Estate planning is not always a comfortable topic. Generally, people do not like to contemplate what will happen when they’re not around anymore. But, with homeownership and mortgages – these things inherently deal with death. The word “mortgage” itself comes from the Old French words mort and gage, which translates directly to death pledge.
In its current form, a mortgage is an installment loan used to purchase a house. The lender takes a security interest in the house to guarantee payment, meaning that the lender can take possession of the property if the borrower fails to pay. But what happens if the homeowner dies before the mortgage loan is paid in full? The short answer is, the mortgage stays with the house. Here are the possibilities:
The heirs get the house, free and clear. In this best-case scenario, when your heirs inherit the house (and the mortgage), there might be enough funds in the estate for them to pay off the mortgage loan.
The spouse or heirs take over the mortgage. Federal law allows for the transfer of a mortgage to a spouse, heir, or other relatives. If it’s the surviving spouse, he or she would simply take ownership of the property and become responsible for the mortgage payments. The rates and payments would be the same. If it’s a different beneficiary (ex: adult child, sibling, adult grandchild, etc.), then they would have to wait for the title to be transferred into their name. Then, they would take over the mortgage payments.
Many home loans have a due-on-sale or acceleration clause that allows a lender to demand immediate and full payment upon transfer of a house. However, when the house transfer is due to death, the lender is prohibited by law from demanding immediate payment in full.
The heirs refinance the mortgage loan. Once the house title has passed to the designated beneficiary, if he or she wants to keep the house, they might refinance the mortgage loan for a better interest rate or payment schedule. If the heirs do not qualify for a new loan but can afford the current monthly payments, they can still keep the original mortgage.
The heirs cannot afford the mortgage payments. If the heirs cannot refinance the loan or afford the current monthly mortgage payments, they can try to sell the house. Lenders may be more likely to accept a short sale, rather than have the property fall into foreclosure. If payments are interrupted for 90 days or more, the lender may sue the estate to recoup its losses.
It is important to note here that if the homeowner did not leave a will or instructions about handling their affairs, the relatives might not be aware of the mortgage on the property. As a result, the relatives would not be making the appropriate payments, and the house could unintentionally fall into foreclosure.
If the original homeowner suspects that their heirs may not be able to afford the mortgage, he or she might want to purchase insurance to help the heirs out with that expense.
The heirs inherit a house with a reverse mortgage on it. A reverse mortgage is a lien on a house; that loan is due when the original homeowner passes away or no longer occupies the property. If an heir inherits a home with a reverse mortgage on it, he or she would have to pay off the balance or take out a new loan in order to take ownership of the house. In many cases, the heir will sell the house, use the funds to pay off the reverse mortgage, and then keep any proceeds from the sale.
The house is sold to pay off other debts. If the original homeowner passed away in debt, their home might be sold to pay off those debts – whether there is a mortgage on the house or not. If an heir or relative is interested in keeping the house, they may be able to negotiate with the lender. But the ability to do that depends on a number of factors.
Contact the Estate Planning Attorneys at Brian M. Douglas & Associates
If you have additional questions related to estate planning or probate, please reach out to our experienced attorneys at Brian M. Douglas & Associates. We work closely with our estate planning clients to make sure they have the best plan in place for themselves and their loved ones. We help our clients with compassion in order to make the process as easy and stress-free as possible. You can reach our law firm at (770) 933-9009.