Legally, you don't inherit debts from other people. When your parents die, for instance, you aren't obligated to settle with their creditors. If you inherit their house, though, and there's a mortgage to pay, you will have to pay it to keep the property. If you walk away from the house instead of accepting it, the lender can't hound you for the debt, though.
Due on Sale
Normally when a house changes hands, the lender wants the owner's debt paid off. The due-on-sale clause in most mortgage contracts guarantees the lender gets its money, or else it can foreclose. Inheritance is an exception. You can pay off the mortgage if you choose, but you can also assume it, paying at the same interest rate for the same length of time. That makes it easier for you to keep the house if you want.
Even if there is a mortgage, the deceased can say in the will that you inherit free and clear of debt. That puts the burden on the executor to pay off the mortgage by selling other property in the estate. It's also the executor's responsibility to keep up mortgage payments while the estate goes through probate. You don't become responsible for the mortgage until probate ends and you get to take ownership.
What to Do
The exemption to due-on-sale only kicks in if you move into the house to live. If you want to keep the house but don't want to live there, you have to take out a new mortgage big enough to pay off the old debt, or sell the house. In the worst case scenario, the house is already in foreclosure. In that case, it may make more sense to walk away and let the deceased's estate and executor deal with it.
Before accepting ownership, get the facts. If you inherit, say, from your widowed father, he might have paid off the mortgage but then taken out a reverse mortgage. You'll have to pay it off to keep the house. Depending on his finances, your dad may also have judgment liens or back property taxes that have to be paid off. Research just what you're getting into, and then decide if it's worth the trouble.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.