Can you transfer ownership of your home to a trust without violating the terms of your mortgage?

There is a federal law called the Garn-St Germain Act. Federal Regulations allow for transfers to trusts in which the transferor or a member of the transferor’s family is a beneficiary. For example, borrowers may transfer ownership of their primary residence to their trust without triggering a due-on-sale clause found in mortgages. The regulation reads “A lender may not exercise its option pursuant to a due-on-sale clause upon 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.” (12 U.S.C. 1701j-3(d)(8).

Some attorneys are under the impression it only applies to revocable trusts, not an irrevocable one. We have always operated under the belief Garn St. Germain only applies to revocable trusts, since the grantor retains the right to revoke the trust, so a grantor never fully relinquishes his or her legal right(s) and equitable right(s) to the property. In an irrevocable trust the grantor fully relinquishes their legal right(s) to the property, which would most likely trigger a due-on-sale clause found in most mortgages. It is important to seek legal advice if you are considering transferring ownership of your home (with a mortgage) to an irrevocable trust.

The Garn-St. Germain provisions do allow for transfers to certain irrevocable trusts, such as income-only trusts. It is important to seek legal advice if you are considering transferring ownership of your home (with a mortgage) to an irrevocable trust.

Most loan originators and supervisors at lending institutions will agree that if the mortgage is paid and the trustee does not attempt to refinance, the lender would have no reason to check the land records. In other words, the transfer would be a non-event, unlikely to garner the lender’s attention, unless and until the property is being sold. At that point, the mortgage would be due in any event.

If you are looking for additional details on this topic or if you require advice about your situation, please contact the Institute for Financial Awareness.