When a mortgage-holder dies, their debt lives on. But no one is required to take on the loan unless there is a co-borrower or cosigner on the mortgage — these parties assume equal responsibility for the loan.
Heirs who inherit the property are free to decide if they would like to take over the mortgage and keep making payments until they can sell the property. If no one steps in to sell or keep making payments on the mortgage, the lender will foreclose on the home.
A homeowner can still pass down their home if they haven’t paid off the entirety of their mortgage. A will or probate will dictate who inherits the property. If the house is passed on, it will be up to the heir or heirs to decide what to do with it and the mortgage.
It can take months to settle an estate after someone dies. During this time, the executor or administrator will continue making payments on the mortgage with the estate funds to prevent the home from going into foreclosure. Once the title is transferred to the heir, they can continue to make payments if they want to keep the house.
Cosigners assume responsibility for making mortgage payments if the primary borrower cannot. In the event of death, cosigners may be required to step in and complete payments while the estate is settled. If they do not, their credit score could be impacted by late or delinquent payments and foreclosure.
As a co-owner, co-borrowers become the sole owner of the home and are responsible for repaying the loan in the event of the death of one of the borrowers. If they choose, co-borrowers can ask the lender to assume the mortgage and bypass the executor process.
Related: What is a due-on-sale clause?
There are multiple routes that an heir or heirs may choose to take when deciding what to do with inherited property. However, they must continue to make mortgage payments while they decide on a long-term solution if they plan on keeping the house.
Some heirs may choose to pay off the mortgage on the home — either with their own money, or any inheritance they received (whether from a payable-on-death account or life insurance policy). While this will alleviate the need to make monthly payments on the loan, it may not be the best use of funds, especially if there are other debts to pay off. Mortgages are generally considered low-interest loans and likely have more favorable terms than other types of debt, like credit card debt.
Related: What is a prepayment penalty on a mortgage?
Multiple heirs can complicate the decision process — what do you do if you want to stay in the home but the other heirs don’t, and you can’t afford to buy them out?
Refinancing the inherited property can be a way to buy out the other inheritors and put the property in your name. You may even be able to secure better mortgage rates or terms. However, if you choose to refinance the property in your name alone, you will be responsible for the entirety of the mortgage payments.
If you are the sole heir and want to keep the property, you may choose to transfer or assume the loan. You will need to work with the lender to see if this is possible. If it is, you will likely need to provide a death certificate to the loan servicer and pay a small fee to take over the loan.
Of course, there is also the option to sell the home, use the proceeds to pay off the mortgage, and pocket the leftover funds. Keep in mind that you will need to pay the associated seller’s closing costs. Use our home sale calculator to estimate your net proceeds.
If the home has depreciated — meaning it's worth less than the remaining mortgage balance — selling may not be an option unless the lender agrees to a short sale. In this arrangement, the lender accepts a lower sales price than what is owed. When the house sells, the proceeds will go to the lender. They may then choose to forgive the remaining balance or pursue the deceased's estate to make-up the difference.
→ Everything to know about selling inherited property
Suppose the mortgage isn't tied to co-borrowers or cosigners, and there isn't enough equity in the home to make a reasonable profit from selling. In that case, some heirs or executors may allow the lender to foreclose on the home.
In this case, the lender will assume property ownership and sell it to recoup their debt.
However, if an heir has already taken over the mortgage, or there are co-borrowers or cosigners attached to the loan when the lender forecloses, the foreclosure will have serious consequences for their credit — so much so that they may be unable to buy a home or get a new credit card for several years.
Nothing can prepare you or your loved ones for the loss of life. If you’re concerned about protecting your home and your loved ones in the case of your death, there are a few steps you can take in order to ensure as seamless a transition as possible:
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