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- It is possible to inherit a house with a mortgage attached to it.
- A deceased person's mortgage must be paid by the beneficiary or by selling the home.
- If you inherit a house, continue making mortgage payments on it, even if you plan to sell.
- If you inherit a home with a mortgage, make sure you can afford not only the monthly payments but also keeping up maintenance and paying taxes on the home, as well.
Often, when a family member passes away, their relatives inherit both a home and the mortgage that goes along with it. This can be a confusing and even stressful situation that raises many concerns. Does the mortgage still need to be repaid? What if the home is underwater? And what happens if there is no will in place?
We’ll explore what happens when you inherit a mortgaged home, your various options (buy, sell or rent) and how special circumstances, like a home with a reverse mortgage on it, can affect those options.
What to do when you inherit a house with a mortgage
Your choices to handle an inherited home and any associated debt range from selling the home to taking over the mortgage payments yourself. Each choice comes with its own set of financial considerations.
Step 1: Seek the assistance of an attorney
First things first: It’s smart to get help from an attorney specializing in elder law or estate planning. This is especially true if there are several (and possibly) contentious heirs, properties located in multiple jurisdictions or big money at stake. An attorney can help sort through next steps, including any legal requirements and filing procedures associated with inheriting a house with a mortgage.
Step 2: Keep making mortgage payments
Despite the borrower’s demise, the mortgage on the home still needs to be repaid and kept current while the estate gets straightened out. If mortgage payments are not made, heirs may face late payment fees or risk losing the home to foreclosure if too much time passes without payments.
So it’s important to find out the details — who the mortgage lender or servicer is, if statements arrive by mail or email, and how payments are handled (manually or auto-pay). If any arrangements need to be changed, now’s the time to change them.
Step 3: Move in and assume the mortgage
The long-term options available include moving into the home and assuming the mortgage in your name, in which case you would simply continue paying the monthly mortgage bills.
If you decide to assume the loan and transfer the home’s deed to your name, the lender or servicer should be willing to work with you. This is because heirs have significant leverage in dealing with a mortgage in an estate situation, thanks to the Garn-St. Germain Depository Institutions Act of 1982 (Garn-St. Germain Act). The law provides protections for heirs, among other provisions, that can help them assume an existing loan.
Many mortgages, for instance, include a due-on-sale or due-on-transfer clause that requires full repayment of the loan in the event of a change in ownership. In certain estate situations, however, the Garn-St Germain Act prevents the lender from calling the loan, even if the mortgage includes such a clause.
Step 4: Buy out other heirs
If there are other beneficiaries who inherited a portion of the property, you may need to buy them out if you’re interested in moving into the home yourself. This process, known as an estate buyout, may require obtaining an appraisal of the home and its contents to determine its current value and coming to an agreement on the price that will be paid to the others for their share.
You may also need to take out a loan to access enough cash to pay off any other heirs in a buyout. Special types of financing for this process exist, known as probate or estate loans.
Step 5: Sell the home
Beneficiaries could jointly choose to sell the inherited home instead. This may make dealing with the outstanding debt easier by using the proceeds to pay off the mortgage. If there are remaining proceeds after the sale is finalized, the money can be distributed amongst the heirs.
The deceased individual’s will may provide instructions regarding distribution of sale proceeds amongst heirs. There may also be state laws surrounding how to distribute proceeds.
If you do decide to sell, make sure you understand whether there will be tax consequences. There may be capital gains taxes to consider stemming from a sale. This tax is paid on proceeds that are above the home’s original purchase price (aka the property’s tax basis) — in other words, any profit on the sale.
When you inherit a home, its tax basis will be stepped up to reflect the home’s current market value, which often entirely eliminates any capital gains taxes that may be due. However, if you wait several years to sell the property and it continues to increase in value, you may be responsible for capital gains taxes.
Step 6: Research “death tax” consequences
Federal estate tax — which is paid out of the deceased person’s assets — is something for the estate executor to deal with, but you might want advice from your attorney as well. In 2023, an estate must be worth at least $12.92 million before the estate tax kicks in. So the odds of owing federal estate taxes are somewhat small. In 2021, 6,158 federal estate tax returns were filed, and of those, just 2,584 returns (just over half) ended up being taxable, according to the Tax Foundation.
Aside from federal liability, some states have estate taxes of their own. Some also have inheritance taxes, which are the responsibility of the heirs to pay. All told, 17 states and Washington, D.C., also have either an estate tax, an inheritance tax or both.
