When someone inherits a home or similar property, the mortgage obligation is usually part of the deal.
If someone inherits real estate, do they also inherit the mortgage? Or does the executor, representative, or trustee pay off the loan before transferring the property to the new owner? Usually, the mortgage stays with the property.
Below is an overview of what happens when someone inherits real estate that has a mortgage. What are the responsibilities of the executor or representative, and what rights and obligations does the inheritor have?
Executors Should Keep Current on Mortgage Payments
When you're the executor or personal representative of someone's estate, part of your job is to safeguard estate assets until you can transfer them to the beneficiaries (the people who will inherit the property). The probate process can take many months, and it's your responsibility to protect the property during that time. This means you'll need to keep making mortgage payments using estate funds. You don't want to run up late fees or, worse, default on the mortgage and possibly trigger a foreclosure proceeding.
You might also need to take other measures to protect or maintain real estate, such as continuing to pay for homeowner's insurance, local property taxes, utility bills, and repairs that are necessary to prevent damage (like having a leaky pipe fixed). As the executor, you have a responsibility to keep the property in good shape until you hand it over to the beneficiaries.
If you're the trustee of a living trust, you'll likely have similar obligations (unless the trust document states otherwise), but the property may be in your hands for a shorter amount of time. People often make living trusts to avoid the delays and expenses of the probate court process.
What Does the Will or Trust Say About the Mortgage?
As executor, you should always first look at the will or trust document for guidance. If the document directs you to use estate or trust funds to pay off the mortgage, your path is clear.
Most wills, however, don't contain such an instruction—instead, they have general language about paying debts, which usually doesn't apply to a debt secured by a specific piece of property, like real estate mortgages or car loans.
If the will or trust document says nothing explicit about the mortgage, the inheritor usually takes the house with the mortgage. Whether the lender can exercise a "due-on-sale" clause—requiring that the mortgage be paid off completely when the inheritor takes ownership—depends on whether the inheritor is a relative of the deceased person.
The Real Estate Inheritor's Rights
Most mortgages come with due-on-sale clauses (also called "acceleration clauses") that allow lenders to demand a mortgage be paid off in its entirety when the property is sold. But the Garn-St. Germain Depository Institutions Act of 1982 (12 U.S.C. §1701j-3) spells out several situations in which lenders can't enforce due-on-sale clauses in loans. These situations include:
- when a joint tenant or tenant by the entirety dies, and
- when the property is transferred to a relative upon the death of a borrower.
In other words, if you inherit a mortgaged home from a family member, the bank can't make you pay off the loan all at once. This law applies to residential property with four or fewer dwelling units, including a residential manufactured home.
Choosing to Inherit the Mortgage
If the law (the Garn-St. Germain Act) applies to the inherited property, the inheritor can choose to keep making the payments under the existing terms of the mortgage. This approach can be a good deal for the new owner for several reasons because it means:
- the lender can't require the new owner to reapply for a mortgage
- the new owner saves the time and expense of the mortgage process, and
- the terms of the existing mortgage—including the interest rate and the number of remaining payments—seamlessly transfer to the new owner.
What If the Beneficiary Can't Afford the Property?
A new owner who can't afford to keep up the mortgage (and all the other expenses of home ownership, including property taxes, repairs, and maintenance) must consider another strategy, like any other homeowner in that situation. If an affordable refinance isn't available, or if the new owner doesn't want to live in the house or rent it out, selling it might be the way to go.
Note that if you hold on to an inherited property and it rises in value, you'll likely owe a capital gains tax on the increase in value when you later sell the house. (But if you reside in the house, you may not owe capital gains tax later.)
Learn more about how real estate is transferred after someone's death.
