Q.  My wife and I plan on creating a Living Trust and transferring our home and two rental properties into the trust. Each property has a mortgage. Should I anticipate any problems from the lenders?

A.   Short answer: As to your home, no. As to your rental properties, maybe.

Virtually all lenders provide in their loan documentation that, upon sale or transfer of the real property, the lender has the right to call the loan due.  This is called an acceleration clause, as it accelerates the due date of the entire unpaid balance of the loan, which otherwise would be payable over the full life of the loan.  Lenders feel they need this protection so that they are not obliged to deal with a future owner who may not be as creditworthy as you, and also so that their loan portfolio, as a whole, is “refreshed” with periodic payoffs, allowing them to fund new loans and thereby stay current with market interest rates.  Even a transfer by you into your own Living Trust would be considered a “transfer” in this context and potentially cause your entire unpaid loan balance to become immediately due.

However, in 1982, Congress passed a law called the Garn – St. Germain Depository Institutions Act of 1982, which imposed limits on the right of lenders to call loans due upon sale, transfer or certain other circumstances. As to your question, here is the short version:

Home: With respect to a home, lenders cannot call a conventional loan due merely because the homeowner transfers the property into a “Living Trust”, provided that the homeowner continues to remain a beneficiary of the trust, retains the right of occupancy, and cooperates with the lender’s request to give reasonable assurances that the lender will be notified in the event of a later re-transfer of the home.

Rental Property: Rental property is a bit trickier.  If it is residential real property of four (4) dwelling units or less and you live in one of the units, then a lender, again, cannot accelerate the loan balance. However, if it is more than 4 units, then the lender could do so.  However, just because the lender retains that right, does not necessarily mean that it would.  Your best bet is to ask your lender for its written consent in advance of the proposed transfer.  If you have been a good customer, paid your mortgage on time, and the like, the lender may give its consent, provided that you meet its conditions and, typically, pay a fee which is sometimes significant.

Reverse Mortgage: Reverse mortgages, however, are quite different.  They are exempt from the protections of the Garn Act of 1982, and reverse mortgage lenders are therefore free to accelerate the loan balance upon transfer of the home to a trust. This can be a real problem for those senior home-owners who have reverse mortgages but wish to create a Living Trust.  In this situation, it is imperative that you first check with your lender to see if there might be any work-arounds before transferring your home to your trust. The good news is that federal HUD guidelines do permit HUD to insure HECM reverse mortgages on homes transferred into trust, provided that the borrower satisfies certain conditions. Thus, notwithstanding that reverse mortgage lender are exempt from the protections of the Garn Act of 1982, if home-owners satisfy those conditions, their lenders may nevertheless consent to a transfer of  the home into a Living Trust. So, be sure to work with your lender.

In all of the above situations, I recommend checking with your lender and securing written consents to transfer whenever possible.

References:  the Federal Statute, and the Federal Regulation. California Code § 2924.6; HUD Handbook 4235.1  REV-1, Chapter 4