Why People Use Living Trusts for Mortgages
Living trusts have become popular estate planning tools because they help avoid probate and provide privacy for your assets. When you put your home in a living trust, you transfer ownership from yourself personally to yourself as trustee of your trust.
The challenge comes when you want to get a mortgage. Fannie Mae treats the trust as the borrower, not you personally. This creates complications because a trust doesn't have income, credit history, or the ability to occupy a home. The guidelines in [[5103.5]] solve this by requiring the person behind the trust (the settlor) to qualify for the loan while allowing the trust to be the legal borrower.
Say you created the "Smith Family Trust" and transferred your home into it. When you refinance, the loan application shows the trust as the borrower, but you still have to provide all your personal financial information, tax returns, and employment verification.
Trust Structure Requirements
Your trust must meet specific structural requirements before any lender will approve a mortgage. The trust must be revocable, meaning you can change or cancel it at any time. Irrevocable trusts don't qualify because you've given up control over the assets.
You must be both the settlor (the person who created the trust) and the primary beneficiary. This means the trust exists primarily for your benefit during your lifetime. If your spouse is a co-settlor, that works too, but at least one settlor must go through full underwriting.
The trustee authority matters enormously. Your trust document must specifically authorize the trustee to borrow money and to purchase, construct, or encumber real estate. Generic language about managing trust assets won't suffice. The lender needs to see explicit borrowing powers.
Most people serve as their own trustee, which simplifies things. If you have a co-trustee (like a bank or family member), they can sign the loan documents with you. But if you use an institutional trustee, they can be excluded from personal liability on the loan.
Required Documentation
The lender must review either your complete trust agreement or an official abstract if your state allows it. Most states require the full trust document, which means your lender will see all the details of your estate plan.
You'll need the deed that transferred the property into the trust. This deed must show title vested in you as trustee of your specific trust, not just in your personal name.
The title insurance policy requires special language. It must state that title is vested in the trustee on behalf of the trust and cannot list any exceptions related to the trust ownership. Your title company handles this, but problems here can delay closing.
Standard mortgage documentation applies to you personally. You'll provide tax returns, pay stubs, bank statements, and employment verification just like any borrower. The trust doesn't change the income and asset requirements.
Signature Requirements
The signature process gets complicated because both you personally and you as trustee must sign different documents. On the promissory note, you sign twice: once in your individual capacity and once as trustee of the trust.
The note signature must include the complete legal name of your trust exactly as written in the trust document. If your trust is called "The John and Mary Smith Revocable Living Trust dated January 15, 2020," that entire name must appear with your trustee signature.
For the deed of trust or mortgage, only the trustee signs, but you must acknowledge the document in your individual capacity. This acknowledgment confirms you understand the obligations even though the trust is the legal borrower.
If there isn't enough space on the note for all required signatures, your lender can use a signature addendum. This separate document gets permanently attached to the note and must reference the loan details like property address and loan amount.
Property Occupancy Rules
The property can be your primary residence, second home, or investment property. For primary residence loans, you as the settlor must occupy the home. Fannie Mae considers your occupancy as the settlor to satisfy the owner-occupancy requirement even though the trust technically owns the property.
This occupancy rule creates an important distinction. If you have multiple settlors (like spouses), only one needs to occupy a primary residence. But for second homes, the occupying settlor must use the property for some portion of the year.
Investment properties in trusts follow the same rules as individual ownership. You don't need to occupy the property, but you'll face higher down payment requirements and interest rates.
Common Problems and Complications
Trust documents often lack the specific borrowing authority that Fannie Mae requires. Many attorneys draft trusts with general asset management language but forget to include explicit real estate borrowing powers. You may need to amend your trust before applying for a loan.
Signature problems cause frequent delays. If your trust name on the loan documents doesn't exactly match your trust agreement, underwriters will require corrections. Even small differences like missing dates or abbreviated names can trigger conditions.
Some lenders simply refuse trust loans because of the complexity. The loan officer must understand the requirements, and the underwriter needs experience with trust documentation. Shopping for an experienced lender saves time and frustration.
Title issues emerge when the property wasn't properly transferred into the trust or when the trust name changed after the transfer. If your deed shows one version of the trust name but your current trust document shows another, you'll need to resolve the discrepancy before closing.
References
For the official guidelines, see 5103.5: Living Trust in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
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Original Freddie Mac Guideline Text
This section contains information related to:
Trust requirements
Property type, occupancy and ownership requirements
Additional information
The Seller warrants and represents that the Living Trust meets Freddie Mac’s revocability and all other eligibility requirements as of the Delivery Date and the Funding Date.
A Living Trust is an eligible Borrower for a Home Mortgage if it meets all of the requirements in this section:
(a)
Special underwriting requirement
The Mortgage applicants must include an Underwritten Settlor (or at least one Underwritten Settlor if there is more than one Settlor).
(b)
Trust requirements
The Trust must meet the following requirements:
The Settlor (or each Settlor, if there is more than one) is the primary beneficiary of the trust
The trustee(s) must be the Settlor (or at least one Settlor if there is more than one) or a Settlor and one or more co-trustees. A financial institution customarily engaged in trust functions in the applicable jurisdiction may serve as a co-trustee.
