real estate

Must heirs repay father's underwater loan?

Steve McLindenDear Real Estate Adviser,
My father passed away with a conventional mortgage loan on his home -- a home worth far less than what he owed. The estate won't have enough to pay the difference. What should we do to get the house out from under the estate? Would the family become liable for this debt?
-- Diane M.

Dear Diane M.,
So sorry to hear about your father. It's always an enormous challenge juggling estate matters during a time of bereavement, and my heart goes out to you.

Unfortunately, you can't extricate the house from the estate at this point. However, the good news is you and any other heirs will have no liability for it, unless a family member or members co-signed the mortgage, which would oblige them to pay the original creditor. But as you correctly pointed out, your father's creditors would likely then pursue satisfaction of the note from the estate.

I am curious if you're still paying the mortgage loan. If so, there's probably no reason to do so, unless a family member wants to assume the loan. Not all lenders allow assumptions by family members following the death of original mortgagors, but many do, especially in this still-soft resale market in which tons of foreclosure inventory still sits on the books. If the mortgage is assumed, make sure the proper paperwork is filed immediately, and the death notice is presented to the lender.

Unless other arrangements are made, the lender will foreclose on the house if loan payments stop. As noted earlier, heirs have no legal obligation to pay off a house left to them in a will. Hence, the house would then become the lender's problem. The bank would then sell the house, probably at a loss, in which case the lender may enter a deficiency judgment against your father's estate -- a judgment that would, as you surmised, eat up any remaining estate assets and render the estate insolvent.

Your other option, and I don't think it's a very good one if the house is upside-down, is to try to sell it. If you do go that route for whatever reason, lenders typically give heirs a three-month period to sell the house, a period that's renewable for three months at a time, up to a year. During this span, lenders would want to see evidence that the house is being marketed. By the way, if a family member does want to keep the place, the loan could be refinanced by that party to settle your father's mortgage.

You'd best check with your father's lender to determine its policies and your options. You might want to at least consult with an estate or probate attorney, especially if additional challenges or complications arise.

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