When it comes to a mortgage, death does not release a borrower's payment responsibility. If a co-borrower, relative or the estate cannot make the mortgage payment, the lender has the right to foreclose. Even with a mortgage, your parent's home can still be inherited by you or other beneficiaries. The mortgage must be paid, but the mortgage or deed indicates who is responsible for the debt.
Mortgage and Life Insurance
Private mortgage insurance may be required by the mortgage company, but it does not pay off the mortgage in the event of your parent's death. PMI is designed solely to protect the lender from loss in the event of a borrower's default. If your parent purchased mortgage life insurance through an insurance company, his beneficiaries will receive funds to pay off the mortgage and keep the home. If your parent had a traditional life insurance policy, you may use the funds to pay off the mortgage, depending on the amount of the payout. Life insurance proceeds are not subject to probate. The beneficiary receiving the life insurance payout is not required to pay off the mortgage or other debts.
Responsibility of Co-Borrowers
If your parent owned the home with a co-borrower or co-signer, the surviving borrower assumes the debt. For example, if your father dies and your mother is on the mortgage, she will become the responsible party. If she stops paying the mortgage, the lender could foreclose and take back the home. The co-borrower must notify the mortgage company of the death. Depending on the current interest rate, the surviving parent might want to consider refinancing the loan to lock in as the sole borrower at a better interest rate.
Property Without a Co-Borrower
If there is no co-borrower, your parent's estate is legally responsible for paying the mortgage. The estate must settle outstanding debts before distributing assets to heirs. However, if someone is listed on the property deed with rights of survivorship, your parent's share will pass to that owner. The surviving owner bears the payment responsibility.
Inheriting the Home
If there are no co-borrowers or joint owners, your parent's home is distributed to the beneficiaries designated in his last will and testament. If your parent did not have a will, the property is inherited using the state intestate law to determine the next heir. When property with a mortgage is inherited, the beneficiary is responsible for paying it. A relative can assume the mortgage under the Garn-St. Germain Depository Institutions Act of 1982. The act allows you to keep the house, provided you keep making the payments. If there is not enough money in the estate to settle the mortgage and no one can make the payment, the home may be sold and the proceeds divided among beneficiaries.
- The New York Times: Inheriting a Home, and a Loan
- Nolo: If One Owner of Property Held in Joint Tenancy Dies, Who Pays the Mortgage?
- The Washington Post: Keep Making Payments, and the Inherited House Is Safe
- CNN Money: Does Mortgage Insurance Make Sense?
- Nolo: How an Estate Is Settled If There's No Will - Intestate Succession