Federal and state laws establish the rules for what happens to a house and its mortgage when the homeowner passes away. Nevertheless, the current owner can retain some control over this process by putting together some basic estate planning. These can range from drafting a will or establishing a trust, to the designation of beneficiaries and potentially taking out a life insurance policy.
When a person dies, all their liabilities and assets, including their house, are absorbed into their estate, which then must be settled. If the deceased has a will, they would have designated an executor to undertake the duty of filing the will for probate to settle their estate. Part of the probate process involves cataloguing assets and liabilities, and determining how they are to be allocated among creditors and inheritors. However, in the absence of a will or trust, the state’s probate court will direct the appointment of an individual to oversee the estate settlement. This person, often a spouse, adult child, or the closest relative, is tasked with discerning who holds the property title and who is named on the deed, as well as identifying if a living trust or transfer-on-death deed has been established to bypass probate. This process can safeguard heirs from unnecessary financial burdens and can facilitate a quicker property transition.
For solo property owners who lack a living trust or transfer-on-death deed but have a will stipulating the transfer of their home to an heir, here’s how the process unfolds:
An heir named in the will isn’t obligated to assume your mortgage, unless they had co-signed or were co-borrowers on your loan. However, federal law does enable heirs to take over the mortgage if they wish. For instance, if you leave your home and its associated mortgage to your son, the mortgage service provider must respect his request to assume the role of the new borrower. In this scenario, he isn’t required to qualify or provide proof of his ability to repay the loan. This provision regarding mortgage assumption is also valid following the demise of a spouse, though it’s worth noting that many spouses are frequently co-borrowers on a mortgage and co-owners of a property. A due-on-sale clause, which generally mandates full mortgage repayment upon the property’s ownership change, doesn’t apply when an heir assumes control.
Nonetheless, the lending institution maintains the right to foreclose if the heir assuming the mortgage discontinues the payments. To avoid this, you can leave additional assets or assign your heir as a life insurance policy beneficiary to provide funds.
If you pass away with other debts that your estate cannot settle, state law might necessitate the executor to liquidate your house to satisfy those debts. If the proceeds from the sale exceed the debt, any remaining balance would be inherited by the individual(s) inheriting your property. Utilizing life insurance to clear debts posthumously can prevent the forced sale of your home, allowing your heir to inherit it.
Importantly, it should be noted that your estate isn’t required to settle your mortgage. Since the mortgage is secured by your property, the mortgage servicer can recover their funds through foreclosure and sale of the house.
For those who find themselves in the position of an heir or an executor (or both) in relation to an estate, there are several options for managing the property and its mortgage after the homeowner’s death. These include:
- Continuation of mortgage payments,
- Mortgage repayment in full,
- Refinancing the mortgage,
- Selling the property, or
- Allowing the lender to foreclose.