Hidden Perils of Refinancing

Be informed when refinancing a home in a living trust.


The secret is out. Refinancing contains hidden perils for homes in revocable trusts. Recently I received a call from a client who fortunately had the good sense to question what had happened to the title to her home during a refinance. I had previously set up a revocable trust for her and transferred her home into the trust by recording a new deed. But after refinancing, she was not sure if the house was still in the trust.

I explained to her that mortgage lenders are not willing to lend to trusts. They require that title to the house be transferred out of the trust. That’s because the lenders and title companies do not want to have to read the trust. Honestly, having read hundreds of trusts, I can understand that. But that is no excuse for taking a house out of the trust and leaving it there after the refinance.

That is what happened to my client. The escrow officer had her sign a deed transferring title out of the trust, but did not take the time to transfer the house back to the trust or even to explain what was happening.

The normal procedure in California is for the title company to record a deed transferring the property out of the trust one day and then back into the trust the next day, as explained by a mortgage broker at this site.

It is not unusual however for the escrow officer to inform the client that the property has been transferred out of the trust and that the client has the responsibility to transfer it back. How is that for service? It is an additional expense and effort for the client to have an attorney prepare a new deed, but at least the client is informed and has the opportunity to remedy the situation.

Worse is where the client is not informed. The house is left out of the trust and might not be put back until it is too late. Then, after the client is deceased, the only remedy is to get a court order or possibly even open a full probate to get the house back into the trust. By comparison, having to prepare another deed is relatively painless.

By the way, recent FNMA (Fannie Mae) guidelines permit a lender to mortgage or refinance a house that is in a trust. No need for the in and out process. The catch is that the guidelines “permit” but do not require the lender to do so. Since it is much easier to transfer a property out of the trust than to read the trust, I don’t know of any lenders who do lend to revocable trusts. The FNMA guidelines are discussed at greater length here.

When refinancing, keep an eye on your escrow officer. Make sure that your house will be returned to the trust. When in doubt, talk to your attorney.

Creative Commons License photo credit: alancleaver_2000


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