The death of a loved one can be an incredibly difficult experience to manage, especially when faced with a pile of legal documents to sort through, including the deceasedâs last will and testament.
You may learn that youâve inherited a house. Owning this property may change your life, but it may also present challenges, especially if the house has a mortgage. So, what happens next? We have a few strategies for you to consider when managing an inherited mortgage.
Inheriting a house with an existing mortgage can be a blessing and a burden. On one hand, you are gaining a valuable asset in the form of real estate. On the other hand, you are also inheriting the financial obligation tied to that asset. As the new owner, you have some options but also responsibilities when it comes to dealing with the mortgage. Here’s an overview of what to expect and do if you inherit a mortgaged home.
Understanding Your Options
When you inherit a house with a mortgage you generally have three options
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Pay off the mortgage As the beneficiary, you can pay off the remaining mortgage balance in full This frees you from the burden of monthly payments However, few people have the cash readily available to pay off a mortgage in one lump sum.
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Assume the mortgage You can continue making monthly payments on the existing mortgage. In most cases, lenders are required by the Garn-St. Germain Depository Institutions Act to allow spouses or relatives to assume mortgages on inherited property without needing to requalify.
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Sell the home: Selling the house and using the sale proceeds to pay off the mortgage is often the most practical option. Just make sure selling costs and capital gains taxes won’t eat up all your equity.
Steps to Take
If you choose to keep the inherited home, either to live in or rent out, you’ll need to go through some legal and logistical steps. Here are some key things to do:
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Notify the lender of the death and change in ownership. Provide a copy of the will or death certificate.
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Have the property formally transferred to your name via a new deed. You may need a real estate attorney’s help with this.
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Make sure mortgage payments, insurance, taxes, and utilities stay current during the transition process. You want to avoid fees or foreclosure.
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Get the property appraised to understand its market value and your equity position.
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Consider refinancing the mortgage in your own name to get better terms, if possible.
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If co-inheriting with others, you may need to buy out their shares to take full ownership.
Special Cases
Certain situations make inheriting a mortgaged property more complicated:
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Reverse mortgage: You’ll need to repay the full loan balance quickly, usually within 6-12 months, to avoid foreclosure.
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Underwater mortgage: If the mortgage exceeds the property’s market value, you may want to negotiate a short sale with the lender.
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No will: Without clear inheritance instructions, expect legal delays and complications, including potentially needing court approval.
Tax and Expense Implications
Aside from the mortgage payments, be prepared for other costs associated with owning the inherited house:
- Property taxes
- Home insurance premiums
- Maintenance and repairs
- Capital gains taxes if you later sell at a profit
Work with professionals like a real estate attorney, accountant, or financial advisor to fully understand the expenses and tax implications involved.
Make an Informed Decision
Inheriting real estate with a mortgage can be financially risky but also rewarding if handled correctly. Take time to explore all your options, run the numbers, and consult professionals to make an informed decision. Act decisively to take ownership, address the mortgage, and cover other obligations so you don’t jeopardize the valuable asset you’ve inherited.
Ask A Professional For Advice
Talk to a real estate attorney and ask them all your burning questions. Inheriting a home with a mortgage can get complicated. Seek assistance from an expert during this process â and most importantly â donât sign or agree to anything you donât understand.
If you plan on selling the home, consult a listing agent. They should be able to tell you the value of the inherited property and how fast it may sell. Even if you donât plan on selling, knowing how much you might earn from selling the home can be valuable information to have. You may even want to consider how much you might earn if you rent the property.
Contact The Mortgage Servicer
Read carefully through the deceasedâs mortgage documents. If you canât find a copy of the paperwork, look for anything that indicates the mortgage servicer. You or your family attorney are required to contact the servicer to notify them of the death, and theyâll likely require a copy of the death certificate.
After verifying the death and updating their documents, the servicer can tell you how much is left on the mortgage and the monthly payment amount. At this point, youâll have the information youâll need to decide whether to take on the mortgage.
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FAQ
How does inheriting a house with a mortgage work?
Under federal law, if someone inherits a home, the mortgage stays in place as long as payments keep getting made. The mortgage company can’t do anything about it.
What happens to a house with a mortgage when the owner dies?
Can you inherit a house that is not paid off?
You can inherit a house with a mortgage – If the home still has a loan, you’ll need to decide whether to assume the mortgage, refinance, or sell the property.
How do you stop a foreclosure on an inherited property?
A court‐approved sale can avoid a foreclosure sale and surplus-fund complications. Work with a probate attorney to negotiate with the lender, marshal estate funds, or secure a bridge loan against other assets. In many cases, heirs agree to pay monthly mortgage or escrow taxes until closing.
What happens if you inherited a home?
If you decide to keep the home, you’ll assume the mortgage and begin making payments. The Garn-St. Germain Depository Institutions Act allows most heirs who’ve inherited a home to assume the mortgage without a credit check or closing costs.
What happens if a family member inherits your home?
But if someone inherits your home and decides to keep it and take over the mortgage, there are laws that allow it. Most commonly, surviving family members inherit the property and maintain the mortgage payments while they arrange to sell the home.
Can you inherit a house with a mortgage?
Federal law says this can’t prohibit you from inheriting a house with a mortgage. However, you need to be prepared to pay off your loved one’s debt before signing the title over to the buyer. Similarly, any liens on the property must be satisfied at the time of closing so that the buyer can obtain “clear title” on the property.
What happens if someone inherits your mortgage?
However, with mortgage debt, the process is different. Unless someone is a co-signer on the loan or a co-borrower, no one is legally obligated to continue paying off yourmortgage. But if someone inherits your home and decides to keep it and take over the mortgage, there are laws that allow it.
What happens if a spouse inherits a home?
Most states follow the federal government’s guidelines and won’t apply the mortgage clause when a home is inherited by a spouse, parents to children, or an heir or beneficiary. Check if the deceased was paying mortgage protection insurance (MPI).
What happens when two people inherit a home?
When two people inherit a home, the easiest course of action is to sell it to pay off the mortgage and split any remaining proceeds. If one beneficiary decides they want to keep the home, they may have to buy the other beneficiary’s share of the property.