The trustee(s) must be specifically authorized to:
Borrow money for the benefit of an Underwritten Settlor
Purchase, construct or encumber realty to secure a loan to an Underwritten Settlor
(c)
Property type, occupancy and ownership requirements
The Mortgage must be secured by one of the following:
1- to 4-unit Primary Residence occupied by an Underwritten Settlor
Second home occupied for some portion of the year by an Underwritten Settlor, or
1- to 4-unit Investment Property
If a Living Trust is a Borrower, then:
The occupancy of the property/Mortgaged Premises by an Underwritten Settlor of that Living Trust will be considered to be occupancy by the Borrower of the property/Mortgaged Premises
The Underwritten Settlor is an individual who is deemed to be the owner of the property/Mortgaged Premises
(d)
(i)
Title
The title to the property must be vested in the trustee(s) on behalf of the trust (or in such other manner as is customary in the jurisdiction for Living Trusts).
(ii)
The title insurance policy must:
State that title to the Mortgaged Premises is vested in the trustee(s) on behalf of the Living Trust (or in such other manner as is customary in the jurisdiction for Living Trusts)
Not list any exceptions arising from the trust ownership of the property
(iii)
The Seller must verify that:
Title vested in the trustee(s) on behalf of the trust (or in such other manner as is customary in the jurisdiction for Living Trusts) does not lessen in any way Freddie Mac’s interest in the Mortgage, such as Freddie Mac’s ability to obtain clear and marketable title to the Mortgaged Premises in the event of a foreclosure of the Mortgage
The title insurance policy provides full title insurance protection to Freddie Mac
(e)
Required signatures; forms of signature
The required forms of signatures (Note) and required forms of signatures and acknowledgment (Security Instrument) are listed in the tables below.
If the Seller elects to use the Note with signature addendum to the Note (“Signature Addendum”) alternative:
The form of Signature Addendum, and its use, must comply with all applicable laws
The use of the Signature Addendum must result in a properly signed and legally enforceable Note
The Signature Addendum must not impair Freddie Mac’s status as a “holder in due course” or any of Freddie Mac’s rights under the Purchase Documents
The Seller indemnifies Freddie Mac from any loss or damage Freddie Mac may incur as a result of the use of the Signature Addendum
(See
Exhibit 9A, Note Signature Forms for Living Trusts
)
Note
Each Underwritten Settlor individually; and
One or more trustees on behalf of the trust, indicating the complete legal name of the trust, using the form prescribed in
Exhibit 9A
. An Underwritten Settlor executing the Note both individually and as a trustee must use one of the methods prescribed in
Exhibit 9A
.
Note with Signature Addendum alternative
May be used if there is not enough space on the Note for the signatures of the trustee(s). The Note must clearly reference the existence of the Signature Addendum.
Each Underwritten Settlor (regardless of whether the Underwritten Settlor also is signing as a trustee) must sign individually in the Borrower’s signature lines on the Note itself; only the signature(s) of the trustee(s) may be included on the Signature Addendum
The Signature Addendum must:
Be permanently affixed to the Note
Clearly identify the Note by referencing the following:
Loan documents
Required forms of signatures and acknowledgment
(See
Exhibit 9B, Security Instrument Signature and Acknowledgement Forms for Living Trusts
)
Security Instrument
Executed by the trustee(s) on behalf of the trust, indicating the complete legal name of the trust, using the form prescribed in
Exhibit 9B
Acknowledged by each Underwritten Settlor on the Security Instrument in the form prescribed by
Exhibit 9B
Security Instrument with rider as alternative form of Underwritten Settlor acknowledgment
The Security Instrument is executed by the trustee(s) on behalf of the trust, indicating the complete legal name of the trust
The Seller may use a rider to the Security Instrument that meets all of the requirements in
, including that the rider is:
Signed by the trustee(s) of the Living Trust; and
Acknowledged by each Underwritten Settlor of the Living Trust
Note:
The Seller may exclude any institutional trustee and any individual trustee who is not an Underwritten Settlor from personal liability under the Note and the Security Instrument, provided that:
The Seller verifies that such exclusion applies specifically to that trustee, and the Seller excludes only that trustee from liability; and
Such exclusion does not impair the exercise of any rights and remedies under the Note and/or the Security Instrument
(f)
The Seller must review:
Either (a) the trust agreement for the Living Trust or (b) an abstract, certification or other summary of the trust agreement if and to the extent the laws of the applicable jurisdiction require or permit a third party dealing with a trustee to rely on such abstract, certification or other summary. Based on such review, the Seller must determine that:
The Settlor (or each Settlor, if there is more than one) has retained the power to revoke or amend the trust
There is specific authorization for the trustee(s) to borrow money and to purchase, construct or encumber realty as more fully described in
Section 5103.5(b)
above
There is no unusual risk or impairment of lenders’ rights (such as distributions required to be made in specified amounts from other than net income)
The beneficiary need not grant written consent for the trust to borrow money or, if such consent is required, it has been granted in writing for purposes of the Mortgage
If the trust agreement requires more than one trustee to borrow money or to purchase, construct or encumber realty, that the requisite number of trustees have signed the loan documents
The deed conveying the Mortgaged Premises to the trustee or trust to verify that title is vested in the trustee(s) on behalf of the Living Trust (or is vested in such other manner as is customary in the jurisdiction for Living Trusts)
(g)
The Mortgage file
In addition to other requirements in the Purchase Documents, when the Borrower is a Living Trust, the Mortgage file also must contain either:
A complete copy of the trust agreement, or
An abstract, certification or other summary of the trust agreement if and to the extent the laws of the applicable jurisdiction require or permit a third party dealing with a trustee to rely on such abstract, certification or other summary
(h)
Section 6302.9
for special delivery requirements when the Borrower is a Living Trust.
(i)
Additional Information
For additional information related to this section, see Document Custodian Procedures Handbook, Chapter 3, Document Delivery and Processing Procedures, Borrower’s Signature.
