In California home loans are secured by deeds of trusts. A deed of trust (sometimes called a trust deed as the terms are interchangeable) is a security instrument and functions for all practical purposes just like a mortgage although in California they usually contain a power of sale reposing in the trustee (a third party) in the event of default. With a deed of trust a third party, known as a trustee, has a temporary hold on the title. If the borrower defaults on the loan, the trustee may sell the property and pay off the lender.
In 1982 Congress passed the Garn-St. Germain Depository Institutions Act of 1982, (the “Garn-St. Germain Act”) which determines when a deed of trust can and cannot be assumed by a new owner of the property. If you know your legal rights under this law, the lender won’t be able to push you around.
Suppose an elderly father passes away and leaves his home to his daughter with a recorded deed of trust. Can the daughter take over its low-interest-rate on the underlying debt or will the daughter have to pay it off with a new higher cost home loan?
What if a relative passes away and leaves his or her home to you with a recorded deed of trust and you intend to occupy the residence?
What if you own investment property with a friend in joint tenancy with right of survivorship and the friend dies and the underlying property has a lien secured by a deed of trust? Can the lender insist you pay off the low interest rate indebtedness?
Even if the deeds of trust in the three examples above contain due on sale clauses, under the Garn-St. Germain Act the lenders cannot force a payoff of the indebtedness. Yet many lenders try to mislead borrowers into believing an existing deed of trust cannot be assumed by the new property owner when title is transferred. An existing advantageous deed of trust can often be preserved and loan payoff avoided if the acquiring owner knows the law.
ACQUIRING CALIFORNIA REAL ESTATE WITH A RECORDED DEED OF TRUST BY INHERITANCE
Inheriting real property in California such as a home can be a sometimes-uncertain time for its inheritors. And inheriting properties with preexisting deeds of trust on them can be an even more uncertain experience for people inheriting them.
There’s certainly no law that prohibits inheritance of any piece of property or real estate, secured by real property, or not. One of the rights U.S. citizens and California residents have is to bequeath their property to others. The right of inheritance applies to all property, including even properties with deeds of trust attached to them. For those inheriting such a property, though, a number of questions and concerns invariably pop up, including whether the underlying debt can be assumed.
Other than home exceptions for relatives and spouses noted in the Garn-St. Germain Act almost no one else can assume an inherited property’s deed of trust. The reason non-related people inheriting properties can’t just assume their deeds of trust relates to those deeds of trusts’ due-on-sale clauses. Other than home exceptions for relatives and spouses property inheritors generally need to make arrangements with the lenders to pay off those deeds of trust. Persons inheriting secured properties sometimes sell the properties or instruct the properties’ lenders to just foreclose. No one can be forced to take possession of anything bequeathed through inheritance.
What you decide to do depends on many factors. Remember, you aren’t legally obligated to accept assets you inherit. If you inherit a home with a deed of trust you cannot or will not pay, you can simply walk away and let the bank foreclose on the home. Legally, you’re not on the hook for the payment, and your credit will remain unaffected.
ASSUME THE DEED OF TRUST?
Generally, deeds of trust feature due-on-sale clauses that prevent assumptions or inheritance. However, there are several instances in which an inherited property’s existing deed of trust and underlying loan can be inherited, or assumed, by its inheritors. The Garn-St. Germain Act carved out exceptions to secured loan barriers against assumption or inheritance of deeds of trust.
Under The Garn-St. Germain Act, if one joint tenant co-owner dies, the secured lender cannot enforce the due on sale clause to demand the surviving joint tenant pay off the indebtedness. This applies whether or not the joint tenants were relatives.
In California, if you own property as “joint tenant” with any person (spouse, relative, friend, business partner, life partner), upon the death of the joint tenant you get full ownership of the property by operation of law (i.e.: the property does not pass through the person’s Will, but instead passes directly to you as the joint owner), AND the underlying indebtedness continues, with no alteration to its terms. Beware of attempts by unscrupulous lenders trying to charge assumption fees in surviving joint tenant cases. There have been cases where companies have tried to foreclose deeds of trust even when joint tenants are involved.
Many spouses take out secured loans against real property in their joint names. If you hold title to the home jointly in a deed with rights of survivorship, your spouse’s half of the home passed to you automatically at death. If this is the case and your spouse dies, you are still a borrower on the underlying secured loan and you are responsible for continuing to make the payments. However, federal law prohibits the lender from calling the underlying loan due because one spouse has passed away. Although you are now responsible for the underlying loan on your own, you own the entire house.
Surviving spouses who are left homes by deceased spouses with secured loans have the right to pay on their deceased spouses’ loans without fear of foreclosure. Usually, lenders are more concerned with receiving payments than about going through with a foreclosure. Generally speaking, lenders are aware of the regulations contained within the Garn-St. Germain Act and due-on-sale clause preemption. Surviving spouses still must notify lenders of their intent to take over their deceased spouses’ loan as soon as possible.
When a relative inherits and occupies a residence, the Garn-St. Germain Act bars the lender from enforcing the due-on-sale clause. In other words, relatives inheriting a home can inherit or assume its secured loan as long as they intend to live in it. However, the inheritance or assumption exception for relatives of deceased homeowners applies strictly to homes only.
Remember, if all regular payments are made and the relative lives in the inherited home, the lender must permit loan assumption. Some lenders will try to coerce the heir into paying an unnecessary assumption fee that may not be necessary.
NOTIFY THE LENDER
Spouses and relatives allowed to inherit secured loans without violating due-on-sale clauses must notify lenders of their intentions. For example, a niece inheriting a deceased aunt’s home and assuming its underlying debt should quickly notify the lender of her intent to assume. The Garn-St. Germain Act even allows relatives inheriting loan secured homes to keep those homes’ loans in the deceased borrowers’ names.
ASSUMING A LOAN THAT IS IN DEFAULT
If a borrower is behind in payments and facing foreclosure at the time of the transfer, then the person who is assuming the underlying loan will have to cure the default to stop the foreclosure. Usually, the new owner will either pay this amount in full or come to an agreement with the lender to catch up on the past-due amounts in a repayment plan or as part of a loan modification under a program.
If you are trying to probate an estate or administer a trust after death, the process can be confusing. In the process you may not know what to do with real property that is inherited with a deed of trust. That is where I can be of help. I make a difficult and bewildering probate or trust administration process as simple as possible. If you wish to gain more information on California probate or trust administration procedures or if you need the general assistance of a Riverside County or San Bernardino County trust administration or probate lawyer, please contact me for a free consultation. I will spend time with you to answer your questions.
I assist clients in all Southern California counties, including Imperial County, Los Angeles County, San Bernardino County and San Diego County. You can reach me by phone at 760-989-4820, by email at [email protected] or through my online contact form.