Free Trust Letter to Mortgage Lender

1. The Trust Letter to Mortgage Lender should be signed by the owner(s) of the property. A copy of the Letter should be retained by the letter-writer for his or her records.

2. The Letter should be sent at least thirty days prior to the intended date of transfer.

3. Two copies of the Letter should be enclosed so that the financial institution can sign and return one copy. (You should sign both copies.)

4. Enclose a self-addressed envelope with the Letter for the convenience of the financial institution in returning a signed copy of the Letter.

5. After the property is transferred to your Trust, notify your insurance agent of the change. The change should not affect your coverage or the cost of the policy.

Real estate is transferred into the name of a revocable living trust through the use of a deed. The specific form, content, accompanying documents and recording requirements for deeds vary by state. Consult an attorney for assistance.

Where there is a loan against the property, particular attention must be paid to any loan restrictions regarding a transfer of the property. Most loans contain a "due-on-sale" clause, which allows the financial institution to "accelerate" the loan (i.e., require immediate payment of the entire remaining balance) if the property is transferred. The acceleration clause in the loan is designed to help protect the financial institution when the property is transferred (usually by sale) to a third party whose creditworthiness has not been approved by the financial institution.

Where the personal residence of a borrower is transferred to the borrower's own revocable Living Trust, however, there is no meaningful change in the ownership or use of the property. For this reason, federal law prevents lenders from invoking the "due-on-sale" clause in those instances, provided that the owner continues to occupy the home as the beneficiary of the Trust. Still, it is good practice to inform the lender of, and obtain the lender's consent to, the transfer.

On the other hand, there is no such law prohibiting the lender from accelerating the loan where the property being transferred is investment property. In these instances, it is critically important that the Grantor of the Trust (the owner of the property) obtain the advance written consent of the lender, confirming that the "due-on-sale" clause will not be invoked.

In order to give consent to the transfer, the financial institution will want to be assured that there is no substantive change in the ownership or control of the property. When property is transferred to a Trust, the Trustee becomes the legal owner, but the beneficiary of the Trust is entitled to use the property. Therefore, if the owner of the property (the Grantor of the Trust) is also the Trustee and beneficiary of the Trust, there is no material change in the ownership or use of the property, and the financial institution will likely approve the transfer.

Financial institutions are prevented by law from accelerating payments on a loan when there is a transfer of a personal residence to a revocable living trust if the owner/grantor will continue to use the property as his or her home. Although consent to the transfer may not technically be required under these circumstances, it is still good practice to notify the financial institution of the transfer.

On the other hand, if the property is investment property, there is no prohibition against the financial institution accelerating the payments pursuant to a due-on-sale clause in the loan. For investment property then, it is necessary to obtain permission from the financial institution prior to the transfer. Most financial institutions will consent to the transfer. However, failure to obtain prior written approval could result in an acceleration of the payments.