Can I Take Out a Mortgage on a Home in a Trust?

 In Revocable Trusts

Question:

My home is in a trust set up by my mother with me as beneficiary. I have no mortgage but the house needs serious remodeling/upgrades as it is a 1986 model. Can I take out a loan against my trust for the major remodeling project? Also, what are some safeguards I can take in the event I die or cannot make payments for some reason? I want to leave this house to my child.

Photo by Priscilla Du Preez on Unsplash

Response:

This depends on the trust and the bank. Probably the trust permits borrowing, but the bank or lending institution may be reluctant to make a loans since it would be “nonconforming.” This means that the bank would not be able to sell the mortgage on the secondary market. I would recommend showing the trust to several bank loan officers or mortgage brokers to see what they (or their lawyers) say.

Once you do take out a loan, it will be subject to the mortgage, which is the bank’s security that it will get paid. This puts the house at risk because if you stop paying on the loan, the bank can and would foreclose on the mortgage. You can make sure that your child can pay on the mortgage if you were to die with it still unpaid by buying life insurance. But there’s not much you can do if you can’t make the payments yourself. Of course, before giving you the loan in the first place, the bank will determine whether it feels you have the ability to make the payments, in other words whether you’re a good credit risk.

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