How trustees and professional fiduciaries can turn the untapped equity in
trust owned realty into cash
What financing options are available for Trustees and Professional
Fiduciaries?
Non-natural person borrowers, usually fiduciaries in these cases are by definition non-conforming borrowers.
This is important to a borrower because, since the lender has no recourse
beyond the security (real estate) for such a loan, traditional mortgage sources
such as Fannie Mae and other lending channel will not buy these loans. These
borrowers only fit the non-conventional equity lender guidelines.
Trustees and Professional Fiduciaries can obtain equity-based mortgages for
up to 50-65% of the property value, per lender’s appraiser. This depends on
the type and quality of the property and the complexity of the file. Interest
rate premiums for first mortgages are typically 2.5-4% above the equivalent
30 year fixed rate for a conventional loan for a fully qualified, “A”
paper borrower. Mortgage terms available are usually shorter than for conventional
loans: 10-15 years on average. Shorter terms are not uncommon.
Lenders will require that the subject property be in insurable condition, since
the mortgage is primarily qualified by the soundness of the security (the property’s
equity).
So, what can you do with mortgage financing? Here are just a few examples:
- Pay attorney fees
- Pay for elderly care or living expense
- Arrange a buy-out by other heirs
- Resolve dispute “work-outs”
- Provide quick funds for emergencies
- Pay Medi-Cal and other creditors
- Stop foreclosure
- Pay delinquent taxes
- Money for repairs
- Pay settlements and fund other legal actions
Loans to Trustees and Professional Fiduciaries may take as few as 10-15 working
days to close if you have full court powers and there are no objections to your
borrowing. This may take from as few as several days to several weeks to accomplish.
What must the attorney need to do to obtain financing for client?
- Review trust for “Power to Encumber” or evidence of statutory
powers. - Power to borrow not sufficient (does not pledge realty asset as security)
- If no Power, requires Court Order to Borrow
- If Power present, need Death Cert. and/or Trust Transfer documents
- If Successor Trustee, need copy of entire Trust Agreement & recent Trustee’s
Certification of Trust Status (to obtain title insurance)
Frequently Asked Questions:
Q: What if a lender’s borrower pre-qualification letter doesn’t specify
the vesting?
A: Don’t be surprised if, at the last minute, the lender requires the property
to be transferred and vested in the name of the borrower personally. Demand
a written statement that clarifies this matter if the loan is to be made to
an estate or trust.
Q: What if available financing falls short of giving all parties cash?
A: An alternative to distributing cash could be a promissory note or other non-cash
asset. Poor condition of subject property may restrict loan limits to third
parties buyers, too.
Q: I’m not sure how to best structure this transaction. Any suggestions?
A: Yes, help is available. If your lender is experienced with estate and trust
financing, they will have sample petitions and other forms, or provide this
service at additional cost.
Putting equity to work in this way is much more time and cost effective
than selling.