When someone dies, all their real and personal property passes through probate. During this process, an executor handles the decedent's estate. The executor will settle all the estate's debts, including mortgages, before transferring the assets to the deceased person's heirs. If the estate is cash rich, the executor can pay off the mortgage without selling the house. Usually, however, the house is sold to pay off the mortgage.
A mortgage is a personal debt secured against property. It is not forgiven at death. The deceased, via his estate, is still responsible for paying the mortgage installments due under the promissory note. If mortgage installments are not paid when they fall due, the bank can sue the decedent's estate for the debt, or force a sale to pay off the loan. The fact that the borrower has died does not reduce the lender's legal right to recover the loan.
Probate is the process of itemizing the decedent's assets and distributing them according to instructions set out in the decedent's will. If the deceased person dies intestate -- without a valid will -- the court will name the beneficiaries by applying state intestacy rules. The executor (administrator for intestate estates) will pay off the mortgage and other debts from the estate's cash reserves. He then removes the mortgage lien from the title, and transfers the property to the beneficiary free of the mortgage debt. Cash poor estates typically do not have enough reserves to pay off the mortgage. The beneficiary of the house has the choice to pay off the loan from his own money -- effectively buying the house, with cash or through his own mortgage -- or permitting the executor to sell the house and settle the debt from the sales proceeds.
"Subject to Mortgage" Property
A will may bequeath property "subject to mortgage." This allows the property to be transferred to the named beneficiary with the mortgage still in place. However, most mortgages contain a "due on sale" clause, which permits the lender to accelerate the loan as soon as title changes hands. Some mortgage products also contain a due on death clause, which speaks for itself. Either way, the beneficiary must immediately settle the loan.
The Sale Process
An executor or beneficiary often must sell a property secured by a mortgage in a deceased person's name. To do this, the executor files a petition to sell the property with the court. If the court consents, he has the property appraised, appoints an agent, lists the property for sale, consults with the decedent's heirs to approve the terms of any purchase offer, handles the sale, settles the mortgage debt and distributes excess proceeds to the beneficiaries, reporting back to court where necessary. Because the executor is under a duty to achieve the best price possible, all offers are made public with an invitation for higher offers to come forth. As such, the sale process is rather slow.
If the deceased person held mortgage life insurance, the executor or beneficiary can use the policy's proceeds to pay off the loan and release the mortgage lien over the house before selling it. If the mortgage was taken out by two borrowers, such as a husband and wife, the co-borrower remains liable for the entire mortgage debt. The lender can sue the co-borrower for the debt, instead of pursuing the decedent's estate.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.