"Can I Put My House in a Living Trust If I Still Have a Mortgage? Will the Lender Call the Loan Due?"

In 1982 Congress wrote a short list into federal law of transfers a lender may not treat as a sale of the home, and one item on it is a move into your own living trust.

Federal law says a lender may not demand the full balance of a home loan because the owner moved the home into a living trust. The owner has to remain a beneficiary, and the transfer cannot change who has the right to live in the home.

A living trust, which lenders also call an inter vivos revocable trust, is a trust you create while you are alive and can change or cancel. You are usually its settlor, the person who creates it, and its trustee, the person who manages what it holds. A beneficiary is the person the trust is for. Moving the home in means the title, the legal ownership, passes from you to the trust.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, licensed in fifteen states, NMLS #483943, through C2 Financial Corporation. The trust, the deed, taxes and estate planning belong to your attorney. The loan is my part, and that is what this article covers.

The clause that worries homeowners is the due-on-sale clause

A mortgage contract can contain a clause that lets the lender demand the full balance if the home is sold or transferred without the lender's written consent. An estate planning attorney's first suggestion, to move the home into a living trust, is a transfer on paper, and homeowners with a mortgage reasonably wonder whether it trips that clause.

That is a due-on-sale clause. The statute that governs it, 12 U.S.C. 1701j-3, defines it as a provision that lets a lender, at its option, declare the secured sums due and payable. That applies if all or any part of the property, or an interest in it, is sold or transferred without the lender's prior written consent.

The statute on a transfer into a living trust

One list in that statute names the transfers a lender may not use the clause for. It covers a loan on residential property with fewer than five dwelling units. It includes a transfer into an inter vivos trust in which the homeowner is and remains a beneficiary, as long as the transfer does not relate to a transfer of rights of occupancy.

The regulation's added condition on notice

The regulation that carries out the statute is 12 CFR 191.5. Its section for a home the client occupies, or will occupy, leaves out a reverse mortgage, a loan that pays the homeowner against the equity, which my article on how a HECM reverse mortgage works covers. It also lists a transfer into an inter vivos trust in which the client is and remains the beneficiary and occupant.

That entry carries a condition. The lender can still use the clause if the client refuses, before the transfer, to give reasonable means of timely notice of any later transfer of the beneficial interest or change in occupancy. The means have to be acceptable to the lender.

The limits that come with the protection

Three conditions come out of those texts, on a loan for a home with fewer than five units.

You stay a beneficiary. Both the statute and the regulation say the client is and remains a beneficiary. A trust that makes someone else the only beneficiary is a different transfer from the one they describe.

You stay in the home. The statute excludes a transfer that relates to a transfer of rights of occupancy, and the regulation says occupant. The regulation's wording is about a home the client occupies. Your attorney or servicer can confirm how it applies if you rent the home out or have moved out of it.

You answer the lender's reasonable request for notice. The regulation conditions the protection on that.

The statute limits what the lender may do with the clause and does not address the monthly payment. I'm not an attorney, so your attorney or servicer can confirm how these texts apply to your trust.

Telling the servicer about the trust

The servicer is the company that collects your payment and manages the loan, and it may be a different company from the one that made the loan. The regulation lets a lender ask for reasonable means of timely notice, so a servicer may well want to hear about the trust. I'm not aware of a single form every servicer uses, so I'd ask in writing what it wants to see. Your attorney can supply whatever it names.

Your attorney and your insurance agent are the ones to ask how a transfer to a trust affects your title insurance policy or your homeowners insurance.

A later refinance with the home in the trust

A refinance is a new loan that pays off the old one and comes with its own note, the loan contract. With the home in your living trust, the new lender looks at the trust as well as at you, reads the trust document and checks that the trustee may borrow.

