One important aspect of estate planning is deciding what will happen to your home after you die. The answer might be fairly cut and dry if the home is fully paid for. If it’s not, though, you’ll need to consider the financial ramifications for your estate and for the person who inherits the home.
Here’s what happens to your mortgage when you die:
Who assumes a mortgage after my death?How to take over the mortgage of an inherited housePlanning ahead
Who assumes a mortgage after my death?
No one automatically assumes your mortgage after your death. Your estate executor (i.e., the person you appoint to carry out your will and manage your estate after you die) or administrator (i.e., the person a court appoints to fulfill those same duties) will continue to make payments using funds from the estate while everything is being settled.
Later, the individual who inherits the home might be able to assume the loan.
Good to know: If you’re a co-borrower or cosigner with the decedent, you don’t have to do anything to take over the mortgage because you’re already responsible for paying it. You’ll simply continue the payments. However, you should contact the mortgage servicer to inform them of the decedent’s death.
How to take over the mortgage of an inherited house
Mortgage loans have a due-on-sale clause, also called an acceleration clause, that requires the loan to be paid in full if it transfers to a new owner. However, federal law prohibits lenders from accelerating a loan in the event of a borrower’s death. Individuals who acquire ownership this way are considered “successors in interest,” and lenders must treat them as if they were the borrower.
The law allows a successor in interest to assume the loan, without having to apply or qualify, and continue making the payments. You’re also entitled to modify the mortgage to avoid foreclosure if you wish to keep the home.
What are my options as the heir of a home with a mortgage?
In the event you inherit a mortgaged home, you have several options. Which one is best depends on your personal preferences and your financial situation.
If you want to keep the house, you can:
Assume the mortgage: Federal law allows heirs to assume a decedent’s mortgage loan in many cases. As long as you’re a qualified successor in interest — someone who inherited or otherwise acquired ownership as a result of the homeowner’s death — you can take over the loan once the deed is signed over to you. The law also entitles you to modify the loan if you’re not financially capable of making the payments.Refinance the mortgage loan: You can also refinance the mortgage into a new mortgage loan as soon as the deed is signed over to you. You’ll have to apply for the loan, qualify based on your own creditworthiness, and pay any closing costs. However, refinancing could result in a lower interest rate or an extension of the time to pay off the loan — either of which can make the home more affordable.Repay the loan in full: Assuming you have the cash on hand, you can avoid mortgage issues entirely by paying the balance in full. The home would then be yours free and clear.
If you can’t or don’t want to keep the house, you can:
Sell it: The home is yours as soon as the deed has been transferred to you, so you can list it for sale just like you would a home you’d purchased yourself.Let the lender foreclose: If you don’t want the house and don’t want to sell it — a reasonable decision if you’re unlikely to sell at a profit — you can simply take no action. After a period of time with no payments, the lender will foreclose and repossess the home.
Important: Foreclosure can have tax consequences for the estate. Contact an accountant or attorney before going this route.
What happens to a reverse mortgage when you die?
The rules change when you inherit a home from someone other than a spouse with whom you are a co-borrower on the home’s reverse mortgage.
A reverse mortgage allows older homeowners to access the existing equity from their home. These loans don’t have to be paid back unless the borrower and their co-borrower spouse both die or move out of the home.
If you inherit a property with a reverse mortgage, you have the option of selling or keeping the home. The loan is not assumable, but you can keep the house by doing one of two things: paying off the balance or paying 95% of the home’s value, whichever is less.
Similarly, if you decide to sell the home, you’ll use the sale proceeds to pay off the debt owed on the loan — or an amount that’s at least 95% of the home’s value — and then pocket the remaining proceeds.
A crucial step in estate planning is drafting a will detailing how you want your estate handled after you die, along with who you want to serve as the estate executor. In the event you die intestate — without a will — the court will appoint an administrator to take on that role.
When planning to bequeath a mortgaged home, it’s important that you disclose the mortgage to your executor and close relatives — otherwise they won’t know to make payments, and the home could be lost to foreclosure inadvertently.
In addition, consider whether the individual who inherits your home will be able to afford mortgage payments and upkeep. An estate or financial planner can help you devise a strategy to keep your gift from becoming a burden to your loved ones.
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