What happens to your mortgage when you die?

2023-07-05 06:51:15 • 97 Views

Nobody likes to think about their own mortality, but the reality is that you have to face who, and what, you leave behind when you die. Especially if you own the home you share with others.

If you have a mortgage, you might worry about what that means for your heirs and loved ones. How will they handle the loan? Who will be responsible for making payments? Will they even be able to keep the home? Let’s look at what happens to a mortgage when someone dies.

Who takes over your mortgage when you die?

Fittingly for this topic, the word mortgage is drawn from a French term for “death pledge.” When you pass away, your mortgage doesn’t suddenly disappear. Your mortgage lender still needs to be repaid, and could foreclose on your home if that doesn’t happen. That’s because a mortgage is a lien on the property that remains in place until the loan is repaid, even if the borrower dies and irregardless of who owns it. The same applies if there are other debts, like outstanding home equity loans or lines of credit, attached to the property.

If you applied for your mortgage with a co-borrower or co-signer, the solution is relatively simple: The other party can continue making payments on the loan (and in fact are often obligated to do so, as they are now entirely responsible for the debt). If you don’t have a co-borrower or co-signer on your title, the responsibility falls to the executor of your estate, who should continue making payments using funds from your estate while the fate of the home is sorted out. The rub is if the estate doesn’t have sufficient funds or assets it can liquidate to pay the mortgage. That’ll create complications for heirs.

If you bequeath your home to someone, or if you have a joint owner with right of survivorship, your heir has to decide what to do with the home and the mortgage. Generally speaking, the person who inherits will either need to assume the mortgage and start making payments, or arrange for the sale of the property.

What happens to a mortgage if someone dies without a will?

What happens to a mortgage when someone dies without a will (aka dying intestate)? The debt still exists, even if there are no co-borrowers, no named heirs and no one in charge of paying the mortgage. In these cases, if no one steps up to make payments, the lender will likely initiate a court proceeding (depending on the state) to determine if there are any legal heirs. If none emerge, the lender will usually foreclose on the home to recoup what’s still owed on the loan.

Joint ownership or tenancy of a home is not the same as a joint mortgage. You can co-own a home with someone — like a spouse — meaning both your names are on the title deed, but be the sole borrower, meaning your name alone is on the mortgage agreement or deed of trust and promissory note. That said, the debt obligation usually passes with the property to the next owner — which if you were a joint owner with right of survivorship, means you. If you don’t want to take total ownership, you can simply let the lender take the property.

When to notify the mortgage company

Among all of the other things you’ll need to do after your loved one dies, you’ll also need to let their mortgage company know that they’ve passed away. If you’re wondering when to notify the mortgage company of death, the answer is: as soon as possible (some states specify within 30 days). You’ll want to give yourself plenty of time to locate and submit any necessary documents, including a death certificate, and assume the mortgage quickly, so you can avoid long-term headaches or problems with the lender. You also want them to update mailing and email addresses.

Inheriting a property with a mortgage

If you inherit a property that has a mortgage, you will be responsible for making payments on that loan. The debt passes with the property to the new owner.

If you are the sole heir, you could reach out to the mortgage servicer and ask to assume the mortgage, or sell the property. You could also choose to let the lender foreclose — though there’s a risk of deficiency judgement against you if they sell the home and the proceeds don’t cover the mortgage.

If you want to assume the loan, you can work with the servicer to transfer the loan to you. Keep in mind that there might be a fee associated with assuming the mortgage.

Of course, if you sell the property, you’ll have to use the proceeds to pay off the loan before you can pocket any windfall.

Inheriting can be scary: Many mortgages include a due-on-sale or due-on-transfer clause that requires full repayment of the loan in the event of a change in ownership. (That’s why, when you sell your home, your friendly lender’s rep is there on closing day, for their piece of the proceeds.) However, there are federal and state laws in place that override those clauses in this sort of situation, mandating a lender to work with a surviving spouse or family member who inherits a mortgaged home. An estates attorney can fill you in on your rights in your state.

