A decedent's home is often his most valuable asset, but that doesn't necessarily mean he lived long enough to pay it off. When you inherit a home encumbered by a mortgage, you inherit both: you get the property, and you get the loan. The good news is that the lender can't call the loan due as long as you make the payments.
When you inherit a home with a mortgage, you have the option to assume the mortgage and make the required payments, or you can opt not to accept the property.
Normally, when a property changes ownership, the mortgage lender has the right to demand full payment of the entire loan balance. Most mortgages include "due on sale" clauses that allow lenders to call the mortgage balance due if the home changes hands. At one point in time, this applied even if the homeowner gave away ownership of the property without compensation, such as by bequeathing it in his will.
The Garn-St. Germain Depository Institutions Act of 1982 changed that, exempting bequests from these clauses. Under the terms of this federal law, lenders can't call a mortgage due if the home transfers either to a joint tenant, to a tenant by the entirety, or to a family member under the terms of a will. The mortgage stays in place, it's still due and owing, and someone has to make the payments. Some states, such as California, have similar rules in their probate codes.
Assuming the Loan
Ideally, the decedent's will addresses the problem of the mortgage. It may direct that the executor of the estate should pay off the loan with other assets, liquidating them if necessary. In this case, you'd receive the property free and clear. Otherwise, if you want to keep the home, you must make the mortgage payments yourself. The lender might require you to officially assume the loan, personally taking responsibility for it, but it can't deny you the right to keep making the payments. It can't force you to refinance the mortgage into one in your own name.
Let it Go to Foreclosure
If you don't want the liability of the mortgage, or if you can't afford it, no one can force you to take the property. If you don't, and if neither you nor the decedent's estate make the mortgage payments, the lender will eventually foreclose. This is typically only a viable option if the property is underwater – the mortgage balance exceeds its fair market value.
If the property has any equity, the executor of the estate would have a duty to protect it for the decedent's other beneficiaries, usually by selling the home and distributing the proceeds among them. Otherwise, the lender could initiate a foreclosure action, but it would file it against the estate, not you. Your own credit history wouldn't suffer any damage.
If the home isn't underwater, but you just don't want it or you can't handle the mortgage payments, you can sell the property after you inherit it. The equity proceeds are then yours to do with as you please. However, this would necessitate making the mortgage payments until the time of sale, and sales can sometimes take a while. If you decide to rent the property for enough to cover the mortgage and other expenses, the lender might require you to refinance because you're not living there yourself.
The Garn-St. Germain Depository Institutions Act of 1982 specifically protects family members who inherit. If you're not related to the decedent, consult with an attorney to make sure of your rights. You also might want to seek professional help if you are a relative, but the lender insists that you refinance to pay off the mortgage.
- LegalBeagle: What Happens If I Inherit Property With a Mortgage?
- NOLO: If I'm Not on the Mortgage, Can the Bank Foreclose After My Spouse Dies?
- Quicken Loans: What Happens to a Mortgage When the Borrower Dies?
- U.S. Mortgage Insurers. "Low Down Payment Facts." Accessed Sept. 3, 2020.
- Consumer Financial Protection Bureau. "What Is a Second Mortgage Loan or "Junior-Lien"?" Accessed Sept. 3, 2020.
- IRS. "Publication 936 (2019), Home Mortgage Interest Deduction." Accessed Sept. 3, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.