At eLegacy, we often recommend that our clients create Trusts as part of their comprehensive Estate Plans. One of the prime advantages of creating a Trust is that it can operate in place of a Will to distribute your estate (or parts of it) when you pass away. However, Trusts have other benefits for managing your assets, as well.
One question that often arises when we recommend a Trust is whether you can transfer your home into a Trust if you still have a mortgage. The short answer to the question is: Yes, you can place your house in a Trust even if a bank holds a mortgage for it. However, you should be aware of a few “wrinkles” in how that works.
The Nature of a Trust
A Trust is a legal entity. When you, as the creator or “Grantor” of the Trust, put property into the Trust, you no longer hold the title to it; the Trust itself holds the title. At the same time, when you are also the Trustee, you may still control what happens to the property in the Trust, but the terms of the Trust instrument govern your control.
In many Estate Plans that involve Trusts, you will create what is called a revocable Trust. “Revocable” means that, even though everything owned by the Trust must be administered and managed according to the Trust’s terms, you, as the Grantor, can move assets in and out of the Trust and can even dissolve the Trust altogether. The Trust will become irrevocable only when you pass away unless you specify some other triggering event to make it irrevocable.
You Own Your Mortgaged Home, but the Lender Has Rights
When most people purchase a home, the majority of the time, they cannot afford to pay for it in cash; instead, they obtain a mortgage loan. Mortgage loans are secured by the property itself – in other words, if the borrower defaults, the lender has recourse to the property itself.
But even with a mortgage, you are still considered the owner of the house, and you have specific rights regarding the home with which the lender cannot interfere. At the same time, your lender also has certain rights. Those rights are spelled out in the loan document you sign with your lender, and those documents govern what you can and cannot do with the house without the lender’s consent.
The lender’s primary concern is to protect its financial interests, which means that certain transactions – such as taking out an additional home loan or selling it – require the lender’s consent and participation. Putting the house into a Trust requires transferring the title, but lenders recognize that is not the same as gifting or selling your property to someone else. Since transferring real estate into a Trust is a fairly common occurrence, many standard lending documents will explain what is required to transfer the home to a Trust.
The lender will specify the terms for the transfer, and there will likely be some extra paperwork involved. Part of the terms will include specific requirements the Trust must meet for the lender to consent to the transfer. The Federal National Mortgage Association, commonly referred to as “Fannie Mae,” defines the conditions under which it is appropriate for a lender to allow a transfer of mortgaged property into a Trust.
When Mortgaged Property is in a Trust
It is important to remember that even if your lender consents to transfer your mortgaged home into your Trust, it will not relieve you of your obligations to continue to make payments and to meet all the other terms of your loan agreement, such as paying property taxes and maintaining sufficient property insurance.
In addition, you have to be prepared to deal with other issues that can arise. For example, it is not uncommon for homeowners to periodically seek to refinance their homes, particularly if interest rates go down or if they want to do a “cash-out” refinance to use some equity to fund some other activity. But what if the Trust owns the property on which you have a mortgage: is it possible to refinance? Are you able to execute a cash-out refinance?
The answer, again, is “Yes.” In some cases, a bank may require a Grantor to move the property out of the Trust in order to approve the refinance loan, which is easy to do with a revocable Trust. After the refinancing, the Grantor will then have to go through the process of transferring the property back into the Trust. Again, what you can do will depend on the agreement with the refinancing lender.
If you are considering putting your home into a Trust, it is easy to do even if you carry a mortgage on the house. Just be aware that your lender will be part of the process, including if you later decide to refinance the home.
eLegacy: Going the Extra Mile
Trusts provide many advantages for estate planning, and, while it is important to know beforehand what limitations or issues you may run into in managing your assets, Trusts are still one of the best financial vehicles for both managing your assets as well as passing your assets on to your heirs. For many people, their homes are their most valuable assets, so putting the family home into a Trust is a step we frequently recommend, whether or not there is a mortgage on the property.
What is more, at eLegacy, our services do not just end at drafting documents for our clients. When they create Trusts as part of their comprehensive Estate Plans, we make sure that their Trusts are actually funded. If you decide to put your home or any other asset into a Trust, we will assist you in meeting all the legal requirements for transferring those assets into your Trust.
If you have further questions about Trusts or are considering putting together an Estate Plan, contact eLegacy today.