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Question:

My parents and sister bought a house together in January 2024 with the intent to live in it together. My parents own 2/3 of the property and my sister 1/3. My parents’ 2/3 of the property was put in an irrevocable trust naming my 2 sisters (including the one owning the 1/3) and myself as trustees. Things have changed for my sister and she wants to move out. She needs the money from her 1/3 of the house to move on. How can we finance her departure? Will a bank give a mortgage on the house? Can we get a HELOC? Can she get a mortgage on her 1/3?

Response:

There’s a legal answer and a practical answer to your question. The legal answer is the easier one. Your sister can definitely sell her one-third share of the house to your parents. In addition, either your parents or the trust have the legal right to borrow the necessary funds.

The practical one is more difficult to answer. The trust likely will be an impediment to getting a mortgage or a home equity loan. This is because banks and other financial institutions often resell mortgages on the secondary market and they can’t do that with a “nonconforming” loan. When property is in a trust, the bank or other lender must carefully examine the trust to make sure it doesn’t contain any provisions that might undercut the lender’s security. Since every trust is different, such loans can’t be packaged and easily sold to other investors.

You or your parents can ask around to see if a local bank might still finance the purchase, which they may do if they don’t intend to resell the loan. Some banks and other lenders do keep some loans on their own books rather than reselling them.

I haven’t seen the trust itself. If it gives the trustees the right to make a distribution to your parents, you may be able to unwind it by distributing out the house to your parents. Then they could get a mortgage or home equity loan. Other possibilities might be for your parents to pay your sister over time or perhaps you and your other sister could loan the money to finance the purchase. If you did so, your loan could be secured by a mortgage.

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