Can a HECM be held in the name of a living trust?

HUD will insure HECMs on property held in the name of an inter vivos trust, also known as a living trust. In general, a living trust is created during the lifetime of a person (as opposed to a testamentary trust which is created by the person's will after his/her death). A living trust is created when the owner of property conveys his/her property to a trust for his or her own benefit or for that of a third party (the beneficiaries). The trust holds legal title and the beneficiary holds equitable title. The person may name him/herself as the beneficiary. The trustee is under a fiduciary responsibility to hold and manage the trust assets for the beneficiary. The trustee's responsibilities are set out in a trust agreement. Property held in a land trust is eligible for a HECM if the requirements for a living trust are met. Property held in a living trust is eligible for a HECM if the trust, and the borrowers, meet the following requirements:

A.Conditions for Origination in the Name of a Living Trust
1) All beneficiaries of the trust must be eligible HECM borrowers at the time of origination and until the mortgage is released (i.e. borrower/beneficiary must occupy the property as a principal residence and new beneficiaries may not be added to the trust). Contingent beneficiaries, that receive no benefit from the trust nor have any control over the trust assets until the beneficiary is deceased, need not be eligible HECM borrowers.
2) The trustee must sign the mortgage, and the mortgage must be signed by each borrower/beneficiary if necessary to create a valid first mortgage. The borrower/beneficiary must sign the Note and Loan Agreement. The lender may require the signature of the trustee on the Note or the signature of the borrower/beneficiary on the mortgage.
3) The trust shall not be a party to the Loan Agreement. The borrower/beneficiary may issue instructions to the lender to permit the trustee to exercise one or more rights stated in the Loan Agreement on behalf of the beneficiary; i.e. the right to receive loan advances or to request changes in the payment plan.
4) The lender must be satisfied that the trust is valid and enforceable, that it provides the lender with a reasonable means to assure that it is notified of any subsequent change of occupancy or transfer of beneficial interest, and ensures that each borrower/beneficiary has the legal right to occupy the property for the remainder of his or her life.

B.Transfer of the Property Into or From a Trust
1) The borrower under an insured HECM may transfer the property to a living trust without causing the mortgage to become due and payable if the lender finds that the trust meets all requirements that would have applied if the trust owned the property at closing. The lender may require the trust to formally assume the borrower's obligation to repay the debt as stated in the Note if considered advisable to avoid difficulty in enforcement of the Note and mortgage.
2) If the trust is terminated, or the property is otherwise transferred from an eligible trust holding the property, the mortgage will not become due and payable, provided that one or more of the original borrowers who signed the Note and Loan Agreement continue to occupy the property as a principal residence and continue to retain title to the property in fee simple or on a leasehold interest as set forth in 24 CFR Section 206.45(a).

Handbook 4235.1 REV-1, Section 4-5

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.

Topic Number: KA-04897