Transferring Mortgaged Real Estate to Your Living Trust
If you own a home and are setting up a revocable living trust, you will want to transfer your home to the newly created trust. If there is a mortgage on the home, will transferring it to the trust trigger the common “due-on-sale” clause in the mortgage agreement. Such a clause typically states that when you sell or otherwise transfer the property, the lender has the right to call the balance of the loan due.
The Garn-St. Germain Act
The answer depends on the type of property. There is a federal law known as the Garn-St. Germaine Depository Institutions Act, passed in 1982 (the “Act”), which prohibits lenders from enforcing the due-on-sale clause in certain situations. If the Act doesn’t apply, you will need your lender approval before making the transfer.
Requirements to Avoid the Due on Sale Clause
For the Act to apply, the following requirements must be met. First, the property must be residential. It doesn’t apply to vacant land or commercial property. Second, the loan must be secured by a regular mortgage or deed of trust, not a reverse mortgage or line of credit. Third, the property must have fewer than 5 dwelling units. So it may apply to a fourplex, for example. And finally, is the residential property your primary residence? If not, the Act may still apply. But if all of these requirements are met, the Act applies and you can move your residence into the trust without worrying about the lender or getting the lender’s consent.
The Act also requires that the borrower is and remains a beneficiary of the living, or inter vivos, trust.
Other Permissible Transfers
The Act also prohibits enforcement of the due-on-sale clause in several other situations. Some of these include the creation of a junior lien, transfer of title to a surviving joint tenant, transfers to a relative that is the result of the borrower/homeowner’s death, or transfer of title to a spouse in the event of divorce.
One reason you create the trust is to avoid probate. So you must fund the trust, which includes transferring ownership of your house to the trust. Yet, many people are concerned with whether they can transfer their home to the new family trust without causing a problem with the bank that holds the mortgage. Because of the Garn-St. Germain Act, the answer is “yes” they can without worrying about the due-on-sale clause.