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Living Trusts and Refinancing

Photo of home in living trust with mortgage that is being refinanced.
Pleasanton California Living Trust attorney explains what to expect when refinancing trust owned property.

Many clients with living trusts are taking advantage of historically low interest rates by refinancing. I'd estimate that I receive an average of 3 calls or emails per week these days with a question about whether and how clients can refinance their homes held inside of their revocable living trusts, or requesting assistance with transferring their properties back into their trusts after a loan closes (more on that later).

Let's start by directly answering the fundamental question: Can you refinance a house that is owned by a revocable living trust? The simple answer is yes, but you need to know what to expect.

How to Refinance Trust Owned Property

The issue (as described in this article from SF Gate) is, when you have a living trust, the borrower no longer holds legal title to the property in their name as an individual owner (i.e. John Smith). Instead, legal title to the property is held as the trustee of their trust (i.e. John Smith, Trustee of The Smith Living Trust). Therefore, when a lender discovers during a refinance that a prospective borrower's home is held inside of their trust, it becomes (slightly) more complicated than when a borrower simply holds title in their individual names.

The reason the transaction becomes a bit more complicated is because the lender needs to feel comfortable and confident that the borrower (1) has the ability to obtain a mortgage on trust property and (2) has the ability to use the property as collateral for the loan (allowing the lender to foreclose and take the property if the borrower fails to make payments).

Fortunately, lenders are very accustomed to borrowers owning their properties inside of a living trust, and have processes in place for how to deal with it for the purpose of closing the loan. In general, they will handle it in one of two ways. They will either:

  1. Have the borrower provide certain assurances about the trust and their ability to borrow and encumber trust property, or

  2. Have the borrower (temporarily) deed the property out of the trust, close the loan, and then (hopefully) deed the property back into the trust.

Let's describe both of the above approaches in more detail so you are aware of what to look out for in your refinancing transaction.

When the Lender Wants Information About the Trust

If the lender asks for information about the trust, such as having the borrower complete a certification of trust document, provide an attorney letter about the trust, or submit the trust document for review, it is their way of completing their own due diligence about the trust and the trustee/borrower's ability to take out the loan in question.

Although this may initially sound like a headache, it's actually quite simple. Mainly, the lender needs to verify that the trust is revocable, valid under California law, and that the trustee/borrower has the power in the trust document to obtain a mortgage on trust property.

That said, sometimes the lender's forms are not very intuitive, and you may need some advice from your attorney to feel comfortable completing the forms. This is where having a relationship with your living trust attorney really comes in handy. We can quickly and easily guide you through the forms and into your new, low interest rate loan.

When the Lender Wants to Remove the Property from the Trust

This is definitely the simplest approach from the lender's perspective, because they do not have to review anything about your trust. They just have you transfer the property back into your individual name (by signing a deed as part of your loan documents) and then deal with you as an individual borrower. Therefore, due to its simplicity, this approach is quite common and perfectly acceptable.

That being said, if the lender has you take your property out of the trust in order to close the loan, it is imperative that you deed it back into your trust after the loan closes. Much of the time, the lender will do this for you as part of the transaction (you may hardly even notice it's happening because you are signing so much stuff). But do not assume the lender is going to handle it for you. Sometimes, the lender simply will not do it, requiring you to transfer the property back into the trust on your own (I have seen this more and more lately). Other times, the lender might say they will do it, but then it does not get done, for whatever reason (they forget, title company misses it, etc). This is a big problem, because a property that is outside of a living trust will not avoid probate when the owner dies. Therefore, the key takeaway here is:

Make sure you ask your lender if they will be placing your property back into the trust for you, and (regardless of what they say) take responsibility and be proactive to make sure that is actually gets done!

The above information should help you feel more comfortable and confident in navigating your next refinancing transaction. If the lender asks for information about your trust or for additional forms to be completed, don't sweat it, it is routine and fairly easy, and your living trust attorney should be there to support you if needed. And if your lender wants to remove your property from your trust in order to close the loan, no worries. Go ahead and proceed with the refinance, just make certain the property is placed back into the trust after closing. Your living trust attorney can prepare a trust deed to accomplish that for you after closing, if needed.


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