What Happens to Your Mortgage When You Die?
If you still have a mortgage loan on your home upon your death, your heirs will inherit both your house and its mortgage. Understanding what happens to a mortgage when you die is an integral part of asset planning, especially if you want to make sure that your family can stay in your home after your death. Read on to learn more about the process of transferring a mortgage after death.
Inheriting a house with a mortgage
Inheriting a house with a mortgage can be much more complicated than simply inheriting an asset free and clear, but your beneficiaries will have some options.
What happens if you inherit a house with a mortgage? That depends on whether the heir is a co-borrower on the mortgage. If the mortgage loan is jointly held with a co-borrower (such as your spouse), then he or she will assume the remaining debt as well as ownership of the property. Your spouse can then choose to keep the home and continue making payments as scheduled, or sell the home.
If you don’t have a co-borrower or spouse who will assume ownership, you can also specify in your will what happens to your home after you die. You can also allow the property to pass to your estate and leave the decision up to your loved ones. If you let your loved ones decide, your heirs (depending on their age and other personal factors) can choose to:
It’s also important to note that your heirs may have trouble navigating their process if you don’t have a well-developed estate plan. “One of the biggest concerns with inheriting a mortgaged home is if the loan is in the deceased person’s name,” says Patrick Simasko, elder law attorney and wealth preservation specialist at Simasko Law in Mount Clemens, Mich. “If the mortgage is in the deceased person’s name, the bank cannot and will not talk to you about the mortgage.”
This can make it difficult for your loved ones to assess the property and mortgage loan. Additionally, says Simasko, “Most mortgages have a clause that says when there is a change in ownership, the mortgage becomes 100% due.” This means that your beneficiaries will often need to make a quick decision about your mortgaged property.
Transferring a mortgage after death
If your heirs decide to keep the property, they will need to transfer the mortgage after your death. This isn’t as simple as it may sound, however. Here’s a look at the few different options your loved ones will have if they plan on transferring the mortgage on your home after your death.
1. Mortgage assumption
The first option is for your heirs to keep the property and simply continue paying off the remaining mortgage loan. Assuming a mortgage after the death of a parent or other loved one may feel like the simplest option, especially if your heirs want to keep the property. Depending on your lender, though, this may be impossible.
Certain loan types, including FHA loans and VA loans, are assumable. Many conventional loans, however, are not.
As part of your estate planning process, be sure to check with your mortgage lender to see whether yours is an assumable mortgage, what your lender allows, and what your loved ones will be able to do with your mortgaged home. Then, consider adding guidance in your will and/or preparing for this possibility when buying adequate life insurance coverage.
Many beneficiaries who decide to keep a mortgaged, inherited home refinance the loan into their own name.
“Banks don’t normally let people assume the mortgage,” says Simasko. “You have to go through a full-blown application process; you are getting a new loan to pay off the old loan.”
This means shopping around with lenders in order to find the best interest rates, as well as considering factors like closing costs and the home’s current equity.
Whether your heirs decide to keep or sell your home depends on certain key factors. One such factor is whether they can actually afford to keep the home in the first place.
“If you can’t afford to make the payments,” says Melissa Cohn, regional vice president at William Raveis Mortgage, “then you must sell the home to pay off the mortgage. Otherwise, the bank will foreclose on the home to get their money back.
Some homeowners who want to give money to their heirs (or even to charitable causes) may also instruct their executors to sell the house and distribute the cash proceeds according to the will’s instructions. Selling the home means getting the property appraised, finding a realtor, listing and marketing the home, in addition to managing offers that come through.
Considerations when transferring a mortgage after death
If you are planning to transfer a mortgage after death to loved ones, you may have many questions. Your options in this situation depend on a few factors, such as your intended wishes, what your loved ones can afford and what the home’s mortgage loan will allow.
Here are a few things to consider:
→ Identify the executor. The executor of your estate will be responsible for managing and distributing any assets left behind. Quickly identifying this individual may help stave off any disagreements or power struggles between heirs. If you do not have a will and do not name an executor, your property will likely need to pass through the probate courts before being disbursed.
→ Make your wishes known. Share your wishes for the property with loved ones — either verbally or in a will. For instance, you may want to be clear about keeping a home in the family for generations to come, rather than selling it upon your death.
→ Know what your heir(s) can afford. If you’re a homeowner considering giving the property to your heir(s), you should spend some time analyzing what your heir(s) can afford to do. If they keep the home, can they afford mortgage payments, insurance, taxes, maintenance and other expenses? Will they rent out the property as an investment or live there full time? You should also consider the requirements of transferring the mortgage, and whether they’ll qualify for your own loan on the property.
→ Be aware of increasing costs. “When the homeowner passes away, you will have to immediately get a new homeowners insurance policy on the house,” notes Simasko. “Premiums and property taxes might also go up, since it’s likely not your principal residence.” If you’re transferring a mortgaged home, it’s important to keep these costs factored into your decisions.
→ Consult with a professional. If you’re not sure what to do or what you can afford, consider speaking with a professional financial advisor. They can help you determine your options whether you plan to keep or even sell the home you’ve inherited.
→ Buy life insurance of your own. The passing of a loved one often triggers thoughts about mortality. If you don’t have adequate life insurance already, this may be a great time to purchase a policy. Life insurance is important if you have loved ones who depend on you, and can be used to cover your own mortgage balance after your death. This saves your family from ever worrying about assuming or transferring a mortgage loan upon your death.