Question: “I want to transfer the title to my home to my revocable living trust I created for as part of my estate plan so it will not have to go through probate on my death. My home is encumbered by a deed of trust that secures a debt I owe to my lender. The loan documents say that the lender has an option to call the loan if I transfer the title to the home. Can my lender call my loan?
Answer: No as if the borrower continues to occupy the home. Most of the time when you ask a lender if it will consent to allow you to transfer the title to your home to your revocable living trust, the lender's personnel will either say no or require you to jump through a bunch of unnecessary hoops. There is a federal law called the Garn-St. Germain Depository Institutions Act of 1982 (12 U.S.C. § 1701j-3(d)) that prohibits a lender from exercising a due on sale clause in loan documents when you transfer the title to the home in which you live to your revocable living trust. Here is the pertinent language of the statute:
(d) Exemption of specified transfers or dispositions. With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon –
(1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(2) the creation of a purchase money security interest for household appliances;
(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;
(5) a transfer to a relative resulting from the death of a borrower;
(6) a transfer where the spouse or children of the borrower become an owner of the property;
(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property“
“Inter vivos” is a Latin term that means ” between living persons.” An inter vivos trust is a trust created by you while you are alive as opposed to a trust created after your death by a valid Will that you created before death.
The applicable federal regulation states:
“A transfer into an inter vivos trust in which the borrower is and remains the beneficiary and occupant of the property, unless, as a condition precedent to such transfer, the borrower refuses to provide the lender with reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficial interest or change in occupancy”
Bottom line: If you create a trust and transfer the title to your home to the trust and you continue to live in the home after the transfer, the Garn-St. Germain Depository Institutions Act prohibits your lender from calling your loan.
For more on this topic see John Reed's excellent article called “The truth about getting around due-on-sale clauses.”