What Happens to a Mortgage When Someone Dies?

When a family member passes away, handling the legal matters pertaining of their home is probably the last thing you feel like doing. It's a difficult situation to navigate, especially with the emotional pain you are no doubt currently enduring. But knowing what to expect can make the decision of keeping or selling your loved one's home significantly easier.

(Disclaimer: This article is not intended to provide medical or legal advice and is only for informational purposes. If you think you have asbestos in your home, it is best to consult a professional.)

You can take comfort that under the Garn-St. Germain Depository Institutions Act of 1982, you will likely not be forced to pay off their entire mortgage right away, regardless of what you choose to do with the property. But there are other things to be aware of to ensure that the home ends up in the right hands without any expensive legal fees. Read on to learn about the ins and outs of what happens to a homeowner's mortgage when they pass away.

Does the mortgage still have to be paid?

A mortgage doesn't simply disappear when a homeowner dies. It needs to be paid off, whether through an heir making the payments, selling the home, or foreclosure. If you want to keep the house for yourself or sell it, you will need to continue making mortgage payments after your loved one's passing. Failure to make these payments on time can result in penalty fees and even foreclosure.

How do mortgage life insurance policies factor in?

Some homeowners choose to take out mortgage life insurance, which provides money to the mortgage lender if the owner dies while money is still owed on the mortgage. With a mortgage life insurance policy, the amount of money the lender receives changes over time. As the borrower continues to pay down their principal balance, the less money the lender gets.

While a mortgage life insurance policy can lessen the burden on the homeowner, it unfortunately also makes things more difficult for their family. Because the money goes directly to the lender, if the borrower owes less money on their mortgage than the amount covered by their policy, their family will not receive the difference. While they benefit from having the mortgage fully paid off, they have no freedom in how to spend their inheritance.

If your loved one had a mortgage life insurance policy, be sure to familiarize yourself with the specifics of their plan. Some policies only provide coverage in the case of accidental deaths (i.e., not from natural causes), so it's possible that their insurance won't take effect if they died from old age or disease.

Can a spouse or heir assume the mortgage?

Most mortgages have a due-on-sale clause, which states that the entire loan balance must be paid by whoever takes on ownership of the property. Mortgage lenders may attempt to enforce a due-on-sale clause after the borrower's death, but it is essential to know your rights and recognize when you are not legally obligated to adhere to this clause.

If you are listed as a co-signer, co-borrower, or designated beneficiary, you are protected by the Garn-St. Germain Act and have the option of assuming the mortgage on your loved one's home, although you are under no obligation to pay it if you are not interested in keeping the property.

How do you get information on the mortgage?

Unfortunately, not all mortgage companies are cooperative with the families of deceased homeowners. If you are an heir or executor of estate, showing documentation as such to the mortgage company obligates them to communicate with you, and you can sue if they refuse to release information to you.

However, if you do not fulfill either of those roles, the mortgage company is usually legally forbidden from releasing confidential information to you. If you are interested in the property, you will need to either speak to an heir or executor of estate or wait until the house is put up for sale and attempt to buy it the same way you would purchase any home.

How do wills factor in?

Most wills designate a specific person to be the executor of estate. This person is responsible for making sure that the deceased's property is distributed according to their wishes and all outstanding debts are paid. While it is typical for the executor to also be an heir to the property, this is not always the case.

It's also worth noting that the contracts for retirement accounts and insurance policies may designate someone other than the individual(s) listed in the will as a beneficiary. In these cases, the contract supersedes the will, and the beneficiary listed there has the right to the property.

If a person dies without leaving a will, this is called dying intestate. When a homeowner dies intestate, their property goes into probate—a process through which the court decides who will serve as the executor of estate and who will inherit the home. Even with a will, the probate process is often required to validate the will and ensure it is adequately enacted.

Probate can take as little as a few months or as long as a few years, and all legal fees come out of the estate, so it's easiest for all parties involved if the homeowner takes steps to prevent probate from occurring. In Texas, a homeowner can make a living trust to avoid probate when they pass away. Heirs can also avoid probate through the signing of an affidavit of heirship.

What if the person who died had a reverse mortgage?

If the deceased was over the age of 62, they might have a reverse mortgage. A reverse mortgage is an arrangement in which the homeowner stops making mortgage payments and instead receives money taken out of their home's equity from their lender.

If you inherit a property with a reverse mortgage, you and any other heirs are responsible for paying off the mortgage. You can meet this requirement by selling the house, renting the property to other tenants, providing a deed in lieu of foreclosure, or continuing to live on the property and taking out a new mortgage.

What if the person who died had multiple debts?

When a person dies with outstanding debt, the responsibility to pay that debt can be inherited by co-signers, joint owners, or account holders. While heirs who do not fall into either of these categories are not responsible for paying off their family members' debts, there are situations where the lender can seize the borrower's property to cover any outstanding balance on their loans. Unfortunately, medical debt and credit card debt may mean that the home goes to the creditor rather than the heirs.

Can I sell the home instead of assuming the mortgage?

While beneficiaries can sell their inherited property, the process is often complicated, especially when there are multiple heirs to the home. At the very least, the executor must obtain permission to sell from all heirs, and an heir who wishes to sell must obtain permission from the executor. In cases where multiple heirs want the property, one will typically buy the others out, but if an agreement cannot be reached or if there is no will, they can take the case to court.

Even if it is agreed upon from the beginning who will be selling the house, the heir in charge of selling may be subject to taxation. The home's value is legally considered to be whatever the fair market value was on the day of the previous owner's death. The heir will then owe taxes on any excess profit gained when they sell the property. For example, if the house is determined to be worth $200,000 and the heir sells it for $210,000, they will owe taxes on the $10,000 that they made.

Also, keep in mind that many homes will need extensive repairs before putting the house on the market. The costs of any repairs you choose to do will need to be paid out of pocket.

Selling an inherited house tends to be both stressful and time-consuming, and it's the last thing you want to deal with when you are coming to terms with the death of someone dear to you. AMI can help make the process simpler by providing you with a no-obligation cash offer on your loved one's home, regardless of the condition it's in. Contact us today to take the first steps towards selling your newly inherited property.