Most people look forward to receiving an inheritance, especially when it's a home. Inheriting a property with an upside-down mortgage, though, can seem like more a liability than an asset. This situation can arise when the value of the house is less than the debt that is owed on the property. This situation is not uncommon -- more than two out of every 10 mortgages are upside-down, as of 2011. Because you are under no legal obligation to pay for the property unless you keep it, you have several options on how to handle your inherited house.
Refinance the Mortgage
You might want to refinance the mortgage to put your name on the deed and to try to get more favorable loan terms. If you have better credit than the person from whom you inherited the property, you might be able to get a better interest rate, which can decrease the final amount of the mortgage. The federal government also sometimes devises programs that allow the Federal Housing Authority to back refinanced mortgages if the lender agrees to write off the deficiency. If the property is worth less than the current debt, a lender might require you to bring money to the table to make up for the deficiency.
A short sale is an agreement between a lender and borrower in which the lender agrees to accept a sale of the house that is less than the amount of debt that is owed on the property. The lender must agree to this arrangement, so you would need to contact the lender if you prefer to sell the house. The mortgage company might forgive the deficiency balance or might pursue the estate to compensate it for the loss.
You can choose to walk away from the inheritance. You can mail in the keys and refuse to make payments on the house. You can also ask the lender about a deed in lieu of foreclosure, which allows you to voluntarily surrender the house instead of waiting for foreclosure proceedings. You can also allow the bank to foreclose on the property. As long as you do not assume the responsibility for the debt, you are not legally obligated to pay the debt simply because a relative named you as a beneficiary. The foreclosure will appear only on the deceased's credit report, and the lender can only pursue the deceased's estate for payment of the outstanding loan.
Rent Out the Property
If you want to own the property but don't want to be personally responsible for making the mortgage payment, you might prefer to rent it out. This option allows you to postpone making any decisions regarding the property while generating income to make the mortgage payments.
Keep the Property
If the property has sentimental value or selling the property would cause emotional conflict in the family, you might want to keep the property. By making continuous mortgage payments and small improvements to the property, you can maintain the property and possibly increase the value of the home. The value of the property might increase with time, or a bad real-estate market can improve, causing your house to increase in value.
- CBS News: When A Mortgage Turns Upside Down
- Bankrate.com: Can You Refi When You're Upside-Down
- Money Crashers: Help A Reader: What To Do When You’re Upside Down On Your Mortgage?
- Bills.com: Upside-Down Mortgage
- The Press-Enterprise: Upside-Down Mortgages Get Refinancing Help in New Obama Administration Program
- CNN Money: Underwater Borrowers Are on the Rise
- ThinkGlink: Estate Must Make Mortgage Payments, Not Heirs Of Inheritance
Samantha Kemp is a lawyer for a general practice firm. She has been writing professionally since 2009. Her articles focus on legal issues, personal finance, business and education. Kemp acquired her JD from the University of Arkansas School of Law. She also has degrees in economics and business and teaching.