Although no one wants to think about death, it is important to plan for the future to protect your family's financial well-being and ease any future burdens. The lender does not forgive mortgage loans after death. Unlike unsecured debt, the creditor has collateral and can choose to take back the home to pay off the mortgage.
When a borrower on a joint mortgage dies, the co-borrower is typically responsible for paying the loan. If the borrower is having trouble making the payment due to the other party's death, he can apply for a hardship modification. If the lender doesn't agree to modify the loan, refinancing may also be an option. However, if the borrower doesn't make enough to qualify for the loan alone or has credit blemishes, he may not qualify without the help of a co-signer.
If the deceased's estate doesn't have enough assets to satisfy the debt, the lender can foreclose and sell the home. The home is either placed on the open market or an heir can choose to pay off the loan. If an heir pays the loan balance, she must make sure any other heirs receive payment for their shares of the home's equity. Without a will, an estate follows the state's laws of succession.
Will Naming an Heir
If the deceased assigns the home to an heir in the will, the mortgage note should include the phrase "subject to mortgage." The named party will need to pay the debt if she chooses to keep the home as stated in the will. Unfortunately, she can't just assume the mortgage payments. Most mortgages also have a clause that indicates transfer of ownership is an event of default, allowing the lender to accelerate the loan. The lender can then require the heir to pay the entire loan balance immediately. If she doesn't have the funds to pay the loan in one lump sum, he can apply for a new mortgage. The named heir can also sell the home if she can't afford to pay the loan. If there is any equity in the home after paying off the loan, the proceeds would go directly to her.
Mortgage insurance pays the loan in full in the event of the borrower's death. Mortgage insurance is often confused with private mortgage insurance. PMI is the insurance some lenders require borrowers to purchase to protect the mortgage company. If the home goes into foreclosure, the mortgage company reimburses the lender for any loss. The other type of mortgage insurance is sold through life insurance companies. Mortgage protection policies are designed to pay off your mortgage. As the balance of your mortgage decreases, the benefit decreases. If a policyholder has a 30-year mortgage, the death benefit reaches zero after 30 years.
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