I am often asked how I come up with new topics to write about every week. Now after writing this newsletter for 11 years, it sometimes is more difficult than others. I am thankful that I have great clients that always ask really good questions. In fact, as soon as this question was asked, I knew it would be the subject of today’s newsletter article.
My client who is currently refinancing his home asked a very sincere question that I will also expand upon. He asked “What happens if my wife and I somehow die together during the term of the mortgage?” To expand, and give you some context to the basis of the question, what he really is asking is “What happens when the person(s) that signed the Promissory Note are no longer living?” This question is not an estate question regarding wills and trusts. His concern, and the concern of many, centers around the lender’s ability to call the note due if you die. Additionally, many have asked what happens if I transfer the property into a trust or LLC? You will be surprised that all these questions are directly related.
The core of the question asked, and how it relates to transfers of title are “What will the lender do if borrower no longer owns the property?”
There are actually two answers to clear up this issue. One is the legal one, the other is the practical (realistic) one.
The legal answer:
Under the terms of both your Note and Mortgage, if you no longer own your property, the lender has the right to call due the entire remaining balance owed. That balance is owed within 30 days of that event. If you die, you no longer own your property, your estate does. This is technically no different than transferring the property out of your name and into your trust or in an LLC at some point after you signed your Note and Mortgage.
If you want to transfer your property into your trust or into an LLC, the way to avoid any potential future issue is to get your lender’s approval first.
The portion emphasized above is really important. Because the lender has the right to call your note due, they are also not heartless zombies. They realize people die, estates are settled, and they will get their money. As long as the payments due are being made, you will have time to settle an estate without the worry of getting a notice demanding full payment.
The practical answer:
Lenders are not scouring the obituary notices across the country waiting for you to die in order to call your note due. In all practicality, when you die, they have no idea you are dead. So long as the lender keeps receiving their payment each month, the likelihood of them knowing anything happened is slim. I have had clients where just the husband was the only party on the note and mortgage. The husband had passed away for several years – the lender never knew.
The same is true for title searches. If you transfer title from your name into your trust, or move the property into an LLC, the lender does not get notified of the changes. If you transfer your property without prior approval from your lender, it is very unlikely they will ever know. But because the terms of your Note and Mortgage required you to get prior approval before a change in title, the lender has the right to unravel anything you have done, if they do find out and don’t approve of what you have done.
It is important to note that lenders are not naive. They are aware that many of their current note holders have transferred their property out of their names. The practical fact is this: If you are making your payments on time, it is cost prohibitive to go after you. Forcing a performing note into a possible foreclosure is never in the lender’s best interest. They would rather let sleeping dogs lie.
In fact, it is a regular practice in the mortgage industry when refinancing a property currently held in a trust of LLC, to have a set of deeds drawn up to first remove the property from that entity, record the new mortgage into the individual’s names, then convey the property back into the trust or LLC. This is all done with the full knowledge of the lender.
The best advice I can give is if you have already set up your trust or LLC and are contemplating buying or refinancing, ask your lender about closing it in the name of that entity. If that isn’t possible, being the trust or entity doesn’t exist yet, don’t freak out about transferring it later. The golden rule is that so long as you aren’t transferring to deceive or try and get away with something, you will be okay – so long as you keep making the payments.