So you’ve inherited a house with a mortgage and wonder what’s next.
When a homeowner dies before the mortgage is paid off, the debt survives her.
It must be paid off by the estate, assumed by another person, refinanced or paid off by the person inheriting it.
The details can be complex.
But, they don’t have to be.
Check them out below.
Assets, Debt and Death
When someone you love dies, the death can leave a huge hole in your life.
But life goes on and the deceased person’s assets and debts don’t disappear with them.
If your loved one owned a home and owed a mortgage debt, you may inherit one or both.
In any event, both must be addressed in probate by the executor and the court.
Probate is a court-supervised process to deal with the estates of deceased persons.
Estates include all assets and all debts of the person, and the first job of the person in charge, termed the executor, is to find the assets and identify the debts of the deceased.
Debts must be paid out of estate assets before the remaining assets are transferred to the beneficiaries named in the will or, if the deceased died without a will, to next of kin according to state intestate law.
Inherited a House with a Mortgage
If the deceased left a house with a mortgage and you inherit the house, you may or may not inherit the mortgage too.
If the deceased had lots of liquid assets, like cash or stocks, she may have specified in her will that you inherit the house free and clear of the mortgage.
In this case, the executor must use liquid assets to pay off the mortgage, then transfer the property deed to you free of liens and encumbrances.
Sometimes the deceased has no other significant assets than the mortgaged house.
Or she specifies that you take it with the mortgage.
In either of these two circumstances, you take title to the house and must deal with the mortgage debt.
If the mortgage debt is in an amount that exceeds the value of the property, you may want to consider opting out of the bequest.
Ask the executor for the proper forms.
Loans often contain language stating that if property ownership is conveyed to a new owner, the loan balance must be immediately repaid.
This is called a due-on-sale clause.
Generally, these clauses are intended to apply when you sell a house to a new owner.
The clause usually means that the loan cannot be assumed and the new owner must get new financing and pay off the old loan.
Some lenders interpret the due-on-sale clause to apply when the debtor dies and the property passed by inheritance.
If the deceased’s mortgage loan has this clause, you may receive a notice of intent to foreclose when you inherit the property.
Speak with your attorney because there are inherited property loopholes for the due on sale clause.
Laws Around Assuming the Mortgage Loan
In 1982, a federal law addressed this issue.
The federal Garn-St. Germain Depository Institutions Act was enacted to protect a relative who has inherited a house with a mortgage.
The law provides that despite a due-on-sale clause in a mortgage.
The lender must allow an inheriting relative to assume the loan in certain cases.
This is not a simple law to understand and the details of application vary by state.
You’ll probably want to see an attorney if you wish to assume a loan under this law.
Another recent rule may assist you in assuming the loan as well.
In 2018, the Consumer Financial Protection Bureau enacted a rule protecting family members who inherit a home with a mortgage.
The loan servicers are required to identify and work with successors.
Successors get the same federal protections that the original borrower had.
This includes the right to be fully informed about the account.
It also includes the right to apply for a loan modification to the same extent the original borrower could.
Assuming the Loan
Ideally, the decedent’s will addresses the problem of the mortgage.
It may direct that the executor of the estate should pay off the loan with other assets, liquidating them if necessary.
In this case, you’d receive the property free and clear.
Otherwise, if you want to keep the home, you must make the mortgage payments yourself.
The lender might require you to officially assume the loan by personally taking responsibility for it.
But it can’t deny you the right to keep making the payments.
It can’t force you to refinance the mortgage into one in your own name.
Other Options When Inheriting A Home With a Mortgage
If you can’t assume the underlying loan, you will have to consider other options.
These include obtaining alternative financing on your own, if your credit and income are good enough, or with a co-signer.
You might also consider selling the property, paying off the loan and buying something more affordable.
At Breyer Home Buyers, we work with executors to purchase inherited homes.
You don’t have to clean the property, remove belongings, make repairs, or anything.
Just fill out the form below to set up an appointment.
You can just walk away from the property with cash zero headaches.
This is a time to focus on family, not preparing a house to be sold.