Inheriting a home can come with a significant amount of legal and financial responsibility. It can also be an emotional process that involves negotiating with siblings or other heirs. Significantly, in many cases, a beneficiary doesn’t take the home free and clear — their inheritance might carry a mortgage. Inheriting a house with a mortgage may leave you wondering what your options are and the best course of action to take in your situation.
People usually expect to have their mortgages paid in full during their lifetimes. However, this doesn’t always happen. If a mortgagor passes away before the debt is paid off, the mortgage survives them and can become the responsibility of the inheritor of the property.
If you find yourself inheriting a house with a mortgage, it’s important to be aware that the lender must be considered in the transfer. While most debt is paid by the executor from assets in the estate, mortgages are treated differently. Importantly, the original contract may control what happens next. Although no one is required to take on the mortgage — unless there was a co-signer or co-borrower — the mortgage servicer can foreclosure upon the home if payments are not made.
While inheriting a house can improve your financial situation, it can sometimes be stressful if there is a mortgage involved. If your loved one passes away before the debt is paid, it’s critical to consider your options. The decedent’s will might specify how the mortgage should be handled. Otherwise, you have several available alternatives if you inherit a house with a mortgage, including the following:
In the event you would like to keep the property subject to the mortgage, you will need to contact the loan servicer. The servicer will advise what documentation they need from you to show that you’ve inherited the house and provide you with information regarding your options for making payments.
If you have the funds to do so, you might consider paying the mortgage off in full. Alternatively, you might consider using the proceeds from the sale of other assets in the estate to satisfy the loan, even though this is not required. By paying off the loan, you can own the house outright. Critically, if there is a reverse mortgage, you will need to pay the full balance or 95% of the home’s appraised value (whichever is less) to keep the home.
Another option you might consider is asking the lender for a loan modification. If you’d like to retain the home but are unable to make the monthly mortgage payments, a modification can help you stay in the home and avoid foreclosure. You might also apply to the bank to refinance the existing mortgage.
Even though the process of selling a house that once belonged to a family member can raise many emotions, it is typically a good option — especially if there are multiple heirs. Inheriting a house with your siblings or other family members can be complicated and each party might have different ideas about what to do with the property. In these cases, it may be best to sell the home to pay off the mortgage and evenly split the proceeds.
When you inherit a house with a mortgage, it can sometimes pay to think outside the box. Rather than selling it, you might consider renting it out. Turning an inherited home into a rental property can have considerable financial benefits. Additionally, the rental income can also be used to pay off the remaining mortgage.
It’s critical to be aware that federal law provides protection from due-on-sale clauses when it comes to mortgages assumed by family members of the decedent. Under The Garn-St. Germain Depository Institutions Act, mortgage lenders must allow the inheritor to take on the mortgage in certain instances. In addition, under a rule established by the Consumer Financial Protection Bureau, mortgage lenders are also required to offer the inheritors the ability to apply for a loan modification.
Probate matters can be complex. Whether you are planning your estate or are a beneficiary in a loved one’s will, it’s essential to have a knowledgeable trusts and estates attorney on your side who can guide you through the legal process. The Twiford Law Firm offers skilled counsel for probate matters and comprehensive legal services for estate planning.
With offices located in Moyock and Elizabeth City, The Twiford Law Firm provides knowledgeable representation for probate and estate planning matters to clients throughout Northeastern North Carolina and the Outer Banks. Contact us today to schedule a consultation.