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Can You Place Your Home In A Living Trust?

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By Igor Krishtul, ChFC, EA

Today, more and more homeowners consider transferring their homes to living trusts. Living trusts have advantages not possible otherwise. Thus, it should not be surprising that their popularity has grown a great deal over the last several years.

In many situations, the living trusts are the most efficient tools to own and manage property. Such property includes your home.

Even after death, living trusts can provide for disposition of assets. Property held in trusts avoids probate. Trusts can also help you to keep the probate courts away in the event of your incapacity.

If your house or apartment is not subject to mortgage loans, then no financial institution can stand in your way if you transfer you’re your home to a living trust. It gets complicated, though, when you do have a mortgage.

For many American citizens and residents, their homes are their biggest assets. But, these homes frequently come with strings attached. Mortgage loans are simply a necessity for many of us to be homeowners.

Your mortgage loan officer doesn’t want additional headaches. Same applies to your closing attorney, real estate broker and other parties involved. Most of these guys (and gals) aren’t knowledgeable in the area of living trusts. Accordingly, many homeowners are pressured into not having their homes in living trusts. Don’t be misled and do what’s right for you – not them.

The lenders are aware of the increased popularity of living trusts. Hence, they cannot simply ignore this fact. The homeowners should also consider some of the issues involved here from the standpoint of lenders. By its nature, the mortgage loans involve a lien against your residence. For lenders, it serves as a security.

Your mortgage loan is a contract. Some common provisions of such contract are clearly in favor of lenders. Naturally, they do not wish to lose anything favorable to them.

Most of the mortgage loans are sold (and resold) in the secondary market. To be attractive to investors, these mortgages must meet certain guidelines. One of the issues is whether the mortgage loan was given to an “eligible borrower”. Now, can your living trust be considered an eligible borrower?

A lenders has a right to foreclose. In short, if you fall behind on your mortgage, the lender isn’t going to wait until you recover. He has the power to force a sale in order to recover his money. Does a living trust reduce – or eliminate – this important power?

Another important right is the lender’s ability to get his money repaid in full when the borrower no longer owns the property. This can be done under the “due-on-sale clause”. Can the lenders exercise this power if you transfer your home to a living trust?

The above concerns by lenders should help you to better understand what to expect when dealing with mortgage companies. Many, if not most, of the revocable living trusts simply don’t take away the lenders’ rights. Even if your revocable trust contains some unusual provisions, they can be removed or changed.

When you transfer your house or apartment to a revocable living trust, you are no longer the owner on paper. But, you are still a beneficial owner of your home. When applying for mortgage loans, you are still the borrower responsible for repaying your debts. The lenders don’t lose the power to foreclose if you don’t pay your loan as agreed.

The mere transfer to a revocable living trust is not really a sale or a loss of control. Hence, the lenders have no business invoking the “due-on-sale” clause.

Some lenders are quite reasonable in dealing with revocable living trusts. Obviously, they want to review the trust documents and know what your living trust is all about. Some may require a “certified copy” of your trust document.

A lot depends on who you are dealing with. Don’t assume that the lenders’ decision makers are necessarily competent. You may have to be more persistent and request an involvement of knowledgeable professionals.

If you already own a property, you can simply transfer the title to a revocable living trust. If you are in a process of buying, consider getting the mortgage first, going through closing and then promptly transferring the title to your trust.

Another headache may occur when a lender is giving you a hard time when you have to refinance. You can remove your property from a trust and transfer it back later. This option will involve additional paperwork and related legal fees.

In any event, make sure your trust is properly drafted so that your transfer won’t trigger an adverse action by your lender.

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