Refinancing your principal residence when owned by your revocable living trust

We occasionally get calls from clients who are trying to refinance their house which has been placed in their revocable living trust.  Most often it is because their mortgage lender 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, i.e., is protected and can be foreclosed in the event of the clients’ default on the loan.

Sometimes the lender wants a letter from an attorney certifying certain things are true about the trust–that it is revocable, that is valid under Montana law, and the Trustee has certain powers including the power to borrow. The attorney opinion letter typically needs to be supplied as soon as possible so the loan may close.

The issue underlying all of this is that some lenders are uncomfortable because the trust, or, more accurately, the clients in their capacity as Trustees of the trust, is applying for the loan and owns the property, rather than what the lender is more accustomed to dealing with–individuals who own the property and are applying for the loan.

The attorney opinion letter should do the trick and allow for the loan to proceed. Another option would be 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 lender to close the deal. The lender, and title company closing the loan, have an incentive to allow this because they want the loan to close. It’s important, though, to make sure the house is transferred back into the trust after the loan closes to ensure the benefits of the trust will be utilized.

Jon