Retitling a Property to a Trust – But What About the Mortgage?

There are several good questions that arise when putting a home in a revocable living trust.  Here are three common questions and answers:

Question:  I think I have a due on sale clause, do I need to be concerned about transferring my house to a trust?

Answer:  Probably not.  It makes sense why a lender wants to recover a loan in full when the borrower transfers ownership in a property.  Banks agreed to loan money to a particular property owner, not current owners and future owners.  However, transferring a home from an individual to a revocable living trust is a little different and the Garn-St. Germain Act offers some solace to individuals in this circumstance.  Federal law prohibits a lender from invoking a due-on-sale clause if five prongs are satisfied.

1. The property must be residential;
2. The property must comprise fewer than five dwelling units;
3. The property must be conveyed to an “inter vivos” trust;
4. The borrower must be a beneficiary of the trust; and
5. The transfer must not relate to a transfer of rights of occupancy in the property.

Question:  Does a new mortgage get prepared and recorded?

Answer:  No.  The original mortgage will remain in effect.

Question:  If I put my house in a trust, what happens if I want to refinance my loan on the house?

This can sometimes be a tricky question.  Interest rates are constantly rising and falling.  It’s certainly understandable to consider refinancing a home.  Some banks may refuse to refinance a home if it has been placed in a trust.  Luckily, it’s not difficult to transfer a home back into the individual’s name and refinance the home.  However, once refinanced, the home needs to be retransferd back into the trust.  This is certainly not an ideal situation, but not an insurmountable challenge.