A death in the family can bring a heap of emotional turmoil, and this also can quickly spill over into financial headache if the family member died with outstanding debt, particularly secured debt such as a mortgage. If the home’s owner had a co-signer on the mortgage, that person automatically inherits the debt, but when the only owner dies, responsibility to pay the home’s mortgage can get a little confusing depending upon what you want to do with the home.
Whenever someone dies, all their belongings -- and the debt they accumulated along the way -- is known as their estate. Upon death, an estate enters a legal system known as probate. In probate, a judge values the deceased’s estate, and allows lenders to come forth to make claims against it. Holders of secured debts, such as mortgages and auto loans, are typically reimbursed, whether it’s through the sale of the home, or by liquidating other assets such as stocks or savings to pay off the mortgage.
Selling and Keeping Equity
In many cases, heirs who inherit a house that still has a mortgage simply choose to sell the home to clear the mortgage. In this case, the estate sells the home, and the proceeds go to paying off the balance of the mortgage. Whatever amount that’s leftover after the estate pays the lender -- the original owner’s equity in the home -- goes back to the estate. It’s split there as determined by the deceased’s will or, if a will wasn’t drawn up, by state law.
If you’re an heir to a home that’s upside down in its mortgage -- the prior owner owed more than it was worth -- there's a silver lining to your plight. In most cases, adults can’t pass on their debts after death, even if you’re designated as the sole heir to the estate. If you choose to wash your hands of the property, it’s liquidated during probate and the lender receives whatever the court could get from the house. All parties call it a day, and your credit is preserved, as the short sale occurs under the umbrella of probate.
If you’re an heir and want to keep the home, federal law requires that the mortgage pass into your hands without any changes in terms. While you’ll need to make sure to notify the lender about changes in ownership and the consequent changes on loan documents, you’ll also need to be sure to keep up with mortgage payments while the property is in probate. If you fall 90 days behind the mortgage’s payment schedule, it may fall into foreclosure.
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