Buying or Refinancing Property With an Inter Vivos Revocable Trust

Traditional lenders typically require that borrowers be individual, natural persons. Businesses and other entities cannot qualify for a conventional loan. However, lending guidelines cut out an exemption for people borrowing through an inter vivos revocable trust.

But while it is possible to secure a mortgage or refinance an owned property through an inter vivos trust, the process can be more challenging than with a normal conventional loan.

Qualifying for a Mortgage With an Inter Vivos Trust

Not all living trusts will qualify for a loan under conventional lending guidelines. First and foremost, the trust needs to be revocable. Irrevocable trusts are not eligible. However, it's okay if your revocable trust has a clause that converts it into an irrevocable trust after your death. Lenders are only concerned with the trust's current status.

Lending standards also require that the primary beneficiary of the inter vivos revocable trust be the person (or persons) who established it, referred to as the trust’s settlor (or sometimes grantor). At least one settlor must use their financial profile to qualify for the loan, and that individual has to be a signor on the mortgage.

The trust’s trustee, acting on behalf of the trust, must also sign the mortgage. With most inter vivos trusts, the settlor fills this role as well. But lenders also allow for institutional trustees (sometimes called corporate trustees), including:

• Trust companies

• Accountants

• Attorneys

• Trust departments of financial institutions

Lastly, your trust must be structured in a way that gives the trustee the legal ability to borrow money on behalf of the settlor. They must also be able to purchase or encumber real estate to secure a loan.

Note: Trustees who aren't the settlor whose credit is used to qualify for the mortgage can request exclusion from personal liability related to the property.

Buying a Property Through an Inter Vivos Revocable Trust

Both Fannie Mae and Freddie Mac allow purchase loans to inter vivos revocable trusts. This can be for a primary residence or second home for one of the settlors or even an income-generating investment property held by the trust.

However, not all mortgage companies choose to lend to trusts. That's because far more work goes into assessing trust documentation, and lenders may take on additional liability if legal problems arise down the line.

Plus, the laws regarding living trusts can vary by state. This further reduces the number of lenders willing to offer loans to trusts in some locales.

If you do find a lender willing to make the loan, you can be prepared for:

• Submitting additional documentation related to your trust

• Coordinating with your trustee if that’s someone other than yourself

• Additional research and certifications on the part of the title company and title insurance provider, which may come with an added cost

What to Consider Instead

In many cases, purchasing a property under individual ownership and then transferring it to the inter vivos trust after closing may make more sense. The cost to transfer the deed is minimal in most cases, and the practice can significantly streamline the mortgage process, especially for well-qualified borrowers using personal income and assets to secure the loan.

This is possible because even though most loans include a “due on sale” clause preventing the transfer of mortgaged property, the Garn-St. Germain Act of 1982 federally prohibits the clause from being triggered when transferring to an inter vivos revocable trust.

But as always, it's vital to consult an estate attorney knowledgeable of the relevant laws in your state when making decisions regarding your living trust.

Refinancing a Property Held in an Inter Vivos Revocable Trust

Just like purchasing a property through a trust, it's possible to refinance a property held in an inter vivos revocable trust. However, the majority of lenders will recommend you temporarily transfer the property to individual ownership for the refinance and then transfer it back to the trust once the transaction has closed.

In most cases, this is a relatively inexpensive process and can drastically simplify the refinance and reduce potential liability to the lender. As a result, mortgage companies often choose to refrain from offering refinances on properties held in trust.

Another Type of Eligible Trust: Land Trusts

Land trusts are another type of revocable living trust that lenders are able to lend to in many cases. The process is essentially the same as for inter vivos revocable trusts. However, in most instances, the settlor does not serve as the trustee, with an intuitional trustee often holding the position instead.

Some borrowers opt for land trusts rather than inter vivos trusts because they offer a higher degree of privacy and anonymity regarding purchase and ownership.

Ultimately, you'll likely face the same difficulty in finding lenders willing to issue loans to a land trust. Still, it is an option in some situations.

Frequently Asked Questions

Here are a few quick answers to some of the most commonly asked questions regarding buying or refinancing property with a trust.

Can Jointly-Owned Inter Vivos Revocable Trusts Obtain a Mortgage?

Yes, you can get a conventional mortgage with a jointly-owned inter vivos revocable trust. Not all settlors are required to be party to the transaction, but at least one needs to use their credit profile to qualify for the mortgage.

Can an Irrevocable Trust Get a Conventional Loan?

No, you cannot get a conventional loan if you have an irrevocable trust. The only types of trusts allowed are an inter vivos revocable trust and a land trust, a different kind of revocable living trust.

Can My Mortgaged Property Be Transferred to a Trust?

Yes, and in most cases, this is the easiest way to purchase a property for a trust. Federal law allows for transferring individually owned real estate into an inter vivos revocable trust without triggering the mortgage's "due on sale" clause. You can seriously simplify the lending process by purchasing property in your own name, then transferring it into your trust.

Buying and Refinancing Real Estate With an Inter Vivos Trust

While buying or refinancing a property with an inter vivos revocable trust is possible, you'll likely have a more difficult time finding a lender willing to accommodate the transaction. In most cases, borrowers opt to purchase or refinance their property outside of the trust and then transfer it in after closing on the mortgage.

However, if you’re committed to borrowing under your inter vivos revocable trust, the best thing you can do is apply with a seasoned lender experienced in all types of non-traditional loan situations.