You might be wondering about that house or condo you’ve left in your will. Often, after a homeowner passes on, the real property is sold from the estate to pay off debts. But maybe you have a relative who would like to have and keep your home.
For the sake of exploring the question, say you still owe a $50,000 mortgage balance when you pass on. Of course, you could leave your beneficiary enough money to pay your loan off, if you are financially able to do so. Or you could pay it off early yourself.
But if you need to pass the home on with a mortgage, can your beneficiary just keep your house or condo, and pick up the monthly mortgage payments where you left off? At least the next owner would have a head start — inheriting your home equity, and just paying what’s left on the balance.
Let’s look at how this plan could play out.
Your Relative May Take Over Your Mortgage When You Pass On
Under a federal provision called the Garn-St. Germain Depository Institutions Regulation Act a lender cannot accelerate the due date of the mortgage when:
- A joint tenant (including a tenant by the entirety or co-owner of community property) survives you and, by law, receives the title to your co-owned house.
- You bequeath your home to a relative who is living in the home when you pass.
- You leave the house to your surviving spouse.
- You leave the house to the child of your divorced co-owner.
- You have placed the title into a living trust. (Tip: Be sure your mortgage company holds a copy of the trust instrument.)
In these cases, your beneficiary can receive the home with the mortgage intact. You can explain this in your will, and keep the mortgage information in an accessible spot with your real estate paperwork. Your beneficiary — the person who inherits the mortgaged home — should tell the mortgage company about the deed transfer, and should start paying where you left off. Your beneficiary should be prepared to contact your mortgage servicer promptly at the time of your passing, so your mortgage company knows it cannot accelerate repayment.
☛ Want to learn more about what happens to your home loan after you pass away? Here, we discuss more on what happens when your mortgage outlives you.
The Mortgage Is Paid by the Personal Representative Until the Title Is Passed to a New Owner
What if your title is vested as sole property, or co-owned as tenants in common (no survivorship rights)? Expect your house to go into probate. It will be sold out of probate (if required to pay your debts) or be distributed to your beneficiary by a deed from the probate court. Until the house is conveyed out of probate to a new owner, the estate’s personal representative will carry on paying the mortgage.
When your relative inherits your home, that person might opt to sell it from the estate and use the sale proceeds to buy a home they would prefer. Because inherited homes can receive preferential tax treatment, beneficiaries should consider consulting with their tax experts before selling.
If the person you name as inheriting your house does want to keep it, that person may be one of the eligible people (see the bulleted list above) to take over your mortgage without having to qualify as a new borrower. This is an important provision. As you might imagine, lenders have been especially unwilling to let new owners keep mortgages that had interest rates lower than the going rates.
In ordinary transactions, transferring a home with a mortgage to a new owner triggers a “due on sale” or acceleration clause in the loan agreement, so that the entire balance of the loan becomes due and the new owner has to start over by applying for a new loan. That means they must prove their ability to pay for a mortgage under the lender’s guidelines. Your beneficiary might be out of work or otherwise not in a position to deal with a new mortgage application process. Fortunately, federal law steps in to ensure that’s not necessary.
Your Beneficiary Will Not Be Forced to Meet the Ability-to-Repay Rule
What are the advantages for a beneficiary who takes over a mortgage without having to qualify as a new borrower? The surviving beneficiary is relieved of the task of demonstrating the “ability to repay” the loan.
Under federal law:
- The new homeowner automatically qualifies to keep the deceased homeowner’s mortgage loan.
- The new owner is entitled to request information about the mortgage, pay off the principal, or request a loan modification.
- The lender must work with the new owner to modify the loan as needed.
- Before taxes are due, the mortgage company must send the home’s new owner an IRS Form 1098. The new homeowner can deduct mortgage interest.
Once probate is taken care of, the beneficiary can remove the name of the deceased from the house title. When the mortgage is in the new owner’s name, it will be possible to refinance when desired.
The Person Receiving Your Home Will Be Treated as Your Successor in Interest
After the above protective law went into effect, some mortgage servicers still put hoops up for people who inherited mortgages to jump through. So, a newer federal provision directs mortgage companies to promptly contact heirs and consider them “successors in interest” to the loan.
The mortgage company must allow successors in interest enough time to put their names on the mortgage and request loan modifications. Otherwise, relatives could inherit homes yet have no support from the lender if the current monthly payments are overwhelming. People in such circumstances can be forced to sell their family homes, then satisfy the mortgage lender with the proceeds of the sale. The Bureau of Consumer Financial Protection thought this was a harsh result, and produced regulations to avert it.
Owners themselves may prevent legal stress over inherited mortgages. Some owners protect their spouses or other joint owners by paying off the mortgage as soon as possible. Other owners might decide to shop for mortgage life insurance policies that pay off the loan when they pass away. It’s important to note that mortgage life insurance policies are worth less as you make payments over the years, and the mortgage balance gradually goes down.
In Some States, You Can Transfer Your Home—And Its Mortgage—With a Transfer-on-Death Deed
A transfer-on-death deed (also called a beneficiary deed) is allowed for passing on homes after death in some states. If you decide to transfer your home in this way, your beneficiary will get not only the title to your home, but also any loans tied to the home.
We recommend consulting with a lawyer who has dealt with estates and trusts if decide to pass your home along by using any type of special deed or trust. But even if you simply pass your home with a will, know that a relative will be able to receive your mortgaged house without being forced to qualify for a new mortgage.
12 U.S. Code § 1701j–3 – Preemption of Due-on-Sale Prohibitions
12 C.F.R. § 1024, 1026; 81 F.R. § 72,160 – 72,165. See also Bureau of Consumer Financial Protection, 12 CFR Part 1026 Application of Regulation Z’s Ability-to-Repay Rule to Certain Situations Involving Successors-in-Interest. Available as PDF: https://files.consumerfinance.gov/f/201407_cfpb_bulletin_mortgage-lending-rules_successors.pdf
Photo credits: Andrea Piacquadio, via Pexels.