Inheriting a house with a reverse mortgage
When a death involves a reverse mortgage or a Home Equity Conversion Mortgage (HECM), your options vary according to the circumstances of the borrower who passed away. Mike Roberts, founder of MyHECM.com and author of “The Reverse Mortgage Revealed: An Industry Insider’s Guide to the Reverse Mortgage,” says there are a few ways to handle inheriting a house with a reverse mortgage:
- Pay off the balance: If you can pay off the balance in full, you can take possession of a home with a reverse mortgage.
- Refinance: You can refinance the inherited reverse mortgage into a traditional one, paying off the balance owed when you refinance.
- Sell the home: You can sell the home for 95 percent of the appraised value.
- Agree to a deed in lieu of foreclosure: By giving the lender the deed to your home, you will walk away from the home without owing anything on it.
If you inherit a house with a reverse mortgage, time is not on your side. According to Roberts, there’s a six-month window to repay the debt, which can be extended if the heir is actively working to pay off the debt.
“If the reverse mortgage isn’t paid off [by the one-year mark], the lender is required by HUD to begin the foreclosure process,” says Roberts. “The word ‘foreclosure’ carries very negative connotations, but it’s a normal part of settling up a reverse mortgage once the last borrower or non-borrowing spouse passes away.”
If you’re a surviving spouse and you’re on the reverse mortgage, nothing will change, says Roberts. But say the borrower who passed away has an unmarried partner. If the partner is on the loan, they can continue living in the home. If not, their options are limited.
“Once the last surviving borrower or non-borrowing spouse dies, the taxes and insurance cease being paid unless an heir chooses to continue the payments,” says Roberts. “[The] heirs will dictate what happens to the home and whether the significant other can remain living in it,”
Note, too, that when you take out a reverse mortgage, you’re responsible for continuing to pay homeowners insurance and property taxes and keeping the home in good shape. When a borrower with a reverse mortgage passes away, these payments stop.
Inheriting a house with an underwater mortgage
There are cases when the value of the inherited home is less than the outstanding mortgage debt, meaning the home has negative equity or is “underwater.” As the heir, this may be a determining factor as to whether you keep it or sell it.
A good first step is to double check that the home’s appraised value is correct. If the home’s value is less than the outstanding mortgage balance, you might consider requesting a short sale of the home or a deed in lieu of foreclosure with the lender.
If the mortgage is a non-recourse loan — meaning the borrower doesn’t have to pay more than the home’s value — the lender may have few options outside of foreclosure. The same generally applies for a reverse mortgage.
Who inherits the mortgage if there isn’t a will?
In some cases, a borrower passes away without a will in place. This condition of “dying intestate” virtually ensures new levels of complication and cost when handling a home with a mortgage (or any other assets), so it’s best to speak with an attorney regarding your specific situation.
On the other side of things, it’s in your interest to protect your assets and ensure your wishes are carried out after your passing. Wills, living wills, trusts and other estate-planning documents are crucial. If you’re seeking legal help, the National Academy of Elder Law Attorneys (NAELA) is a good resource and has a look-up tool so you can find attorneys in your area.
FAQ about inheriting a house with a mortgage
Yes, you can. The home can be left to you as part of the deceased individual’s will, or if the person died intestate, you may inherit the home due to a court distributing the deceased individual’s estate.
If you inherited a house with a mortgage along with your siblings (or anyone else), chances are you will need to sit down together (in some cases, with a mediator) to discuss everyone’s plans for the house.
For example, if one sibling wants to keep the house, they must buy the remaining siblings out of the house. If everyone is going to share the home, they will need to decide how to best pay down or make recurring payments on the remaining mortgage.
If heirs cannot agree on how to handle the home, they will need to go to court. If this is the route taken, the mortgage will still need to be paid, as will continued home maintenance.
The Garn-St. Germain Depository Institutions Act of 1982 (Garn-St. Germain Act) is a law that provides protections for relatives who inherit property with outstanding mortgages. In particular, this act bars lenders from enforcing what’s known as the due-on-sale clause. Often a part of mortgage contracts, due-on-sale clauses require full payment of a loan upon transfer of interest in the property.
If you inherit a home that needs repairs, you could do a cash-out refinance and use the proceeds to cover the costs of the needed work. You could also look into getting a home equity loan or a home equity line of credit (HELOC) — both let you borrow a sum based on the home’s value and your ownership stake in it.