Matters of Trust: Mortgage Lending and Properties Held in a Trust
Trusts often play a key role in estate planning, asset protection, and property ownership. Many homebuyers and homeowners wonder: Can a trust hold title to a property being financed with a mortgage? What types of trusts are acceptable to lenders? The answers depend heavily on guidelines from major players like Fannie Mae, Freddie Mac, FHA, and VA, with Revocable Trusts (AKA Living Trusts or Inter Vivos Trusts) generally being the most straightforward and widely accepted option.
This post explores the acceptable forms of trusts in mortgage lending, highlights key differences between common types, and explains how specialized mortgage service providers like The Commonwealth Group (www.thecommonwealth.net) support lenders in navigating these rules effectively.
Understanding Trusts in Mortgage Lending
When a trust holds title to a property, lenders must ensure the arrangement complies with investor guidelines, secondary market requirements, state laws, and federal regulations. The trust must allow the trustee to borrow, encumber the property, and handle mortgage obligations without jeopardizing the loan's enforceability.
Lenders review the trust agreement to confirm:
The trustee has authority to mortgage the property.
The trust aligns with occupancy and ownership requirements.
Title insurance provides full protection without exceptions related to the trust.
The Garn-St. Germain Depository Institutions Act protects transfers of mortgaged properties into certain trusts (like revocable living trusts) from triggering due-on-sale clauses if the borrower remains a beneficiary.
Acceptable Trust Types for Mortgage Lending
Major secondary market investors and government-backed programs have specific rules:
Inter Vivos Revocable Trusts (Revocable Living Trusts): These are the most accepted and preferred option. Created during the grantor's lifetime, they allow the grantor (settlor) to retain control, revoke or amend the trust, and serve as trustee and primary beneficiary.
Fannie Mae explicitly accepts Inter Vivos revocable trusts as eligible mortgagors for all transaction types, provided the trust meets requirements like the grantor being the primary beneficiary, the trustee having borrowing authority, and at least one individual grantor occupying the property (for principal residences).
Freddie Mac similarly allows "Living Trusts" that meet criteria such as the settlor being the primary beneficiary and the trustee (often the settlor) authorized to borrow and encumber real estate.
These trusts are ideal for estate planning, as they help avoid probate while keeping the mortgage process straightforward.
Land Trusts: Acceptable in certain states where they are common (e.g., Illinois), often on a negotiated basis with investors like Fannie Mae. The beneficiary (usually an individual) must qualify as the borrower.
Irrevocable Trusts: Generally, not acceptable as the title holder for standard residential mortgages. Once irrevocable, the trust cannot be easily changed, and control shifts away from the grantor, raising concerns about repayment ability and enforceability. Lenders and investors like Fannie Mae and Freddie Mac typically do not allow irrevocable trusts to hold title in the same flexible way as revocable ones. Exceptions might exist for specific programs or non-standard scenarios, but they complicate underwriting significantly.
Other Types (e.g., Testamentary, Blind, Qualified Personal Residence Trusts): Usually ineligible for standard conforming loans, as they don't meet the control and beneficiary requirements.
It should be noted that FHA and VA follow similar principles as conventional, aligning with Fannie Mae/Freddie Mac on revocable trusts, though additional documentation may be needed.
Why Revocable Trusts Dominate Mortgage Approvals
Revocable living trusts offer flexibility: The grantor can continue to live in the home, make changes as needed, and ensure smooth inheritance. Lenders view them as low risk because the individual borrower remains personally liable on the note, even if title is in the trust's name.
In contrast, irrevocable trusts are more rigid and often used for asset protection or tax strategies, but they can make lenders hesitant due to limited access to assets and potential income unpredictability.
Key Documents Needed for Review
Lenders and the secondary market agencies require these core items to verify the trust's validity and compliance:
Complete Copy of the Trust Agreement (or Trust Instrument): This is the full, original trust document, including all pages, signatures, notarizations, and any amendments or restatements. Lenders review it to confirm:
The trust is revocable (the settlor can amend or revoke it).
The settlor(s) is/are the primary beneficiary(ies).
