenders assess the trust’s stability and income potential.
Trust Income: If the irrevocable trust generates income that you intend to use for mortgage payments, lenders will typically require proof of this income over a period of time (often two years). This can include trust income tax returns, statements from the trustee, or other financial documents.
Lender Requirements: Not all lenders may be willing to consider income from an irrevocable trust, as they may have specific criteria or restrictions. It’s important to research lenders who have experience or policies accommodating trust income.
Credit and Financial History: Your credit history and financial situation, including any other debts and assets, will also be considered by lenders. A strong credit score and a low debt-to-income ratio (DTI) can strengthen your mortgage application.
Work with Specialists: Given the complexities involved with mortgages and irrevocable trusts, it may be beneficial to work with a mortgage advisor or lender who has experience in handling these types of cases. They can guide you through the documentation requirements and help find a lender that suits your needs.
Legal Advice: Consider consulting with a legal professional specializing in trusts and estates to ensure that you fully understand the implications of using trust income for a mortgage and to ensure compliance with trust terms and legal requirements.

In summary, while obtaining a mortgage with income from an irrevocable trust is possible, it requires thorough documentation, understanding of trust terms, and possibly finding lenders who are willing to consider trust income. Working with knowledgeable professionals can help streamline the process and increase your chances of success.

Summary

Placing a mortgaged property in a trust is possible and common, although key considerations must be taken into account. Some considerations to keep in mind are mortgage payments, refinancing, and the due-on-sale clause. You should discuss your situation with an estate planning attorney, who can guide you through these considerations and determine the best next steps for your estate.