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If you're estate planning, you may wonder what happens to a mortgage when someone dies. Who's responsible for the real estate you leave behind, and is there a way to make it easier for a loved one to take over your house when you're gone? Whether you have an FHA, USDA, VA, or conventional loan, we've outlined what happens to your mortgage when you die.
For legal purposes, everyone has an estate. An estate encompasses everything you own, including cars, clothing, furniture, bank accounts, retirement accounts, and real estate. An estate may be worth millions or next to nothing, but it's still considered an estate. If you die with a will or trust in place, the legal documents you've set up outline who you want to inherit your estate (or parts of your estate) after you're gone.
If you're married and your significant other cosigned the mortgage, that surviving spouse becomes the sole owner following your death. If the home was titled in your name only, your heir or heirs inherit the property.
Does the estate have to pay the mortgage off in full?
What happens to a mortgage when someone dies is a bit different than other outstanding debt. Let's say when you die, you leave behind credit card debt and an unsecured debt like a personal loan. The debt you leave behind is not forgiven, meaning it will need to be paid off by your estate before any remaining funds are distributed to your beneficiaries. However, a mortgage company will not come after your estate to pay off the mortgage.
To be clear, the mortgage lender still expects to be paid for the property, but they give the heirs a chance to keep the house if that's what they want to do.
Let's say you're single and want to leave the house to your daughter and her family. As long as you name her beneficiary, she'll have the opportunity to make it her own.
What steps does an heir have to take to keep the property?
Imagine there's a $200,000 balance left on your home when you pass away. Your daughter inherits a property with a $200,000 balance. The balance does not go away. However, if she can swing the payments, your daughter can take over the mortgage and have the title transferred into her name. She won't even have to take the traditional route to homeownership by filling out an application or going through a credit check.
According to an interpretive rule issued by the Consumer Financial Protection Bureau (CFPB), after a person dies, the person who inherits their home can be added to the loan as a borrower without going through standard underwriting. In other words, if they have a low credit score, other secured debt, or even if they've been caught up in debt collection, they still qualify to assume your loan.
A beneficiary is not required to apply for a new home loan. They can simply be added to the existing mortgage as an owner.
Does the lender make it difficult?
There was a time when mortgage lenders made it difficult for heirs to find out details of a loan. That's because lenders have traditionally been willing to share information with the borrower named in the loan documents only.
Another federal law addressed the issue by saying "successors in interest" get the same protection as the original borrower. A successor in interest may be a joint tenant or someone named a beneficiary. The best mortgage lenders make it easy to find out everything they need to know to keep the mortgage up to date.
Mortgage payments must continue
Sometimes, beneficiaries will make mortgage payments until they figure out what they want to do with the property. It can take months (or longer) to settle an estate, and all mortgage payments must be made as though you never died. Otherwise, the lender has the legal right to begin the foreclosure process.
The funds to pay the mortgage may come from the proceeds of a life insurance policy. Or, you may name them as a transfer on death (TOD) beneficiary on your bank or investment account, giving them the money they need to keep up with the mortgage payments. Conversely, the beneficiary may want the property enough to begin making the monthly payment out of their personal account.
Once they know how much the house is worth and what they want to do, the beneficiary can take over the mortgage themselves, sell the property and keep the proceeds, or allow the lender to foreclose.
What if an heir can't afford the mortgage payment?
A beneficiary who wants the property but can't afford the monthly payment may be able to lower the payment by doing one of the following:
Refinance into a longer-term loan. For example, if you have five years left on the mortgage when you die and your beneficiary refinances the remaining $200,000 balance for 15 years, the mortgage payment can drop dramatically, even if the mortgage rate remains the same.
Request a loan modification.
What if the person died with an outstanding reverse mortgage?
If you have a reverse mortgage on your property when you die and there is no surviving spouse living on the property, the lender will foreclose and use the proceeds to repay the reverse mortgage.
However, if your heirs want to hold on to the property, they have these options:
Pay back the reverse mortgage balance
Repay 95% of the appraised value of the home
Deed the home back to the lender
Do nothing and allow the lender to foreclose on the property
When is it best to sell the property?
Holding onto your property after your death may not be suitable for everyone. It may be best to sell if:
The person or people who inherit the property cannot afford the mortgage payment, taxes, or upkeep.
There's almost no equity in the house, and inheriting it is more of a burden than a blessing.
There is more than one beneficiary, and they have differing opinions regarding the property.
There are dozens of decisions to be made while planning an estate, some more difficult than others. Hopefully, knowing what will happen to your mortgage after you die helps you make the best decisions possible for those you leave behind.
You have several options. You can take over the mortgage and begin making monthly payments yourself (without the lender putting you through a credit check or otherwise having to qualify for the loan). If there's enough equity in the house, you can sell it, pay off other old debt, and keep what's left over. Or, you can walk away and allow the lender to foreclose on the property.
If there was a co-signer on the loan, that person assumes total responsibility for the property. Otherwise, an heir (or heirs) inherit the property.
No, heirs are responsible if they want to keep the property or prevent it from going into foreclosure. However, unlike other types of debt, creditors do not come after the estate for the balance owed. If an heir does not take over the monthly mortgage payment, the lender begins foreclosure on the property.
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