Placing a house into a trust is a common estate planning strategy designed to simplify asset distribution, avoid probate, and provide privacy. However, when the property has an existing mortgage, the process becomes a bit more complex. Fortunately, in most cases, it is still entirely possible—and legal—to transfer a mortgaged property into a living trust. Below is a step-by-step guide on how to do this, what to consider, and how it affects your mortgage.

Understanding How Trusts and Mortgages Work

A trust is a legal entity that holds property on behalf of a beneficiary. A revocable living trust, the most common type for estate planning, allows the trust creator (or grantor) to maintain full control of the assets during their lifetime and name beneficiaries to inherit the assets upon death.

When a house has a mortgage, the loan is a lien on the property. Transferring the house into a trust doesn’t erase the mortgage; instead, the mortgage remains in place, and the trust assumes ownership of the title while the borrower remains responsible for payments.

Step-by-Step: How to Put a Mortgaged House into a Trust

1. Review Your Mortgage Agreement

Check your mortgage documents for a “due-on-sale” clause. This clause allows the lender to call the entire loan due if ownership is transferred. However, under the Garn-St. Germain Depository Institutions Act of 1982, lenders are generally prohibited from enforcing this clause when the transfer is to a revocable living trust, and the borrower remains the occupant and loan payer.

2. Consult an Estate Planning Attorney

A trust is a legal document and should be customized to your estate goals. An attorney can draft the trust and ensure it’s structured properly. They can also review your mortgage documents and clarify your lender’s requirements.

3. Create the Trust Document

You’ll need to identify:

  • The grantor (you)
  • The trustee (you or someone you appoint)
  • The beneficiaries (heirs who inherit the home) The trust document will outline how the property should be managed and distributed.

4. Obtain Lender Approval (If Required)

While most lenders won’t require approval for transferring to a revocable trust, it’s wise to notify them. Some lenders may want to see a copy of the trust or require additional paperwork.

5. Prepare a New Deed

To officially transfer the property into the trust, a new deed—typically a quitclaim deed or grant deed—must be drafted. This document conveys the ownership from your name to the name of the trust (e.g., “John Smith, Trustee of the Smith Family Trust”).

6. Record the Deed with the County

File the new deed with the county recorder’s office to complete the transfer. There may be a small recording fee involved. Some states also require a Preliminary Change of Ownership Report.

7. Update Insurance Policies

Notify your homeowner’s insurance provider about the trust transfer and ensure the trust is listed as an additional insured party. This ensures coverage remains valid.

How Does the Mortgage Work After Transfer?

After the transfer, the mortgage remains in your name, and you continue making monthly payments. The terms of the loan do not change, and the lender cannot accelerate the loan under federal law as long as it’s a revocable trust and you remain the occupant. If the trust becomes irrevocable upon your death, the trustee or heirs will need to continue payments or refinance the loan.

Pros of Putting a Mortgaged Home in a Trust

  • Avoid Probate: Assets in a trust bypass the lengthy and costly probate process.
  • Maintain Control: With a revocable trust, you retain control during your lifetime.
  • Continuity: Ensures a smoother transfer of ownership to heirs.
  • Privacy: Trusts are not public records, unlike wills.

Considerations and Drawbacks

  • Title Insurance: Transferring the title may affect title insurance; consult your provider.
  • Refinancing Later: You may have to temporarily transfer the home out of the trust to refinance, then back into the trust.
  • Legal Fees: Setting up a trust typically involves attorney fees.

Final Thoughts on How to Put a House in a Trust with a Mortgage

Putting a mortgaged house into a trust is not only possible—it’s also a smart move for many homeowners planning for the future. With proper planning and professional guidance, you can ensure your home is protected, your heirs are spared probate hassles, and your mortgage remains unaffected. Always consult a qualified estate attorney to tailor the process to your unique situation.

References:

LegalZoom. (2023). Can you put a house with a mortgage in a trust? 

Nolo. (2024). How to transfer real estate into a living trust.

Consumer Financial Protection Bureau. (n.d.). Understanding mortgages and home ownership. Retrieved from https://www.consumerfinance.gov

 

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