Does the home you inherited include a mortgage?

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When a family member passes away, there are often questions about wills, inheritances and how best to settle financial affairs. It can be a stressful time, and complicated, especially when real estate is involved. What happens if you inherit your loved one’s home? What if they still have payments to make on their mortgage? We’ll explore these and other questions you may have below.

When you inherit a mortgage

In many situations when a family member passes away, heirs inherit both a home and the mortgage that goes with it.

First thing’s 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 contentious heirs, properties located in multiple jurisdictions or big money at stake.

Despite the passing of the borrower, the mortgage still needs to be repaid, so if you’ve inherited it, you’ll have to decide how the loan and property will be handled. You may be faced with late payments (or nonpayment) as you get things straightened out, or you may not even know about the outstanding debt, who the lender or servicer is or what balance remains.

Once you know your standing, you have several options.

If you move into the home, you may be able to assume the mortgage and continue paying it. You might also consider doing a cash-out refinance and pay that way.

You could choose to sell the home instead, which may make it easier to repay the loan by using the proceeds. If there’s more than one heir, such as in the case of siblings, you may be considering buying them out, as well.

There’s good news with these options. First, heirs have significant leverage dealing with a mortgage in an estate situation. The Garn-St Germain Depository Institutions Act of 1982 (Garn-St. Germain Act) provides protections for heirs, among other provisions, that can help them assume an existing loan.

Second, the odds of owing federal estate taxes are small. For perspective, in 2016, there were 2.74 million deaths in the U.S., but only roughly 12,400 estates filed returns that were subject to the estate tax, according to the IRS. In 2020, an estate must be worth at least $11.58 million before the federal estate tax kicks in.

Aside from federal liability, though, 17 states and Washington, D.C., also have either an estate tax, an inheritance tax or both. In addition, depending on what you do with the home, there may be capital gains taxes to consider stemming from a sale.

When you assume the mortgage

If you’re assuming the loan, the lender or servicer should be willing to work with you. That’s because while most mortgages aren’t assumable, the Garn-St. Germain Act allows heirs to assume a loan for a number of reasons, including the transfer of property to a relative when a borrower passes away.

More often than not, mortgages 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, this law prevents the lender from calling the loan, even if it has such a clause.

The Consumer Financial Protection Bureau also has newer guidelines for lenders that generally allow for an heir’s name to be added to an existing mortgage when the borrower passes away.

Additionally, surviving spouses have special protections to ensure they can keep an inherited home. In many states, this includes holding the title as a “tenancy by the entireties” or, in community property states, a “community property with right of survivorship.”

If you decide to assume the mortgage and make payments, it’s important to work with the lender or servicer to get all the paperwork upgraded so that you become the new borrower on the loan.

When 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 paying 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.

When the mortgage is underwater

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.”

When there isn’t a will

In some cases, a borrower passes away without a will in place. This 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 or legal clinic 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 and other legal documentation are crucially important. If you’re seeking legal help, the National Academy of Elder Law Attorneys (NAELA) is a good place to start, and has a look-up tool so you can find attorneys in your area.

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