Can You Put a Home That Has a Mortgage in a Family Trust?

You want your loved ones to be protected when you’re gone, and putting your home in a trust is a great idea. But if you still have a mortgage on that property, it’s important to know what limitations you’ll have on refinancing or taking a home equity loan on the property later. To transfer a property to trust with a mortgage still in place, you’ll simply need to set up a trust and sign a new deed putting the home in the trust’s name.

The top reason people want to transfer property to a trust with a mortgage in place is to avoid probate. Without a trust, your home and other assets could be tied up in court proceedings for several months to several years. Your will is designed to cover your smaller assets, like jewelry and furniture, while a trust covers high-dollar items like your house.

But if you have a mortgage on property held in a trust, things can get a complicated, particularly if you’re still paying on it. Before you can make that move, you should check with your mortgage company to see what repercussions there might be for doing so. Once you’ve moved a mortgage to the trust, it is officially the property of the trust, not you, and your lender could have something to say about that.

It's important to distinguish between revocable and irrevocable trusts when it comes to transferring your home. When you move a home into an irrevocable trust, you give up all interest in it, turning it over to the estate. If you still have a mortgage on a house you’re moving to a trust, it needs to be put into a revocable trust, allowing you to retain the rights to modify it. With a revocable trust, the home remains yours with the understanding that it transfers to the trust upon your death.

One of the biggest concerns about a mortgage on property held in a trust is that it will trigger something called the due on sale clause, which mandates that property transferred to another seller will trigger a requirement to pay the balance due. Since you’re transferring property into an estate, it could technically be considered a sale, but your responsibility to pay the mortgage doesn’t change. Still, you may feel concerned if you have that clause in your mortgage.

The good news is, the law is on your side. The Garn-St. Germain Depository Institutions Act of 1982 protects homeowners who transfer property to trust with mortgages from the due on sale clause being enacted. However, to be protected, the transfer will need to be for estate-planning purposes and the mortgageholder will need to be a beneficiary of the trust with the right to continue to occupy the property.

Lending to a trust-protected home can be complicated, but you can usually refinance your property. This is subject to your lender’s requirements, though, which means you’ll need to check before you get started. Some lenders will require you to transfer the home out of the trust before the refinance process can start.

Moving the home out of the trust isn’t legally necessary, so you may be able to find a lender willing to refinance while the home remains there. The trustee(s) of your trust will simply need to sign the refinancing paperwork. If your home’s lending to a trust requires that you take your home out of the trust first, you’ll need to make sure you move the home back into the trust once your new loan is in place.

If you still hold a mortgage on property held in a trust, you may eventually want to take a home equity loan on the house. Similar to a refinance, you can also take a loan against the equity in your home, but your lender will likely ask you to remove the home from the trust first. You should make sure your new loan won’t prohibit you from moving the home back into the trust before you start the process.