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You can use a trust to get a loan or mortgage, but there are many caveats and contingencies. Some trusts allow the estate holder to make changes to the trust while still alive. In other cases, getting a mortgage with a trust fund requires the trustees to work with other beneficiaries after the estate holder passes away.
Yes and No
The answer to the overarching question of, “Can a trust get a mortgage?” or “Can a trust get a loan?” is yes and no. The answer depends on the type of trust obtained.
A trust is a financial arrangement that gives a third party the right to hold assets on behalf of beneficiaries. A trust can be arranged in a variety of ways, so it is important to know which method will work best for the beneficiaries in the long run.
To ensure the benefit of all involved in a trust decision, it is important to know the types of trust and benefits of each. Some types of trusts allow for the trust to obtain loans and mortgages, some types must follow specific situations, and others do not allow a mortgage or loan.
When choosing to get a trust, it is important to know all the facts. Most trusts, when dealing with obtaining a loan or mortgage based on that trust, fall into two categories: living or revocable trusts and irrevocable trusts.
Living or Revocable Trust
A revocable trust, or living trust, helps assets left to beneficiaries pass without the hassles of probate. This type of trust also allows the grantor to have control of the assets while still living. You can change or dissolve a revocable trust at any time. One thing to remember, however, is that a revocable trust traditionally becomes irrevocable when the grantor passes away.
When you name yourself the trustee, you can retain control over the trust. You can name a co-trustee to manage your trust once you pass away or are incapable of making financial decisions. While a revocable trust can avoid probate, it will still be taxed under estate tax laws. This simply means that it will be treated just as your other assets are during your lifetime.
An irrevocable trust means that the trust is not flexible or changeable. In fact, this type of trust requires a court order or beneficiary approval to change any aspect of the trust. Once your assets become part of an irrevocable trust, you can no longer access them freely. Therefore, any edits or changes require an agreement signed by a judge or by the trustee and each of the beneficiaries.
These trusts aren’t as popular due to their lack of flexibility. Most often, very wealthy people use them to reduce costly estate taxes. Once you transfer assets to the trust, they are no longer part of the taxable estate.
A living or revocable trust can get a loan or mortgage from a bank, credit union, or other organizations that provide loans to entities. However, a trust can only obtain a loan or mortgage this way if the original trustee is still alive. Traditional lenders, such as banks and credit unions, will not give loans or mortgages to irrevocable trusts. Therefore, before a loan is given, the lenders require moving the trust to a revocable trust.
Pros and Cons
As with many situations, you need to weigh the pros and cons of gaining a loan or getting a trust mortgage. Some of the advantages and disadvantages are listed below.
- You can pay trust expenses. Generally, when the original trustee dies, there are expenses left to pay. These expenses can include medical bills, mortgages, and legal fees. Unfortunately, items bequeathed to other heirs may require immediate processing. If there are not enough liquid assets to take care of these financial obligations, a trust loan or a hard real estate loan can help provide money immediately to pay these obligations as soon as possible. Keep in mind that a hard money loan interest rate is generally higher than other interest rates.
- You can buy out other heirs. If the trust assets include a home, having more than one heir can make it difficult to make a decision on what to do with that home. One may want to sell, and one may want to live in the home. This difference in opinion can create a very stressful situation. Fortunately, a trust mortgage can accommodate the goals of both parties.
- You can avoid reassessments for property tax. A property that stays in one family for many years has a lower yearly increase in property taxes. When that property sells or goes to another family, the taxes can increase dramatically. Borrowing against the trust avoids person-to-person transfers and the accompanying increase in property taxes.
- You can ready the home to rent or sell. If all the heirs agree to sell or rent the home, you can use a trust loan to update the property or make any repairs required to make the home ready for rent or sale. This keeps the expenses from coming directly out of the heirs’ personal funds.
- Loans cost money. Loans, no matter the type, have interest rates and fees to arrange them. Ask questions of the lender to ensure you understand what is involved over the entire course of the loan. You don’t want to be surprised by unknown fees and have to pay for things you hadn’t anticipated. There are also legal expenses involved, so make sure you weigh all the costs against the benefits of the loan.
- There are always risks to consider. Be certain you think of and account for any risks that may arise with the loan or mortgage. Create a plan that looks at all the risks and has mitigating actions to reduce that risk or to find a way to pay if things go wrong.
Buy a House Through a Trust
Buying a house through a trust is a good option because it protects the property owner’s identity, allows multiple people to buy a property together without being taxed, and helps with estate planning.
Getting a mortgage with a trust fund is generally a short-term loan and is used to help make the distribution of money and assets equal among all the beneficiaries. These are usually amortization loans.
Frequently Asked Questions on Trusts
Many people have questions when it comes to fully understand how a trust works. Always ensure you understand how the trust works before making any moves. Ideally, ask for legal advice before making any decisions that affect the trust.
Can a trust lend money?
Before making any decisions about lending money to one beneficiary, make sure you are not favoring one over another. Trustees are allowed to make loans to beneficiaries of the trust but should always make sure the terms of the trust allow this process. This process allows you to become a hard money lender when the beneficiaries need money quickly to take care of expenses from the loss of the original trustee.
Can a trust get a mortgage?
A trust can get a mortgage if the trust is from a revocable trust and if the mortgage is being sought from a traditional lender. However, it’s a good idea to make sure all beneficiaries are in sync with how the loan will impact their inheritances.
Can a trust buy a house?
You can buy a home or property with a trust. This means you don’t own the home but rather the trust does. However, as the trustee, you will have significant control over what happens to the property in the event of your death.
Why would I want to borrow against a trust?
Borrowing against a trust will help you pay the fees and other outstanding bills that may still be owed by the original trustee. This can also help you settle funds that are owed to other heirs as well. It makes it easier to handle the financial part of being a trustee instead of it coming directly from your pocket.
What is a real estate lender?
A lender in real estate is someone who loans the money from a financial institution.
Being a trustee is not an easy job when there are multiple heirs and complex situations to deal with. Being knowledgeable about what kind of loans and mortgages you can acquire through a trust can help alleviate the financial obligations and stress that come with being a trustee. Source Capital can help you make all of the decisions you need to make as a trustee. Our experts can help you make the best decisions when it comes to getting a trust loan or trust mortgage.