The trustee(s) (often the settlor) has explicit authority to borrow, mortgage, encumber, or convey real property.
At least one settlor occupies the property (for primary residences). Fannie Mae and Freddie Mac both require lenders to retain a copy in the loan file. In some cases, if state law permits, a shorter abstract, certification, or summary may suffice instead of the full document.
Trust Certification or Abstract/Summary (Alternative in Some Jurisdictions): A condensed version (often called a "Certificate of Trust") that summarizes key provisions without disclosing sensitive details like beneficiaries or assets. This is acceptable if allowed by state law and sufficient for third parties (like lenders or title insurers) to rely on it. It typically includes the trust name, date, trustee powers, and revocability confirmation. Many lenders accept this to avoid sharing the entire trust.
Title-Related Documents:
Preliminary title report or commitment, showing title vested in the trustee(s) of the revocable trust (e.g., "John Doe, Trustee of the John Doe Revocable Trust dated [Date]").
Evidence that the title insurer will provide full coverage without exceptions related to the trust or trustees. Lenders must confirm this to ensure enforceability.
Signature and Acknowledgment Requirements (Related Documentation): While not "review" documents per se, the executed loan docs (note, security instrument/mortgage/deed of trust, riders) must follow specific formats. For example:
Trustee(s) sign the note and security instrument on behalf of the trust.
Settlor(s) whose credit qualifies must acknowledge terms via signature on the security instrument (often with a statement like "acknowledging all terms and agreeing to be bound"). Lenders review these to match trust provisions.
Additional supporting items sometimes requested (depending on the lender, state, or loan type):
Proof of the trust's existence and date (e.g., first and signature pages if not providing the full agreement).
Attorney opinion or verification (more common with VA loans, confirming validity, revocability, and settlor as trustee).
If trust income is used for qualification: Trustee statements, distribution history, or tax returns.
Why These Reviews Matter
Lenders bear responsibility for ensuring the trust meets investor criteria (e.g., Fannie Mae's B2-2-05 and B8-5-02 sections, Freddie Mac's Section 5103.5). Failure to properly document can lead to delays, title exceptions, or loan ineligibility.
How The Commonwealth Group Supports This Process
Specialized mortgage service providers like The Commonwealth Group (www.thecommonwealth.net) assist lenders with these complex reviews. Based in Germantown, Tennessee, they offer contract underwriting, processing, and quality control services that include thorough examination of trust documents, compliance with Fannie Mae/Freddie Mac guidelines, and title/ownership verification. Their expertise helps lenders efficiently handle revocable trust scenarios—reducing risk, speeding approvals, and ensuring regulatory adherence—especially useful for non-traditional ownership structures.
If you're a borrower, work with an estate planning attorney to prepare the trust properly, then share the required documents early with your lender. For lenders navigating volume or complexity, partners like The Commonwealth Group provide scalable support. Always consult current investor guides (Fannie Mae Selling Guide, Freddie Mac Single-Family Seller/Servicer Guide) as requirements can evolve. If this ties into your mortgage journey, feel free to share more details!
The Role of The Commonwealth Group in Mortgage Lending
Handling trusts requires precise underwriting, thorough document review, and strict compliance with investor guidelines—areas where mistakes can delay closings or lead to loan repurchases.
The Commonwealth Group (www.thecommonwealth.net), a Germantown, Tennessee-based provider of contract services and consulting for the mortgage industry, specializes in supporting lenders through these trust challenges and many others. Services include:
· Contract underwriting
· Contract processing.
· Quality control
· Condo Project Review
· Technology Related Services
· Cyber-Security
· Consulting Services
· Expert Witness Services and Litigation Assistance
· Due Diligence for Servicing Sales
With flexible, experienced partners like The Commonwealth Group, lenders can confidently handle non-traditional ownership structures like revocable trusts, leading to faster approvals, fewer compliance issues, and better service for borrowers pursuing estate planning alongside homeownership.
Ready to see what the professionals at The Commonwealth Group can do for your organization? Contact Martin Luplow at The Commonwealth Group – [email protected] or for condo related issues contact Nick De Santis at Condoanalytics at [email protected].
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