When a homeowner passes away, the inheritance of their property is usually determined through a will or probate process. But what happens when there’s still an outstanding mortgage on the home? Do family members inherit the responsibility for this debt? And what happens to the heirs and surviving family members who continue living in the home?
Understanding how mortgage debt is handled after death is important for homeowners and their heirs. Below, we’ll break down what typically happens with a mortgage when a borrower dies and offer insights on how to prepare for these situations.
What Happens to a Mortgage When a Borrower Dies?
After someone passes away, their estate is generally used to pay off any outstanding debts before assets are transferred to heirs. However, mortgages operate a little differently.
Unless a person is a co-borrower or co-signer on the loan, no one else is legally obligated to continue making the mortgage payments. But if someone inherits the property and wants to keep the home, they may be able to take over the mortgage. In most cases, heirs continue making the payments while they decide whether to sell the property or retain ownership.
If no one takes over the mortgage, the lender will eventually begin the foreclosure process.
Inheriting a Home with a Mortgage
When property ownership changes hands, a “due-on-sale” clause is often triggered, which requires the remaining mortgage balance to be paid immediately. Fortunately, there are laws that allow heirs to inherit property without invoking this clause.
If you inherit a loved one’s home, you may assume their mortgage and continue making payments without paying off the entire balance at once. Heirs can typically keep the loan current by continuing to make payments, even before officially assuming the title of the home.
The only exception is when a co-signer is involved. Co-signers remain responsible for the mortgage even if they do not inherit the property itself.
How to Get Mortgage Information After Inheriting a Home
If you’ve inherited a home with a mortgage, your first step is to contact the loan servicer. They’ll require proof of death and documents showing that you are the rightful heir.
The loan servicer will then provide details on how to continue making payments and explain your options for assuming the loan.
Next Steps After Inheriting a Home
Once you’ve contacted the mortgage servicer, you’ll need to decide what to do with the property inheritance. If there are multiple heirs of the inheritance or you’re not the executor, this can get tricky. When multiple people are involved, it’s important to come to an agreement about how to proceed with the home.
Let’s explore the more straightforward scenarios, such as when an adult child or surviving spouse inherits a house. In these cases, the next steps are usually more manageable. If things are more complicated, it may be best to consult with a lawyer.
Can I Sell an Inherited House with a Mortgage?
Yes, selling an inherited home to pay off the mortgage is one option. Any remaining proceeds from the sale can be divided among heirs according to the will or state law.
However, if you wish to keep the house, you can work with the loan servicer to have the mortgage transferred into your name. If the current mortgage payments are unaffordable, consider loss mitigation options, such as a loan modification, to make payments more manageable.
If the inherited home had a reverse mortgage, things work a bit differently. With a reverse mortgage, the full loan balance becomes due upon the borrower’s death. If the heir wants to keep the home, they’ll need to repay the loan. Otherwise, they can sell the property or surrender it to the reverse mortgage servicer to satisfy the debt.
Can I Refinance an Inherited Home?
If you’re looking to keep the property but need additional funds, refinancing can be a good option. Refinancing allows you to free up cash, which can help you buy out other heirs and take sole ownership of the home.
Just be aware that once you refinance, you’ll be solely responsible for making all future mortgage payments.
Planning Ahead: Preventing Mortgage Issues After Death
The time following a loved one passing away is emotionally challenging, and dealing with the complexities of an inherited home can add stress. Planning ahead can prevent issues with your mortgage after death and ensure that your heirs are not left with financial burdens.
Mortgage Protection Insurance
Mortgage protection insurance (MPI), also known as mortgage life insurance, is one way to prevent mortgage issues after death. Instead of leaving mortgage payments for heirs to handle, MPI pays off some or all of the remaining loan balance directly to the lender.
However, there are drawbacks. Many insurers require you to enroll in MPI shortly after purchasing a home, and the premiums can be costly. Some homeowners may prefer a traditional life insurance policy, which allows heirs to decide how to use the funds.
Estate Planning
Creating a will or trust is one of the best ways to ensure your property is handled according to your wishes. Estate planning allows you to specify who will inherit your home and how it will be passed down.
For homeowners in non-traditional relationships or those with loved ones outside the family, having a will is especially important. Without a will, state laws will determine inheritance, which may leave non-relatives without any rights to the property.
If you’re planning your estate, refinancing your home now could also be beneficial. A lower interest rate can reduce future mortgage payments for your heirs.
The Bottom Line
Preparing for the future, especially after a loved one passes away, isn’t easy. However, by planning ahead, you can ensure that your mortgage is taken care of, and your heirs are provided an inheritance. Consult with an estate planner or financial advisor to determine which options best suit your situation.
If you’re considering refinancing as part of your estate plan or have recently inherited a home, we’re here to help. Get started today and explore your mortgage options to secure your financial future.
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