The scenario is all too common. A person dies unexpectedly, leaving their estate to beloved heirs only to have them also dealing with a mortgage on the house. The owner of the estate may have still been paying on the original mortgage, they may have taken out a second mortgage on the equity, or they may have gotten a reverse mortgage. Each of these situations is unique and presents challenges to the heirs and personal representative.
What Happens with the Mortgage When the Mortgage Owner Dies?
When the person with the property dies, the mortgage doesn’t go away. It still must be paid, but the details on how will depend on what the will states and what the heirs want to do with the property.
One thing is certain in this situation – you will need to go through probate in most cases. Probate is the legal process of filing the estate and will with the county court and paying off all debts before dispersing the estate to the heirs. Since mortgage is a debt, it must be resolved before the heirs can take over the property.
There are generally three options for a house with a mortgage when the person dies. It may be paid off by other assets in the estate, it may be changed into another person’s name through refinancing or it may be paid off by the person who inherits the home.
The personal representative is the person who handles the details of the estate as it goes through the probate process. This includes selling assets and paying the debts. However, they are required to follow the guidelines of a will if one exists and meet other legal obligations.
Selling Assets to Pay the Mortgage
The owner of the estate may have had enough liquid assets, such as money market accounts or certificates of deposit to pay off the mortgage. If the will stipulates that someone should inherit the house free and clear, the personal representative or executor will pay the mortgage with the other assets to allow the heir to receive the house.
If there are no liquid assets but enough other assets are available once they are sold to pay for the mortgage, this may be another option if it is allowed in the will.
Taking on Mortgage Debt as an Heir
If there aren’t enough assets to pay the mortgage, the heir may receive the house with the mortgage attached. This means they will get the title to the property, but they must assume the debt and make the mortgage payments to keep the property.
Some heirs don’t want this responsibility or can’t afford it even if they are given the house by their loved one. They aren’t required to take the house, but they must fill out the forms to get out of the bequest.
Requirements for the Loan
Lenders have often included phrasing in loan paperwork that says if the ownership of the property changes, the loan balance is due immediately. In other words, it is due on sale. This clause has been included in many loans. For the heir to get to keep the property, they would have to get their own financing. If they were unable to do so or unaware of the requirement, the lender could foreclose on the property and take it back. However, a federal law that went into effect in 1982 dealt with this problem.
The law was known as Garn-St. Germain Depository Institutions Act. It required lenders to allow heirs to take on the mortgage in specific cases. This is a complex law that would require the assistance of an attorney to handle because the details of the law can vary, depending on the state where the property is located.
When the Property is Tied to a Reverse Mortgage
Most mortgage works similarly when the property owner dies. It doesn’t matter whether they are government backed, like the FHA or USDA loans, or if they are conventional loans through a bank or mortgage company. However, reverse mortgages work a bit differently.
A reverse mortgage is designed for older people who want to pay off their mortgage and get the cash. The homeowner is allowed to live in the home and have access to cash from the equity in the home. They no longer have to pay the original mortgage payments as long as they pay insurance, taxes, and maintenance on the home. When they move out or die, the reverse mortgage is due, and the home must be sold to pay it. Any equity left after the sale becomes part of the inheritance.
If an heir wants to keep the home with a reverse mortgage, they must get it refinanced to a conventional loan or another government backed loan to pay it off. This is a viable option because a reverse mortgage is never more than the home’s value.
Inheriting an Out-of-Date Home with a Mortgage
In many cases, the home being inherited is older and out of date. To get it in shape, you might need to pay for some major renovations. It seems like a no-brainer to sell the house instead of being saddled with a mortgage and renovations. However, there is another side to consider in this scenario.
It can take months for a home to sell after a person dies. During this time, the mortgage payments continue and taxes accrue, eating away at your inheritance. Another option is to make some affordable updates to increase the home’s value while you wait for it to sell. Even just a few thousand dollars can mean a significant increase in the selling price of the property. You end up selling faster, which means less money going out for the mortgage. Plus, you will probably sell at a higher price for more money in the inheritance.
Inheriting a Home with More Upkeep
Perhaps you have inherited a home from your family and are in the process of probate right now. You are thinking about the taxes and insurance along with all the maintenance required to keep up the place. It may be more than you can handle, so you determine that selling is the best decision.
Before you go that route, think about another option. Instead of keeping the home to live in or selling it, you could use it as a long-term investment. You could turn it into a rental property where the tenants pay for the mortgage and maintenance. Once the mortgage is paid off, you would have additional income.
Inheriting a Home with Your Siblings
If you have brothers and sisters, inheriting a home is more complicated. If all of you inherit it equally, you will have to make a group decision about what to do with the property. You can sell it outright and divide the proceeds between you. One sibling can buy out the others or you may all keep it equally with one sibling living there and paying a reduced rent to the others.
Many times, not everyone will agree on what to do with the property. In this case, attorneys will likely be involved. They will advise you based on the law and your rights to the property.
What If You Aren’t the Heir and Want to Buy the Property?
What if one of the heirs wants to buy the house but it wasn’t given to them in the will? Even if they are an heir to other parts of the estate, they cannot automatically be given the estate. They can’t refinance the loan or assume the mortgage in most cases. Instead, they must purchase the house from the estate.
Inheriting a home with a mortgage comes with a lot of complications and decisions to be made. Time is of the essence because the mortgage payments must be made. However, you don’t want to make a hasty decision until you have considered all options and know the facts. It is important to discuss your situation with an estate attorney who can offer sound legal advice.