Listen to Lawrence…Can you refinance your mortgage if your home is in an irrevocable trust?

Question:

Is it true that once you place your home into an irrevocable trust you cannot refinance the mortgage?

My Response:

The short answer is that it is NOT TRUE! A trustee can absolutely get a mortgage (or re-mortgage) on a house held in an irrevocable trust. But I didn’t say it would be easy and your choices may be limited.

Let’s be clear on a couple of things. First, once the house is in the trust, you no longer own the house and you cannot personally use the house as collateral for a loan. The trust will own the house and it is the trust that must apply for the loan, although you may guarantee the loan. If the trust gets a loan, the trust gets the money from the loan and cannot pay it to you. If you can get it, Medicaid can get it.

Secondly, there is language in our irrevocable trusts that authorize the trustee to seek out a loan and sign a mortgage agreement if it is in the best interest of the trust.  So, the trustee can seek out a loan; but the real question is, will the bank loan the money to the trust? Can the trustee get a mortgage, a reverse mortgage, or even a home equity loan? The practical answer is that most banks do not want to deal with an irrevocable trust. I have heard them say that “the trust does not have the income to support the loan.” I have heard them say that “the FHA guidelines prohibit an irrevocable trust from getting a loan.” Yet, I have seen banks loan money to irrevocable trusts. My own father refinanced his house while it was held in an irrevocable trust! The bottom line is that if you shop around you MAY find a bank to give you a mortgage. One bank, in particular, we have had great success with, issuing traditional 30-year mortgages and reverse mortgages, is Quontic Bank. Let me know if you need an introduction to them. One reason that this bank has been issuing loans to irrevocable trusts is that they do not sell their loans on the secondary market; they keep them in their portfolio. This seems to exempt them from FHA regulations.

The bottom line is that I caution clients that irrevocable trusts and mortgages are problematic but possible.

I hope this helps! Please forward this information to your friends and relatives.

As always, please send me your questions. If you are thinking about it, others are probably too, so my answers will no doubt help you and many others.

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