No one likes to think about their own mortality, but the reality is that nothing in life is certain. You could have an accident or get sick and find yourself having to take care of what you leave behind when you die. If you have a mortgage, you might be concerned about what it means for your heirs and loved ones. Will they be able to keep your house, and who will be responsible for paying for it?
Who takes care of your mortgage when you die?
Rightly for this subject, the word mortgage is taken from a French term for “pledge to death”. When you die, your mortgage does not suddenly disappear. Your mortgage lender has yet to be paid off and could foreclose on your home if that doesn’t happen. The same is true if there are any outstanding home equity loans or lines of credit attached to the property.
If you’ve applied for a mortgage with a co-borrower or co-signer, the solution is relatively simple: the other party can continue to repay the loan.
If you do not have a co-borrower or co-signer, the responsibility rests with the executor of your estate, who should continue to make payments using your estate funds while the fate of the house is settled.
If you leave your home to be inherited by an heir, your heir can decide what to do with the house and the mortgage. Typically, your heir will either need to assume the mortgage and start making payments, or arrange for the property to be sold.
What if you inherit an asset?
If you inherit a property that has a mortgage, you will be responsible for making the payments on that loan.
If you are the sole heir, you can contact the mortgage agent and ask to take over the mortgage or sell the property. You can also choose to let the lender enter.
If you want to take on the loan, you can work with the service agent to transfer the loan to you. If you sell the property, you will need to use the proceeds to pay off the loan before you can pocket a windfall.
Some lenders are willing to be flexible if you can’t afford the loan but don’t want to sell. You may be able to refinance the loan for a lower payment or change the terms to make it more affordable.
If several heirs inherit an interest in the house, things get complicated. Each party will have to agree on what to do with the property, or one of them may have to buy back the shares of the others, for example. It is best to seek the help of a lawyer specializing in real estate law or real estate law in these types of situations.
Do heirs have to requalify?
Borrowers generally must meet “repayment capacity” requirements before a mortgage lender can approve a loan. These rules help protect borrowers from predatory lending that they might not be able to afford.
However, there is an exception to this rule if you are inheriting a house. Heirs do not have to re-qualify for the mortgage on the house they inherited. This gives them the ability to keep the house and take on the loan without having to meet repayment capacity requirements.
However, if you want to change the terms of the mortgage, such as refinancing at a lower rate, you will need to qualify for a new loan and meet all of the lender’s eligibility requirements.
How to take out a mortgage
You may need to provide proof that you are the lawful heir of the property, or the executor, if you inherit a house with a mortgage and want to assume the loan. Contact the mortgage lender or service agent for next steps and information, such as outstanding balance, monthly payment, and other essential details.
You can usually work directly with the service agent to take care of the loan. Remember, you don’t have to go through the underwriting process or re-qualify for the mortgage in order to take it on. You may want to hire a lawyer to help you with your communications with the duty officer, especially if the duty officer is not very helpful in your situation.
Once you have taken over the loan, you can continue to make payments or opt for refinancing.
At the end of the line
If you are a homeowner, it is important to plan for the future and what will happen when you die. Having a clear will that outlines what to do with your mortgage, bank accounts, and other assets will help those close to you know what to do with your estate. A good life insurance policy can also help save your heirs from financial stress. Take the time to create an estate plan, even if you don’t think you need it, and talk to your loved ones about your wishes, including what you would like to see happen with your home.