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 was no will in place? We’ll explore these and other questions you may have below.

What to do when you inherit a house with a mortgage

There are several ways to handle an inherited home and any debt associated with it. Your choices 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 who specializes 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 home with a mortgage.

Step 2: Keep making mortgage payments

Despite the demise of the borrower, 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 be faced with late payment fees or even 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? By 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 to you include moving into the home and assuming the mortgage in your own 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 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 get a loan in order 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 home instead. This may make it easier to deal with the outstanding debt, 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 proceeds should be distributed.

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.

What to do if you inherit a reverse mortgage

When there’s a death that involves a reverse mortgage, or a Home Equity Conversion Mortgage (HECM), your options vary according to the circumstances of the borrower who passed away.

If you inherited a reverse mortgage from a parent, for example, your options include paying off or refinancing the balance and keeping the home, selling the home for at least 95 percent of the appraised value or agreeing to a deed in lieu of foreclosure, explains Mike Roberts, founder of MyHECM.com and author of “The Reverse Mortgage Revealed: An Industry Insider’s Guide to the Reverse Mortgage.”

According to Roberts, there’s a six-month window for the balance to be repaid, 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,” Roberts says. “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, Roberts says. 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.

“[The] heirs will dictate what happens to the home and whether the significant other can remain living in it,” Roberts says.

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.

“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,” Roberts says.

What to do if you inherit 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.

If the mortgage is a non-recourse loan — meaning the borrower doesn’t have to pay more than the value of the home — the lender may have few options outside of foreclosure. The same generally applies for a reverse mortgage.

“The most that will ever have to be repaid is the value of the home,” Roberts says. “The heirs are fully protected if the home isn’t worth enough to pay off the entire HECM balance.”

What to do when 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 crucially important. 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.

Frequently asked questions 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 as a result of a court distributing the deceased individual’s estate.
  • 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), which let you borrow a sum based on the home’s value and your ownership stake in it.