Inheriting a Mortgage Along With a Deed? A Few Considerations on How to Respond

More than 40% of baby boomers still have a mortgage on their home. The great generational deed transfer has begun, and many homes are about to be passed to the next generation.

Can homes get through probate and be passed to the next-generation owner(s) with their mortgages still in place? It’s possible.

This is not always an easy question for older adults or their loved ones to thrash out. But it’s critical to understand how to plan for a mortgaged property inheritance.   

Where to Start: The Basics

Can a home with a mortgage be willed to someone else? It can—mortgage and all. All major assets can be included in your will.

If you’re the one who received the bequest, and the home comes with a mortgage, what happens?

First, know that you do not have to accept the bequest. A beneficiary is free to refuse a deed. Unless you’re already on the mortgage, you don’t have to become responsible for the deed with its connected mortgage loan.

But if you choose to accept it, start by contacting the loan servicer. That is, call the company the late owner was paying.

It’s true that heirs sometimes simply begin making payments to keep the loan alive. But it’s best to get in touch with the mortgage servicer and make it official. You want everything to go well with the account, and that means making yourself known to the company you’ll be paying.

Tell the agent about the deed transfer, and explain that you wish to keep the mortgage intact. Be ready to supply:

• A death certificate for the purpose of taking the deceased owner’s name off the deed.

• The deed, and the new homeowner’s proof of identity.

Find out what the servicer expects regarding the loan. For a mortgage company, it helps when a new owner is prepared to keep a loan going. So, federal law helps heirs who wish to take over a home and keep making the mortgage payments.  

Cake and Eat It Too: You Can Accept, Then Sell

Heirs who inherit a financed home can keep it and keep paying the loan off. A variation on this theme is keeping the real estate and using it as an investment. One or more heirs can oversee the rental business, and they can use rental income to pay for the management work and gradually pay off the mortgage. Because rental homes and primary homes are classified differently, a lender must agree to maintain or restructure the financing. The heirs will also need to update the insurance policy to cover the investment use.

But if holding onto the real estate isn’t feasible, they can sell it and satisfy the mortgage debt out of the proceeds. Same goes for a surviving co-owner. A co-owner unable to continue making mortgage payments might need to sell in order to satisfy the mortgage and perhaps downsize.

Heirs can also keep the home within the family. That is, multiple heirs may decide to buy each other out.

If there are co-heirs, they’ll need to arrive at a legal agreement. Say you’d like to keep the home. You inherited the deed together with another heir. To buy out the other person, you’ll first need an independent appraisal. After determining the current fair market value, agree with your co-inheritor on what you will pay for their interest. There are real estate brokerages with experience guiding heirs through this process, including connecting the heirs to suitable financing options.

Often, co-heirs simply decide together to sell their inherited real estate, pay off the mortgage, and distribute the funds left over. In any case, no matter how they may decide to sell, heirs will need to stay on top of the mortgage payments until they do. They also need to make sure the property taxes and the insurance policies are kept up.

Many states permit the use of a beneficiary deed or transfer on death deed for homes. The TOD deed can work if the named beneficiary outlives the homeowner and agrees to accept the home and any debt attached to it.  

Why a Full Mortgage Payoff Might Not Be Due Upon Death

When someone dies with a mortgage, leaving no surviving co-borrower, the personal representative of the late mortgage holder keeps paying the mortgage to avert foreclosure.

Normally, a full payoff becomes due when the borrower is no longer the title holder. But if the home is bequeathed to a relative, the loan won’t automatically become due. Under the Garn-St. Germain Depository Institutions Act of 1982, a federal rule requires the lender to contact relatives with interests in the home and treat them as “successors in interest” to the mortgage. Close relatives get a reasonable time to place their names on the loan agreement.

What if you lack the “ability to repay” according to the loan’s terms? You may request that the lender modify the loan. And when you are named as the new homeowner on the mortgage, you’ll be able to claim mortgage deductions if you itemize them on your federal tax return.

Paying nothing at all for three months or more is likely to result in a mortgage default and foreclosure. If no heir agrees to accept the deed, the lender will foreclose on the loan.

What if the late owner took out a reverse mortgage? Reverse mortgages allow homeowners to get income out of their home equity. But they must be paid off when the deed holder dies. Speak with the lending company about how to proceed.

Good to Know

We hope this exploration of the inherited mortgage offers confidence. A home can be effectively left as an intergenerational bequest, and the lender will acknowledge the recipient’s choice to take on the mortgage.

It’s important to discuss these plans in advance, and we hope we’ve encouraged our readers to do so. Planning ahead for the life of a mortgage will make things easier for everybody—just in case your mortgage lives longer than you do. If you have enough in your accounts when you pass, you can instruct the executor through your will to pay off your debts, so that your beneficiaries don’t have to. 

Seeking advice from an attorney is a good move. All the more so when a high-value asset is in question, when there are multiple beneficiaries, or when the circumstances implicate more than one county or state. Inheritance laws and taxation vary from location to location. If you’re not sure where to start, the National Academy of Elder Law Attorneys can help you find elder law practitioners by location.