Mortgages Life Estates and Title Insurance

By admin

So you want to make sure that your kids get the house after you’re gone, but you’re still living there.  One of the more common ways to make this happen is for you to have a lawyer prepare and record a Deed whereby you transfer the property to the kids, but retain a life estate for yourself.  The idea behind this is that as long as you’re alive, you get to live in the house, but when you die, the kids become immediate owners.  While alive, you are the ‘life tenant’ and your kids are the ‘remaindermen’.  Whether or not you can now make a mortgage and borrow money against the house depends upon what state you live in and whether or not the bank will allow it.

If you live in Maryland, then the deed creating your life tenancy must contain very specific language giving you the right to make that mortgage.  You would hold the title as life tenant “with powers”.  As a Title Company handling Maryland Title Insurance we recently had a transaction where the exact language in the deed read “with powers during her lifetime to sell, mortgage, lease, assign or otherwise dispose of the said lot of ground and premises or any thereof, without restriction, for the rest of her life;”.  In this instance, as long as the lender approved, the owner could make the mortgage by herself.   Ironically, just a few days earlier, we had a separate refinance file where the deed into the life tenant contained no such language.  The borrower could not make the mortgage unless her children (the remaindermen on the deed)  also signed the mortgage papers.

Not all states require specific language granting powers to a life tenant.  Pennsylvania, for instance, makes no such distinction.  In those states it’s entirely up to the lender whether it will allow you to make the mortgage by yourself.  Typically, though, a lender will not allow it and will either insist that your children sign the mortgage papers or have you do a new deed taking the children out of title and transferring the property back to you as full owner and not as life tenant.

You might wonder what difference it all makes to the lender since you’re the one promising to pay back the money.  Right, wrong, good or bad a lender makes every loan with an unspoken thought of what happens if the borrower eventually defaults and stops paying.  If that happens, they may have to foreclose on the house in order to recoup some of their losses.  If you were only a life tenant and the remaindermen (your kids) did not sign any mortgage papers, then the lender might not be full owner of the house after a sheriff sale.  Whether handling PA title insurance, MD title Insurance, NY Title Insurance or any other state for that matter we will run the title and advise the lender how the deed is held.  At that point though, each lender and each state has its own rules in regards to life tenants.

Transferring the house to your kids while retaining the right to live there until you die is a good way to ensure that the kids inherit your house without their having to go through the courts.  Just be aware, though, that if you want to borrow money against that house, the lender may not care about your desires and insist you change things.  It may become a question of ‘your money or your life’.  Estate, that is.