If someone dies with an outstanding mortgage balance on the home, the heirs get to work through the issue of what to do with both the home and the mortgage. What happens with the mortgage depends on several factors, but it is important to quickly resolve how the home loan will be handled. It could cause problems for the estate if the bank forecloses on the home while the will is still in probate and goes after other assets of the deceased.
Will Stipulates Mortgage Disposition
The will of the deceased homeowner may state what happens to the mortgage as well as who inherits the home. If the will says the heir gets the home free-and-clear, the executor of the estate must pay off the home loan, even if it means that other investments in the estate must be sold to raise the cash. If the will does not include provisions for the mortgage to be paid off, the heir receiving the home as an inheritance also inherits the mortgage.
Contact the Lender
If the estate is not going to pay off the mortgage, it is important to contact and inform the lender that the homeowner has died. Find out if the payments are current or behind and whether the property tax payments are up to date. If the bank was getting ready to foreclose on the home because of missed payments, the lender may give you some time to work out what you want to do with the home and the mortgage. In any case, the lender needs to note in its records that the homeowner and person responsible for paying the mortgage is deceased.
Due On Sale Clause
The majority of mortgages include a due-on-sale clause that requires the loan to be paid off if ownership of the home changes hands. Federal law excludes the clause from applying if the home is inherited by a relative. However, if a non-relative of the deceased inherits the home, the lender has the right to enforce the due-on-sale clause and ask for the full repayment of the loan balance. In this case it is again important to contact the lender and let them know what the plans are for the home, for example selling the property and paying off the loan or if the non-relative heir would like to keep the mortgage and make payments.
Keep or Sell the Home
If you have inherited a home with an outstanding mortgage, a decision should be made whether to keep the home and continue to make the mortgage payments or sell the house. The answer depends on your financial situation compared with the costs of keeping the house and any sentimental attachment you might have. If the loan balance is greater than the home's value, the question get a little trickier. As an heir instead of the original loan applicant, turning the house back to the bank should not affect your credit, but it is best to talk to the lender to discuss your options.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.