What happens to the mortgage when someone dies?

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If you do estate planning, you might wonder what happens to a mortgage when someone dies. Who is responsible for the real estate you leave behind and is there a way to make it easier for a loved one to take over your home when you are away? Whether you have an FHA, USDA, VA, or conventional loan, we’ve outlined what happens to your mortgage when you die.

Who is responsible for the mortgage after your death?

For legal reasons, everyone has an estate. An estate includes everything you own, including cars, clothes, furniture, bank accounts, retirement accounts, and real estate. A domain can be worth millions or next to nothing, but it still counts as a domain. If you die with a will or trust in place, the legal documents you have drawn up indicate who you want to inherit your estate (or part of your estate) after you leave.

If you are married and your spouse co-signed the mortgage, that surviving spouse becomes the sole owner after your death. If the house was titled in your name only, your heir or heirs inherit the property.

Does the estate have to repay the mortgage in full?

What happens to a mortgage when someone dies is a little different from other unpaid debts. Let’s say that when you die, you leave behind credit card debt and unsecured debt like a personal loan. The debt you leave behind is not forgiven, which means it will have to be repaid by your estate before the remaining funds are distributed to your beneficiaries. However, a mortgage company will not come after your estate to pay off the mortgage.

To be clear, the mortgage lender still expects to be paid for the property, but they give the heirs a chance to keep the house if that’s what they want to do.

Let’s say you’re single and want to leave the house to your daughter and her family. As long as you name her beneficiary, she will have the opportunity to make it hers.

What steps must an heir take to keep the property?

Imagine that there is a balance of $200,000 left on your home when you die. Your daughter inherits a property with a balance of $200,000. The balance does not go away. However, if she can swing the payments, your daughter can take over the mortgage and have the title transferred to her name. She won’t even have to take the traditional route to homeownership by filling out an application or going through a credit check.

According to an interpretative rule issued by the Consumer Financial Protection Bureau (CFPB), after a person dies, the person who inherits their home can be added to the loan as a borrower without going through the standard underwriting. In other words, if they have a low credit score, other secured debts, or even got caught up in debt collection, they are still eligible to take on your loan.

A beneficiary is not required to apply for a new home loan. They can simply be added to the existing mortgage as the owner.

Is the lender complicating the task?

There was a time when mortgage lenders made it difficult for heirs to know the details of a loan. This is because lenders have traditionally been willing to share information with the named borrower in loan documents only.

Another federal law has addressed the issue by saying that “beneficiaries” enjoy the same protection as the original borrower. A beneficiary can be a co-owner or a named beneficiary. The best mortgage lenders make it easy to find everything they need to know to keep the mortgage current.

Mortgage payments must continue

Sometimes beneficiaries will make mortgage payments until they know what they want to do with the property. Settling an estate can take months (or longer) and all mortgage payments must be made as if you were never dead. Otherwise, the lender has the legal right to begin the foreclosure process.

The funds to pay the mortgage can come from the proceeds of a life insurance policy. Or, you can designate them as Transfer On Death (TOD) beneficiaries in your bank or investment account, giving them the money they need to meet mortgage payments. Conversely, the beneficiary may want the property to be sufficient to start making the monthly payment from their personal account.

Once they know how much the house is worth and what they want to do, the beneficiary can take over the mortgage themselves, sell the property and keep the proceeds, or allow the lender to foreclose.

What if an heir can’t afford the mortgage?

A beneficiary who wants the property but cannot afford the monthly payment may be able to lower the payment by doing one of the following:

  • Refinance the mortgage (if their credit is strong enough to qualify for a new loan)
  • Refinance into a longer-term loan. For example, if you have five years left on the mortgage when you die and your beneficiary refinances the remaining balance of $200,000 for 15 years, the mortgage payment may drop significantly, even if the mortgage rate remains the same.
  • Request a loan modification.

What happens if the person dies with an outstanding reverse mortgage?

If you have a reverse mortgage on your property when you die and there is no surviving spouse living on the property, the lender will seize and use the proceeds to pay off the reverse mortgage.

However, if your heirs want to keep the property, they have these options:

  • Pay off the reverse mortgage balance
  • Reimburse 95% of the appraised value of the house
  • Sold the house to the lender
  • Do nothing and allow the lender to seize the property

When is it best to sell the property?

Keeping your property after you die may not be for everyone. It may be better to sell if:

  • The person or persons who inherit the property cannot afford the mortgage payment, taxes or maintenance.
  • There is almost no equity in the house, and inheriting it is more of a burden than a blessing.
  • There is more than one beneficiary, and they have differing opinions regarding ownership.

There are dozens of decisions to make when planning an estate, some more difficult than others. Hopefully knowing what will happen to your mortgage after you die will help you make the best possible decisions for those you leave behind.

FAQs

  • You have several options. You can take over the mortgage and start making the monthly payments yourself (without the lender giving you a credit check or having to qualify for the loan). If there’s enough equity in the house, you can sell it, pay off other old debts, and keep what’s left. Or, you can walk away and allow the lender to foreclose on the property.

  • If there was a co-signer on the loan, that person takes full responsibility for ownership. Otherwise, an heir (or heirs) inherits the property.

  • No, the heirs are responsible if they want to keep the property or prevent it from being seized. However, unlike other types of debt, creditors do not come after the estate for the balance owing. If an heir fails to meet the monthly mortgage payment, the lender begins foreclosure of the property.

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