Refinancing a house held in a living trust

san francisco houseI can usually tell when mortgage rates begin to drop because my phone starts ringing with former clients who are trying to refinance.  Often, their loan broker wants them to supply assurances that, if the living trust owns the house, the trust gives the Trustee the power to mortgage the property and use the house as collateral so that the lender’s interest is secure. (That’s a lawyer way of saying that the lender wants to be certain that, if the mortgage isn’t paid, they can take the house.)

Sometimes the lender wants a letter from an attorney certifying certain things are true about the trust — usually that it is revocable, that is valid under California law, and the Trustee has certain powers including the power to borrow. Often, they want this letter right away because it’s holding up the deal.

The issue underlying all of this paperwork is that some (but not all) lenders are uncomfortable because something other than the individuals applying for the loan owns the property (the trust). Here’s an article that explains this in more depth from SF Gate

One easy way to make this all simpler is to simply take the house out of the trust, get the new loan, and then transfer the property back in. That way, the homeowners are the legal owners and the people applying for the new loan, so it makes it easier for the lenders to close the deal.

Almost always, the mortgage broker or your title company will take the house out of the trust for the purpose of securing the new loan. They have an incentive to do this because they want the loan to close. Here’s where things can fall apart though-after you get that new loan,  you have to make sure that the house gets put BACK into the trust. Sometimes this doesn’t happen for one reason or another — the broker gets busy with the next loan, the homeowner doesn’t realize that it’s up to them to make sure that this gets done, the title company drops the ball.

Don’t let this happen.  If the lender takes the house out for you, make sure they put it back in for you. Failure to retitle the home to the trust after a refinance is the number one reason that I find a house isn’t in the trust after a person dies. When we go through the paperwork, we often find a deed from many years back taking a house out of the trust in connection with a mortgage. It’s an easier problem to fix when you get the new loan; not so easy many years later after there’s been a death.