Fannie Mae recently updated its Selling Guide FAQ to address whether a mortgage secured by property titled in a life estate is eligible for delivery. The question asked was, “If the property is held in a life estate, what is required for the loan to be eligible for delivery to Fannie Mae?” Fannie Mae responded:
“When title to the subject property is held as a life estate with a remainder interest, this is a form of joint ownership where both parties have an interest in the property (the holder of the life estate has the right of current possession of the property, while the remainder holder has the right of future possession of the property upon death of the holder of the life estate). The holders of both interests must grant their interests in the property by signing the security instrument for the loan to be eligible for delivery to Fannie Mae. At least one of these persons must be the borrower on the mortgage note.”
In other words, a lender can deliver a loan to Fannie Mae when the property is vested in a life estate if: (i) either the life tenant or the remainder holder is a borrower and (ii) both the life tenant and remainder holder sign the security instrument.
However, because of Texas’ unique home equity lending laws, a remainder holder generally cannot pledge their remainder interest to secure a Texas Home Equity 50(a)(6) Loan – because a remainder interest generally doesn’t qualify as a homestead interest. Therefore, closing a home equity loan on property in a life estate is generally not legally feasible, and would not be deliverable to Fannie Mae.
Why does the Remainder Holder Have to Sign the Security Instrument?
Although the life estate grants the life tenant the right to occupy and use the property during their (or another’s) lifetime, the life tenant generally may not mortgage or sell the property without the remainder holder’s consent. Therefore, in order to secure the mortgage lien against the entire fee simple property interest, both the life tenant and the remainder holder must sign the security instrument.
So-called “Deeds with an Enhanced Life Estate” (also known as “Lady Bird Deeds” in some states) purport to allow the life tenant to act alone when selling or encumbering the subject property, thus removing the necessity of the remainder holder’s joinder during the life tenant’s lifetime. Such enhanced life estates are often used to preserve Medicaid eligibility for the life tenant.
Should your borrower’s property be held in such an enhanced life estate, we nevertheless recommend the remainder holder sign the security instrument both to insure the lien is perfected and to meet Fannie Mae requirements. Because there is no statutory form of deed for an enhanced life estate, we have seen such deeds that do not, in fact, grant the life tenant the sole authority to mortgage the property without the remainder holder.
If the remainder holder is unable or unwilling to sign, we recommend the lender provide us with a copy of the deed for review to determine if the life tenant may act alone to mortgage the property. We would also recommend the lender verify with its investor that the remainder holder’s joinder is not required.
Why Can’t a Remainder Holder Pledge Their Remainder Interest on a Texas Home Equity Loan?
A Texas home equity loan cannot close when the property is vested in a life estate because the remainder holder does not hold the requisite homestead interest necessary to sign the note or security instrument.
A 50(a)(6) loan cannot be secured by any additional real or personal property other than the homestead. Tex. Const. art. XVI Sec. 50(a)(6)(H). The Texas Administrative Code expressly states that “a guarantor or surety is not permitted. A guaranty or surety is considered additional property for purposes of Section 50(a)(6)(H).” 7 TAC § 153.8 (2).
A homestead interest can arise only in an individual who has a present possessory interest in the subject property (e.g., the life tenant). Laster v. First Huntsville Properties Co., 826 S.W.2d 125, 131 (Tex. 1991). An individual, such as the remainder holder, who holds only a future interest in the property with no present right to possession is not entitled to a homestead interest. Id. Therefore, generally a remainder holder cannot have a homestead interest in the subject property necessary to grant a valid 50(a)(6) lien. The joinder of the remainder holder as required by Fannie Mae would be considered a guaranty or surety and subsequently prohibited additional collateral under Texas home equity law.
In order to close a 50(a)(6) loan where the property is held in a life estate, a deed conveying the property out of the life estate and into fee simple title would be necessary. But before requesting such deed, we recommend the lender suggest that the borrowers speak to their estate planning attorney to ensure such deed would not negatively impact their larger estate planning goals.
If you have further questions regarding life estates and the contents of this alert, please reach out to Andrew Duane, or any of our firm’s attorneys or representatives at: https://www.mortgagelaw.com/people.
