You inherit a house with a mortgage. What happens depends on the solvency of the estate. You may have to sell the house to pay off other debts the estate may have. Otherwise, you have a few options depending on what you want to do with the house. Basically, you can sell the house or keep it.
- Heirs do inherit mortgage debt
- You can inherit a house with a mortgage
- You can get insurance that will pay your mortgage if you die.
If you are fortunate enough to inherit the real estate from a loved one look at it as a blessing, not a burden. In the worst case, the estate must sell the house to pay off other debts and you will not get any money. Otherwise, you may get a nice monetary inheritance or a legacy property to live in.
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Do Heirs Inherit Mortgage Debt?
You inherit a house with mortgage debt. However, this does not have to be a frightening proposition because the loan is secured by the house. It is likely that the house is worth more than the loan. If this is the case, then you have several options for what to do with the property which we will discuss later. On the other hand, what happens if the principal amount is greater than the value of the home? In this case, the best alternative may be to let the bank foreclose and take possession of the property.1
What is the Basis for a House You Inherit with a Mortgage
If you decide to sell the basis for the property becomes important. The basis is the value of the property when you take possession. Therefore, as soon as you inherit the house get it appraised. This becomes your basis when you sell it. The difference between the sale price and the basis is subject to capital gains, so if you sell the property quickly you will not have to pay any capital gains taxes.
Foreclosure of a House You Inherit with a Mortgage
Lenders can foreclose on an inherited property with a mortgage and often do. In many cases, this is the best course of action. These criteria determine if it is a good idea to let the bank foreclose:
- The loan amount is greater than the house’s equity
- The deceased is the only borrower (no co-borrowers)
If there is another borrower on the loan, then the foreclosure will damage their credit. However, if the deceased is the only name on the mortgage, then neither the foreclosure nor the remaining balance after the sale of the house will impact the heirs.2
Can You Inherit a House with a Mortgage?
It is common for someone to inherit a house with a mortgage. What you do with the house depends on your financial situation and your desire to own the property. You may want or need to sell the property. If you are a close relative, you may be able to assume the mortgage. If you cannot assume the mortgage, you may finance a new mortgage on the home. Finally, if you have the resources you may want to pay off the mortgage and own the home with a clear title.3
Can You Sell an Inherited House That Has a Mortgage?
The first option we will look at is to sell the real estate. This is the most common disposition of real estate when a person dies. There are several reasons:
- If there are multiple heirs, they usually find it easier and more beneficial to liquidate the property.
- Often, the sale is necessary to pay off other debts.
- Many times, heirs do not want to own the house because they live in another primary residence and do not want to maintain it as an investment.
- Finally, many do not want to keep the house that a loved one owned for sentimental reasons.
For whatever reason, most inherited property is sold during probate. If the house has a mortgage, then that loan gets paid off first. If anything is left, that money goes to pay off any other debts the estate has. After that, any money goes to the heirs.
Can I Assume My Deceased Parents’ Mortgage?
You can assume your deceased parents’ mortgage under certain conditions. The Garn-St. Germain Depository Instutions Act of 1982 provides for an heir to assume the mortgage of a deceased relative. It is a complex law that deals with many banking issues besides inherited property. Therefore, you should speak with an experienced real estate attorney before you assume your parents’ mortgage.
Can You Keep a Mortgage in a Dead Person’s Name?
If it is not a close relative, you probably will not be able to keep the mortgage in the deceased person’s name. you must finance under your name. The process for transferring the debt into your name is very similar to when you buy a house from someone else.
- You must get approved to borrow enough money to pay for the house.
- The bank appraises the home to make sure it is worth at least the value of the loan.
The underwriting process is the same because the bank is addressing the same issues that they need to in a regular house sale.
Can You Pay Off the Mortgage of a Deceased Parent’s Home and Continue to Live There?
If you have the resources, you can pay off the loan balance and continue to live in the home. Usually, this is not an option because most people do not have enough money to pay off the balance of a mortgage. However, if you do have enough liquid assets you may pay off the mortgage and do whatever you want with the house.
What Kind of Insurance Pays Off Your House if You Die?
For most people, the best way to ensure that your mortgage does not become a burden for your heirs if you die is to buy a term life policy that covers the life of your mortgage. If you have a 30-year mortgage, buy a 30-year term life policy. On the other hand, if you have a 15-year mortgage buy a 15-year policy.
If you do not qualify for a regular term life insurance policy, there are mortgage life insurance, also known as mortgage protection life insurance, policies. Since these policies typically do not have underwriting, you can qualify even with serious medical problems. There are significant downsides with these policies, though:
- Premiums are usually much higher than term policies.
- The payout goes directly to the mortgage company and funds cannot be used for any other purpose.
- With many of these policies premiums fluctuate.
Therefore, if you can get a term life policy to cover the value of your mortgage principal it is the best value to protect your loved ones from mortgage headaches if you die.
One final note about mortgage life insurance. It is different from mortgage insurance. Banks may require the latter to protect themselves for certain loans. These premiums pay the lender the difference between the sale price and loan balance when the bank must foreclose on a house. Mortgage insurance does not pay off your house if you die. Mortgage (protection) life insurance pays off the mortgage if you die.4
Final Thoughts About a House You Inherit with a Mortgage
What happens if you inherit a house with a mortgage? Several things can happen depending on your financial situation. You may need to sell it. You may even let the bank foreclose on it. However, you may want to assume the loan if you can or pay it off if you have enough money.
The bottom line is it will not be a financial burden for you. If the estate owes money, the executor sells the assets, including the house, to pay the debts. Sometimes the proceeds from the house sale are insufficient to pay the debts. In these cases, you simply do not get any money. If the proceeds from the sale pay off all the debts and money is leftover then you get that residual amount. Finally, if there are no other debts or other more liquid assets that get sold to pay the debts, then you have options for taking possession of the property if you want to.
Therefore, if you inherit a house from a loved one look at it as a blessing. Someone loved you enough to leave you their most important and treasured possession.