Freddie Mac's section on living trusts says a living trust is an eligible party on a home mortgage if it meets all of its conditions. Those conditions are that the settlor is the trust's primary beneficiary, meaning the person it is mainly set up to benefit, and that the settlor, or a settlor with co-trustees, acts as trustee. The trustee also has to be specifically authorized to borrow money for the settlor and to encumber the home to secure a loan, which means to pledge it as collateral. The loan can be on a one- to four-unit primary residence occupied by the settlor. Freddie Mac also calls for title to be vested in the trustee on behalf of the trust, and for the title insurance policy to say so. "On title" means your name, or here the trustee's, is on the deed, the document that moves ownership and is filed with the county.

Luxury Mortgage Corp. reads a living trust the same way on its Prime Access and Simple Access sheets. The creators must be the primary beneficiaries, the trustee must have the power to mortgage the home, and the client signs the note individually. Its sheets say irrevocable trusts are not eligible for financing.

So a living trust that meets those conditions can stay on title through a refinance on those guides. The trustee's borrowing power is something the trust document either says or does not, so the wording is worth checking early.

The time the home spent in the trust also counts. For a cash-out refinance, a loan that pays off the old mortgage and pays you cash, Fannie Mae's cash-out rules require someone on the loan to have been on title for six months. They say that when an inter vivos revocable trust owned the home before closing, the time the trust held it can count toward that six months if the client is the primary beneficiary of the trust. For a plain refinance, Fannie Mae's limited cash-out rules have an exception to the on-title requirement for a home previously owned by an inter vivos revocable trust when the client is the primary beneficiary.

Freddie Mac's cash-out refinance section has its own six-month rule for time on title. My home equity hub compares the ways to use your equity, and the guide to purchase, refinance and cash-out loans explains how each is defined.

The trust becomes irrevocable at the settlor's death

Freddie Mac's refinance section notes that a living trust may be made irrevocable by a settlor's death, and that to be an eligible party at the time of a refinance the trust must continue to meet its revocability requirements. The heirs' options are covered in my article on a parent's home in a living trust after death and in the inherited house and the mortgage.

If you are buying a home to hold in a trust from day one, read buying a home in a revocable living trust. A different kind of trust is covered in a mortgage on a home held in a land trust.

Your next step

If you want to see what a plain refinance of your home would price at, Rate & Best Fit shows pricing for your scenario. You can choose a rate option that works best for you, and that selection can change as your file comes together. For anything about how your trust is worded, your attorney is the right call, and for the loan side you are welcome to call me at (843) 765-0000 or email jeff@solverya.com.

Nothing here is legal, tax or estate advice, and nothing here is a loan approval, a denial or a commitment to lend.

Common questions

Can a lender call my mortgage due if I put the home in a living trust?

The federal statute says a lender may not use its due-on-sale clause for a transfer into a living trust in which you remain a beneficiary and the transfer does not change who has the right to live in the home. Your attorney or servicer can confirm how that applies to your situation.

Do I have to tell my mortgage company I put the home in a trust?

The regulation lets a lender ask for reasonable means of timely notice about the trust, and a client who refuses to give it before the transfer can lose the protection. The safest step is to ask your servicer in writing what it wants to receive.

Can I refinance a home that is in my living trust?

Yes, when the trust meets the lender's conditions. Freddie Mac's guide and Luxury Mortgage's sheets both require the settlor to be the primary beneficiary and the trustee to have the power to borrow against the home.

Does the time the home was in the trust count toward the six months on title?

For a cash-out refinance, Fannie Mae says the time an inter vivos revocable trust held the home can count when you are the trust's primary beneficiary. Freddie Mac has its own six-month rule that your lender will apply.

What happens to the trust when the person who made it dies?

Freddie Mac's guide says a living trust may become irrevocable at the settlor's death. After that, the trust may no longer meet a lender's conditions, and the heirs' options are covered in my article on a parent's home in a living trust.

Sources: 12 U.S.C. 1701j-3 (subsection (a)(1) and subsection (d)(8)); 12 CFR 191.5(b); Freddie Mac Seller/Servicer Guide Sections 4301.2, 4301.5 and 5103.5; Fannie Mae Selling Guide Sections B2-1.3-02 and B2-1.3-03; Luxury Mortgage Corp. Prime Access guidelines v9.0 and Simple Access guidelines v9.2, Section 11.2.