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An important aspect of estate planning is deciding what will happen to your home after your death. The answer could be quite simple if the house is fully paid for. If not, you will need to consider the financial ramifications for your estate and for the person who inherits the house.
Here’s what happens to your mortgage when you die:
Who assumes a mortgage after my death?
No one automatically assumes your mortgage after you die. Your executor (i.e. the person you appoint to execute your will and manage your estate after your death) or administrator (i.e. everything is sorted out.
Later, the person who inherits the house may be able to take on the loan.
How to take over the mortgage on an inherited house
Mortgages have a sellability clause, also known as an accelerator clause, which requires full repayment of the loan if it is transferred to a new owner. However, federal law prohibits lenders from accelerating a loan upon the death of a borrower. People who acquire property in this way are considered “successors in interest”, and lenders should treat them as if they were the borrower.
The law allows an eligible person to assume the loan, without having to apply or qualify, and to continue making payments. You also have the right to modify the mortgage to avoid foreclosure if you want to keep the house.
What are my options as an heir to a house with a mortgage?
If you inherit a mortgaged home, there are several options available to you. The best depends on your personal preferences and your financial situation.
If you want to keep the house, you can:
- Suppose the mortgage: Federal law allows heirs to assume the mortgage loan of a deceased person in many cases. As long as you are a qualified successor – someone who inherited or otherwise acquired the property following the death of the owner – you can repossess the loan once the deed has been signed to you. The law also allows you to modify the loan if you are not financially able to make the payments.
- Refinance the mortgage loan: You can also refinance the mortgage into a new mortgage as soon as the deed is signed for you. You will need to apply for the loan, qualify based on your own creditworthiness, and pay closing costs. However, refinancing could cause the interest rate to drop or the loan repayment period to be extended, which can make the home more affordable.
- Repay the loan in full: Assuming you have the cash on hand, you can avoid mortgage problems entirely by paying off the balance in full. The house would then be yours free and unobstructed.
If you can’t or don’t want to keep the house, you can:
- Sell it: The house is yours as soon as the deed is transferred to you, so you can put it up for sale just like you would a house you bought yourself.
- Let the lender enter: If you don’t want the house and don’t want to sell it – a reasonable move if you’re unlikely to be selling for a profit – you can just do nothing. After a period of time without payment, the lender will foreclose and repossess the house.
What Happens to a Reverse Mortgage When You Die?
The rules change when you inherit a house from someone other than a spouse with whom you are a co-borrower on the home reverse mortgage.
A reverse mortgage gives senior homeowners access to the existing equity in their home. These loans do not have to be repaid unless the borrower and his co-borrowing spouse die or move out of the home.
If you inherit a property with a reverse mortgage, you have the option of selling or keeping the house. The loan is not assumable, but you can keep the house by doing one of two things: paying off the balance or paying 95% of the value of the house, whichever is less.
Likewise, if you decide to sell the home, you’ll use the proceeds to pay off the debt owed on the loan – or an amount that is at least 95% of the home’s value – and then pocket the remaining proceeds.
A crucial step in estate planning is to write a will detailing how you want your estate to be managed after your death, as well as who you want to name as executor. If you die intestate – without a will – the court will appoint an administrator to take on this role.
When planning to bequeath a mortgaged home, it’s important that you disclose the mortgage to your executor and loved ones, otherwise they won’t be able to make the payments and the home could be inadvertently lost.
Also, determine if the person who inherits your home will be able to afford the mortgage payments and maintenance. An estate or financial planner can help you develop a strategy to prevent your gift from becoming a burden on your loved ones.
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