Some lenders are willing to be flexible if you’re not in the financial position to assume the loan, but don’t want to sell. You might be able to refinance the loan to secure a lower payment or extend the term so it’s more affordable. Depending on the loan’s interest rate in comparison to current rates, you might be better off getting this other mortgage.

If multiple heirs inherit an interest in the home, things get more complicated. Each party will need to agree on what to do with the property — one might have to buy out the others’ shares, for instance. If none of the heirs are interested in living in the home, selling it might be the best route to take. Alternatively, if one or more heirs want to convert it to a rental, consider the ramifications of changing it to an investment property: You might need to get a new mortgage, since the original loan was for a primary residence, not an investment property.

Whatever heirs decide, it’s best to enlist the help of an estate or real estate lawyer in these types of situations.

Do heirs need to re-qualify for the mortgage?

Borrowers typically need to meet “Ability to Repay” requirements before a mortgage lender can approve a loan. These rules help protect borrowers from predatory loans they wouldn’t be able to afford.

There’s an exception to this rule if you inherit a home, however. Heirs don’t have to requalify for the mortgage on the home they inherited. This gives them an opportunity to keep the home and assume the loan without having to meet the ability-to-repay requirements. If your goal is to keep the property, though, be sure you can actually afford the mortgage before committing to it.

If you want to change the terms of the mortgage, however — such as refinancing — you’ll need to qualify for a new loan and meet all of the lender’s eligibility requirements.

How to assume a mortgage

If you’ve inherited a mortgage, you can typically work directly with the servicer to take over the loan, but you might also decide to get outside help. Here’s how to assume a mortgage from a deceased family member.

Find a reliable lawyer. It isn’t required, but hiring a lawyer will simplify the process and take some of the stress out of assuming your loved one’s mortgage – especially if you’re grieving.
Gather necessary documents. You might need to provide proof that you’re the rightful inheritor of the property or the executor of the estate, so you’ll want to collect relevant documents: To transfer title, you will need proper authorization/paperwork, including the deed. If you can’t locate it, contact your local records office (e.g., the county clerk) for a copy. You can usually get a copy for a modest fee, or pay more for a certified copy (which lenders usually require).
Contact the mortgage lender or servicer for next steps and information. Ask about any things like the outstanding balance, the monthly payment and other essential details. If you have a lawyer, you can ask them to help you communicate with the servicer, especially if the servicer is less than helpful with your situation.

Remember that you don’t have to go through the underwriting process or requalify for the mortgage in order to assume it, but you’ll likely need to provide a certified copy of the borrower’s death certificate (and potentially the borrower’s will). If you are a joint owner, you will likely have to show the deed with your name on it

Once you’ve assumed the loan, you can continue making payments on it or opt to refinance.

Planning ahead

Managing someone’s affairs after they’ve died is challenging and, sometimes, confusing. To help make the process a little bit easier, here are two ways you can prepare your post-mortem plans so your loved ones know exactly what to do when you pass away.

Get mortgage protection insurance

If you can’t afford or get approved for traditional life or disability insurance, you can take out mortgage protection insurance (MPI) to ensure that your partner or loved ones can hold onto your house after you die. The premise is simple: If you have an outstanding mortgage balance at the time of your death, your insurer will pay it off directly to your lender.

Your MPI premium will depend on a few factors, including your age, the number of years left on your mortgage and the amount of coverage. In general, the younger you are and the longer you’ve had your mortgage, the less you will pay each month.

Estate planning

Having a solid estate plan at the time of your death can make life much easier for your loved ones. That’s because good estate plans specifically outline who receives what, which can prevent your family members from wondering about your wishes or fighting amongst themselves. Estate planning is also a great way to minimize taxes on your assets.

Final word on when a mortgage-holder dies

If you own a home, it’s important to plan for the future and decide what happens to a mortgage when you die. Having a clear last will and testament that describes what should be done with your mortgage, bank accounts and other assets will help your loved ones navigate what to do with your estate.

A good life insurance policy can also help save your heirs from financial stress (but be sure to compare the differences between life insurance and mortgage protection insurance — these are separate policies with separate coverages).

Take the time to create an estate plan, even if you don’t think you need one, and talk to your loved ones about your wishes, including what you’d like to see happen with your home.

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