Here’s a question we heard recently: “We’re about to finalize a re-finance given the current rates and I’m wondering whether the mortgage go under the trust or just the house (which is already done)?”
Great question and I’m glad you asked. This can be a confusing area and one that unfortunately can have dire consequences if there are any mistakes. In fact, this is one of the most common mistakes that I see, and one that leads to a number of probates even when a revocable living trust has been created.
I will highlight the problem and solution below (just look for the bolded sentence and read on from there), but first some quick background on the terminology behind deeds and the interplay between them.
There are two types of deeds associated with your home:
(1) A Deed of Trust; and
(2) A Grant Deed.
The first deal with the mortgage note while the second concerns legal title (i.e. ownership). More on that…
Deed of Trust
Deeds of Trusts are loan documents given at the time of purchase resulting in an obligation to pay the loan or foreclosure may result. The Deed of Trust is also recorded when refinancing. A Deed of Trust is the instrument that the lender (usually a bank but can really be any individual) who records to securitize its mortgage loan to you. It’s recorded as a form of notice to other possible creditors and a way to stake their interest in the future sale proceeds to pay off the remaining loan balance. That way the property isn’t transferred and the borrowers escape paying the loan because they transferred or sold property absent the knowledge of the bank. It’s also used as a way to catalogue the loan in case paperwork is lost or there is a question about the terms of the loan (which sometimes happen when banks are bought out or your loan is purchased by other lenders). If you notice, every time your loan is sold in the future to other lenders, a new Deed of Trust will be recorded and a copy mailed to you. That’s your notice of who owns your loan and who you will have to pay-off if you refinance or sell your home.
Grant Deed
Grant Deeds are used to transfer title of real property. This is done at the time of purchase and can be later recorded to add or remove individual’s names after purchase. This is known as the “title” document.A Grant Deed is the official title document that records the legal ownership interest. While we sometimes joke that “the bank really owns my property” because they fronted the money to pay for a majority of the purchase price, on the legal front the property legally belongs to the person or entity that is named on the grant deed. The bank simply has a lien on the property such that if the property owner can’t pay, they can seek to claim the property (or the value of the property). That’s why you pay the property taxes and it transfers upon your direction (or through probate court if you don’t have a trust in place).
What Happens With Your Grant Deed In a Refinance
In a refinance, much like with the initial purchase, the lender will record a Deed of Trust against the property. Depending on the policies of the lender in how they wish to securitize the loan, the Deed of Trust will list the name or names of the individual borrowers (i.e. you or you and Brooke) or you and your revocable living trust. The lender will instruct you as to their policies and be in charge of preparing and recording the Deed of Trust.
The Common Mistake
That leads to one of the most common mistakes I see: homes taken out of trust during a refinance not being put back in the trust.
As mentioned, every mortgage lender has their own policies and operates differently. Some are open to revocable living trusts, while others are adverse. What I mean by that is that some lenders will require you to remove your home from your revocable living trust in order to secure and fund the loan. Others will not. Those that do sometimes ensure that you are signing a series of Grant Deed transfers of ownership (often called Quitclaim Deeds) to transfer your home briefly out of your trust to secure the loan and then transfer it back into the name of your trust. This should all happen through the escrow process and should be relatively painless.
However, the pitfalls and problems happen when mortgage lenders drop the ball and the property is not deeded back into the revocable living trust and the borrower is not paying attention. Worse, is when borrowers balk at paying the extra money in escrow to complete the second deed transfer thinking that they will just do it later to save on cost now. No matter the reason, if the home is not deeded in the name of the trust after a refinance the risk is that it is not under the control of your trust and it can fall into probate later.
What You Can Do
I realize that there are a number of variables that contribute to who you decide to use for your mortgage lending. Relationships and rates primary among them. However, if possible I recommend always using a lender that will not require you to transfer your home in and out of your trust in order to complete the transaction so as to avoid any headaches. If you do not, no worries. Just be diligent in your oversight of the process and get confirmation with a title search post refinance to ensure the most recent Grant Deed still lists your revocable living trust as the legal title owner.
Estate planning is more than just preparing wills and trusts. It involves the organization and integration of your assets with your overall plan. In the estate planning world we call this “asset verification.”
No matter the quantity or value of your assets, asset verification is crucial to all estate plans. Especially your most valuable ones like a home or other real estate, in order to avoid unintended consequences in the form of confusion, complication, cost, and court.
While having no plan is a bad plan, having an unfunded plan is like having no plan. If you would like assistance reviewing your estate plan including asset verification.
