When you buy a home, you may not be thinking about its legacy after your death. But you should understand what happens to your mortgage when you die. After all, this is an important step in preparing your family for the future.
Jump ahead to these sections:
- Who’s Responsible for Paying Off the Mortgage?
- How to Pay Off an Inherited Mortgage
- What Happens If the Heirs Can’t Afford Mortgage Payments?
- Taking Care of a Mortgage After a Death
If you buy a home, but die before you pay off the loan, the bank has several ways to recoup their investment. Luckily, your heirs will have a few options as well.
As you work through estate planning, your mortgage should be an early consideration. If you’re a beneficiary, you'll want to know how mortgages work, too. Let's have a look at what happens to mortgages when you die.
Who’s Responsible for Paying Off the Mortgage?
When someone dies with a mortgage still in effect, it may pass to others who participated in the purchase. This could be cosigners on the loan, co-owners, or spouses. The person who inherits the property may also take over the mortgage. If there are sufficient assets in the estate, the estate may pay off the mortgage, and should at least make the mortgage payments while the estate is pending. If mortgage payments aren’t made, the bank will foreclose on the mortgage. Just as if the owner was living and stopped making payments.
The property acts as collateral on a mortgage. This is a redeeming quality of mortgage debt since foreclosure will resolve the debt. Other debts, such as credit card debt, have no collateral, which can make them harder to settle. That said, you have a variety of options to consider before foreclosure.
The original owner did make mortgage payments, after all. Allowing foreclosure on the property may not be the best way to honor their legacy. Now we'll take a look at your options for handling an outstanding mortgage.
How to Pay Off an Inherited Mortgage
If you inherited a mortgage, it might be difficult to imagine how you’ll continue to make payments. Luckily, there are a few methods you can use to start making payments or pay off the house in full.
Paying off the house out of the estate
An estate is the total of the assets and debts a person has at the time of their death. If there is enough money in the estate, the administrator or executor of the estate may decide to use it to pay off a mortgage.
This can be tricky when there are many beneficiaries of a single estate. If the estate is large enough, some heirs may opt for a cash payout. Others may receive assets, such as the house, along with a smaller cash payout. Ideally, all debts will be paid before the heirs receive anything. If you have many heirs, consider this when working on your estate planning checklist.
Selling the house
Sometimes, no one in the family wants to live in the house. In this case, selling it will liquidate this asset and take care of the debt. Hopefully, there will be enough equity in the home to pay what remains on the mortgage out of the sale.
Whether the house has gained or lost in value will affect this. During the sales process, be sure to keep up with payments on the house to keep it out of foreclosure. Either the estate or a family member can do this. Talk to the executor or administrator of the estate and close family members to arrange for this.
Taking over the mortgage
If one or more heirs wish to live in the home, they can take over the mortgage. If the mortgage is more expensive than you might otherwise qualify for, don't worry.
The Consumer Financial Protection Bureau (CFPB) has ruled to protect you. As an heir, you may take over the mortgage without an ability-to-repay evaluation.
Keep in mind, you don't have to take over the mortgage forever. Base your decision on the monthly payment, your inheritance, and the housing market. If there is an approaching upswing in the market, you might have a good opportunity to sell after a year or two.
Refinancing a mortgage is also an option if the current payment is out of reach. When you take over a mortgage, you can extend the term of the loan through a refinanced loan.
Sometimes, this can make the monthly payment more affordable. Interest rates may have changed in your favor since the original mortgagor took out the loan as well.
Pay off the reverse mortgage
A special case that could result in far more mortgage debt than expected is the use of a reverse mortgage. When a person is 62 or older, they can borrow against a home if that home’s mortgage has substantial equity.
This creates a periodic or lump-sum “loan” with the house as collateral. People may take out a reverse mortgage to pay expenses or to increase cash flow during retirement. However, the total loan amount grows over time as you borrow more and interest grows. You aren’t allowed to borrow more than the equity you have in the home, as you might expect.
When a home has a reverse mortgage and the owner dies, you may need to sell it to repay the debt. Depending on the terms of the reverse mortgage, there may be little remaining equity in the home.
If you wish to keep the home in this case, it can be tricky. You can buy the home from the lender immediately (paying the loan created by the reverse mortgage). Or you can speak with an attorney or housing agency who could help find the time and financing for a new home loan.
What Happens If the Heirs Can’t Afford Mortgage Payments?
There are a few options for heirs that can’t afford mortgage payments long-term.
There may be positive proceeds in the estate to help make mortgage payments. As long as you can make them, these monthly payments increase the equity in the house. This gives you more time to find an appropriate buyer.
There is also the option to short sell the property if you know that paying the mortgage isn’t possible. This is an agreement with the mortgage lender to sell the property for less than the value of the mortgage.
This option lies between selling the home and allowing it to go to foreclosure. Since foreclosure proceedings cost money, banks may be willing to work with you on a short sale.
If you are out of options, you might allow the home to go into foreclosure. This will net you no gains, but it will remove the loan from the property. Please note that it would likely be considered fraud to allow the mortgage to go into foreclosure, and then have a family member buy the property at a deep discount at the foreclosure sale. If the property is foreclosed on, the loan is gone but so is the property.
If you are a spouse or cosigner on the mortgage, this will harm your credit score. So treat this as a last resort.
Taking Care of a Mortgage After a Death
In many families, the home they live in is the single largest asset they have. If the home carries sentimental value, it may be all the more important to keep it in the family. As a homeowner, you can help prepare your loved ones for the need to assume a mortgage after your death.
Consider buying enough life insurance to make payments on the home or even enough to pay it off. Think about the impact of reverse mortgages on your estate. In general, most families find a way to manage a leftover mortgage. That said, preparing in advance is your best bet.
If you've figured out your debts and assets and how they work after you die, you may be ready to take the next step and get a will. Look at the comparisons of the most popular will services and estate planning attorneys below.
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- “CFPB Clarifies Mortgage Lending Rules to Assist Surviving Family Members.” Consumer Finance Protection Board. 8 July 2014. www.consumerfinance.gov/about-us/newsroom/cfpb-clarifies-mortgage-lending-rules-to-assist-surviving-family-members/