Inheriting a House with a Mortgage
You may have inherited your family home recently through the death of your parent. Perhaps a favorite aunt or uncle left you their property because they had no children of their own. Now that you have become the heir to this home, you may wonder what you can do with it. This isn’t always an easy question to answer, especially if there is a mortgage attached to the property.
Assets, Debt and Death
When a person dies, much of the time their assets must go through probate. Probate is the legal process for distributing assets according to the will left by the deceased person. However, debts the person had must be paid before the assets can be distributed.
If the person had a small estate and significant debts, the assets may need to be sold to pay off the creditors. If they had enough liquid assets, such as bank accounts, the other assets may not need to be touched for debt payment.
Once the debts have been paid, the remaining assets are left to the heirs. When a house is involved, it may be sold to divide the profit between the heirs, or the will may have stipulated that one heir gets the house. The title would be transferred to the name of the heir chosen.
When a House Has a Mortgage
How the transfer of a house to an heir is handled changes when there is a mortgage on the property. The lender must be considered, and the wording of the original contract may dictate what happens next. It will also depend on whether the house had a traditional loan or a reverse mortgage on the property.
You generally have a few options when you inherit a house with a mortgage. You can sell it to pay off the mortgage and keep the rest of the money as your inheritance. You can keep the home and use other assets to pay off the mortgage. Another option is to take over the loan and become responsible for the mortgage payments with the house deed and loan in your name. You can also make payments on the loan as it is currently. There is a rule with the Consumer Financial Protection Bureau that allows lenders to name an heir as the borrower without going through the normal loan approval process to ensure ability to repay the loan.
The situation is a little different if the owner had a reverse mortgage on the property. In this case, they wouldn’t have had to pay on the principal of the loan until they sold or moved out. At that point, the balance would be due.
You will need to pay off the reverse mortgage if you want to keep the property. You can also sell it to pay off the loan and keep any remaining proceeds. You also have the option to allow it to go in foreclosure, at which point it will go to the lender. You aren’t responsible for the home or the debt in this case.
Assuming the Mortgage
When you inherit a house, one of the first things to do is to find out if there is outstanding debt on the property and what kind it is – reverse or traditional mortgage. You’ll also want to find out the home’s value. These two pieces of information will help you decide what you want and can do with the property.
You can talk to a real estate agent or an appraiser to find out market value of the property in it’s current state. You may also want to ask about value if some minor updates were made. Sometimes, a few changes can improve the value enough to make it worth the extra effort.
As you’re going through this process, you will need to find out what utilities go to the property and either pay or cancel them. Most likely, you’ll cancel unnecessary bills, such as cable, internet or phone. On the other hand, you’ll want to keep electricity and heat or air conditioning going, especially if you plan to show the house to sell or have it updated.
Consider Other Heirs
If you inherited the house with siblings or other family members, you’ll want to sit down and have a talk with them about their plans. They may want to sell, which means you’ll either need to buy them out or sell your part. If they want to keep the place, you will need to have a discussion of what it will look like for all of you to own the property. Maybe one person wants to live in the house while another sibling may want to use it as a rental property for added income.
Inheriting a house with others often makes for a complicated process. You will need to agree on how things are handled or argue it out in court. This is a process that can take months, and the house must be maintained during the time.
Due on Sale Clause
Loans have often included the phrase due on sale in the contract when a person buys a property and gets a mortgage. This clause just means that when you sell the house to someone else, the mortgage balance is due immediately before the title can be transferred. The new owner will need to get their own financing and aren’t able to take over the current loan.
In 1982, a federal law was enacted to ensure the clause didn’t impact heirs on property received after a person died. Before that, some lenders interpreted the clause to mean the loan balance was due immediately when the owner died.
With the new law in place, the heir could inherit the property and take on the loan. However, this is a complex law that doesn’t apply in all situations. To know if the law applies in a particular situation, you should speak with an attorney.
How to Finance an Inherited Home
If you don’t qualify for the protection of the federal law on a home you inherited, you will need to get financing on your own. If you have good credit and income to repay the loan, you can get approved to cover the cost of paying off the balance of the current mortgage. You may also try for a co-signer on the loan if you can’t get it on your own.
The other option is to sell the home and take the proceeds to buy something you can afford. If the home is large and more than you can handle, selling is often the best choice. When determining how much upkeep you can expect, you’ll need to think about any renovations that might be necessary as well as yard upkeep, roof and exterior maintenance, replacing or repairing appliances and other systems in the house, and various little repair issues that homeowners need to deal with. The larger the home, the more all these expenses are going to cost. Don’t forget about taxes on the house, especially if it’s large or in a nice neighborhood. You’ll want to consider how much it will cost to heat and cool the house as well. Insurance is another expense you will have to deal with. Once you add everything up, you will have to decide if you have the finances to handle these costs along with the mortgage.
Other Considerations When You Inherit a House
An important area to consider if you inherit real estate is the taxes you must pay if you sell. Called a capital gains tax, you pay on the amount over the value of the house when you inherited it. If you sell the property within the first year or as state law dictates, you may not have to pay the tax. But if you decide to keep the house and sell it in three or four years, you will be responsible for the tax on increase in value during that time.
When you inherited the house from your deceased loved one, it’s pretty likely that it came with a lot of stuff inside. Furniture, artwork, personal belongings all must be sorted through and either divided between the heirs or sold with the profits being divided. You might discover that the value of those items are enough to pay off the balance of the mortgage if there were any antiques or rare items.
Selling the Property
If you decide to sell the house, you will need to determine if you want to sell it yourself or hire a real estate agent. You must also make the decision if you’re selling as-is or doing some remodeling first. It’s a good idea to talk with a professional about how much work needs to be done and what it will cost. You can compare that amount with the expected selling price now and with the updates.
The money from the sale of the property will go to pay off the balance of the mortgage with the rest of the funds being divided up as specified in the will. Once you have completed this job, you are free from the home and can move on with your life.