Inheriting a Property with a Mortgage

It's a bit like one of those good news/bad news jokes: the good news is your favorite uncle left you a house in his will; the bad news is he also left you the mortgage.

Whether or not the joke turns out to be on you - and whether or not you still remember the deceased as your favorite uncle when everything has been settled - depends very much on what you do as soon as you find out about this inheritance. Inheriting a property with a mortgage means examining both the property and the mortgage to determine whether you have more to gain than to lose from the situation.

Here is a list of things to do if you inherit a property with a mortgage:

Notify the lender and determine the status of the mortgage

Opening the lines of communication immediately will help you keep your options open. Mortgages are frequently sold to investors or serviced by outside companies, so simply establishing that you know the right place to send payments is an important step. Beyond that, it is a good idea to work your way past the call-center customer service staff to find a contact who can handle a more complex situation such as the inheritance of a property and mortgage.

The first thing you need to find out from the lender is the status of the mortgage. Are the payments up to date, or is the mortgage in danger of foreclosure? Have property taxes been paid through the lender, or do you have to check separately with the local municipality to make sure they have been kept current? Before you assume any responsibility for the property, you need to establish where things stand so you can make decisions with as much information as possible.

Find an attorney familiar with local real estate law

The estate's attorney might help answer some basic questions, but remember an estate attorney's job is to represent the estate, and not necessarily your interests. If the property is out of state, your usual attorney might not be fully conversant with the applicable real estate laws. Finding a reputable local real estate attorney will help you make sure that any liabilities such as liens on the property are brought to light, and that the deed is properly recorded in your name when the time comes.

Figure out who is responsible for paying off the mortgage

Inheriting a property with a mortgage does not necessarily mean you are responsible for the mortgage. Your uncle may have stipulated in the will that you are to inherit the property free and clear, in which case any mortgage will have to be paid off with proceeds from the estate. That would allow you to consider what to do with the property separately from dealing with the mortgage.

On the other hand, if there is no specific provision in the will for paying off the mortgage before passing along the property, you have to figure out what to do about the loan. A big part of this decision is determining whether or not you want to assume the mortgage.

Determine whether you want to assume the mortgage

Assuming a mortgage basically means taking over the payments under the current terms and payment status of the loan. You should check with your attorney, but generally speaking you may be eligible to assume a mortgage on an inherited property if you are related to the deceased. Naturally, taking over the mortgage can be preferable to immediately coming up with the cash to pay off the lender, but before you assume a mortgage you should ask yourself the following:

  1. Is the mortgage under water? Have an appraisal done and compare this to the mortgage balance. If the house is not worth as much as the amount still owed on it, you should decline to inherit it. This will save you from taking on any liability from the mortgage, though if the estate has other assets they may be pursued by the lender to recoup any losses on the mortgage.
  2. What would you do with this house? Your options include selling it, renting it out, or living in it yourself. If you are thinking of selling or renting, check out the local market so you can make a realistic assessment of what you are likely to get back as sale proceeds or rent. If the location and characteristics of the house meet your own needs, you may consider living in it and assuming the current mortgage.
  3. Can you afford the current payments? This is a cash flow issue. You may inherit a home with a huge amount of equity, but if the existing mortgage payments are too big for your income, you could quickly find yourself headed for foreclosure. Don't assume a mortgage unless the payments fit your budget; otherwise, the best way to get value out of the inheritance might be to sell immediately and pay off the mortgage.
  4. Could you get a better rate on a new mortgage? Just because you can assume a mortgage does not necessarily mean it is the best deal available. Check with a few lenders to see how the current mortgage rate compares with rates available on the open market.

Inheriting a property with a mortgage can be thought of as a good news/bad news joke, but in financial terms you should think of it as inheriting both an asset and a liability. Before you accept such an inheritance, you should make sure the asset outweighs the liability, and if it does, you should still keep in mind that you can separate the liability from the asset if disposing of it makes more sense than taking it on in its current form.

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