Mortgages can span decades. Naturally, not all homeowners outlive these long-term loans. Here, we discuss what happens when a homeowner passes away with a loan still on the home. This can be a tough topic to confront, but reviewing the potential scenarios will help you prepare for the possibility.
How the Mortgage Lives On—And for How Long
A deceased person’s mortgage has to be paid, of course—just as any debt does. If there is no co-owner to automatically receive homeownership, and the house goes into probate, the personal representative must keep paying the estate’s bills. This includes keeping the mortgage payments up to date. If the estate lacks the cash to pay the lender, the personal representative might sell the house and pay the mortgage with the proceeds.
Instead, could the home survive the probate process with its mortgage intact? It might.
First, check the language of the mortgage itself. Acceleration clauses are standard in home mortgages, making the debt due within a very short window after the borrower transfers the asset. So, by default, the mortgage must be paid off when the home is transferred to a new owner.
But if certain people are named as beneficiaries to the home, pursuant to federal law, the mortgage lender must transfer the loan to the beneficiary. The Garn-St. Germain Depository Institutions Act of 1982 exempts close relatives from acceleration clauses. The relative who inherits should tell the mortgage company about the deed transfer, and assume the mortgage.
Then:
- The new owner will receive Form 1098 from the lender and can claim mortgage interest deductions when filing income taxes come April.
- The new owner will be named on the mortgage, and can initiate a loan payoff when selling or refinancing the home in the future.
A new owner who is happy to just keep the home may assume the regular mortgage payment schedule.
New Mortgage Rights Are Good News for Heirs
Two vital rules help heirs who wish to take over a home with the mortgage intact:
- Since 2014, after the mortgage borrower dies, under federal law a relative who inherits the property may take over the deceased person’s mortgage as a borrow —without triggering the Ability-to-Repay rule. This new mortgage holder is not deemed a new borrower. This allows a surviving loved one to avoid the burden of proving an ability to repay the mortgage. The lender must work with the heir to pay the mortgage or obtain a loan modification as needed.
- Since 2018, a federal rule requires the lender to quickly communicate with family members and heirs who have a legal interest in the home, and treat them as “successors in interest” with full rights in the mortgage. Close relatives protected by the Garn-St. Germain Depository Institutions Act of 1982 are entitled to a reasonable time period to place their names on the loan agreement, and to apply for loan modifications.
Given these protections, you can leave your home to a loved one in your will without worrying that the lender will refuse to deal with your beneficiary.
Some Mortgages Might Not Make Sense to Keep
What if the property, at its current market value, isn’t worth the mortgage? If no one is keen to take over the debt, and the estate itself can’t cover it either, then the estate’s personal representative might ask the mortgage lender about possibly accepting a lesser payoff than what’s due. Then the house would be sold in a short sale. A lender might agree to this in order to avert the time-consuming process of foreclosure. The personal representative should be sure to engage an attorney to determine the legal ramifications of a short sale.
In some cases, beneficiaries walk away. On the other hand, someone who co-signed the loan agreement is liable for paying it off—whether that person’s name is on the deed or not.
Pro tip: A beneficiary is allowed to refuse the deed without credit damage or financial penalty. As long as heirs are not already on the mortgage agreement, they do not become liable for the loan without their consent. If no one steps up to accept the deed, it is up to the mortgage lender to initiate a foreclosure.
Planning Ahead: Looking Out for a Surviving Loved One
Is your marriage partner already on your mortgage? Then, the likely scenario is greatly simplified.
Granted, the death of one spouse can leave the remaining homeowner financially vulnerable. A surviving partner who cannot continue making the payments might be compelled to sell, then pay off the mortgage with the sale proceeds. If you co-own your home, and this problem could occur, you might take one of the following precautions:
- Buy a mortgage life insurance policy. If you pass away with a mortgage in place, It will cover the balance due to your mortgage lender. Mortgage life insurance presents another option, apart from traditional life insurance, to shield your loved one from financial vulnerability. Important note: The value of mortgage life insurance goes down as you continue to pay the mortgage down. Keep this in mind as you decide how long you want this policy in place.
- Decide to downsize, to make sure you have no concerns about your surviving spouse being left in a difficult financial position. Proceeds from your home sale will make funds available to your loved one, who will need cash to maintain and pay taxes on the smaller property you buy.
- Using your current income, pay off your current mortgage quickly, for your peace of mind.
If you do die leaving a surviving co-borrower, you can expect a simple transition of the loan the survivor, so the mortgage can stay in place. If you are in the fortunate position of leaving enough wealth in your estate, using your will to instruct your personal representative to pay off the mortgage will allow your loved one to receive the home free of debt.
Pro tip: Most people leave general instructions in their wills that the estate should pay off debts. But does that mean secured debt? How can your executor know for sure? It's better to be clear, and expressly state that you want the executor to send a final mortgage payoff, if that is your intent.
Should You Transfer a Mortgage Through a Transfer-on-Death Deed?
If state law allows for a beneficiary deed or transfer-on-death deed for transferring real estate, the general process goes this way. You’ll place the name of your beneficiary, and copy the legal description of your property from your current deed, onto the Transfer-on-Death deed. Then you’ll record it, taking care to follow your state’s required formalities. Then, when you pass away, the deed’s beneficiary receives not only the home, but also its debts (mortgages, home equity loans, and so forth).
State laws offer a range of estate planning tools that help you plan to transfer your title straight to a beneficiary without probate. For example, the use of a transfer-on-death deed can effect the title transfer. These deeds can work if the person designated in them outlives the homeowner and is willing to take on the house and its debt as it stands when the owner passes away.
Because of the complex interplay between state laws, loan rules, and your own financial and relationship dynamics, we recommend consulting with a lawyer experienced in wills, estates and trusts if you opt to transfer real property with a special deed. Because of the supportive rules we have outlined earlier in this guide, most people do not need to use special deeds or creative tactics to help a relative assume the mortgage loan.
Pro tip: There are good reasons to remove a deceased owner's name from the real property title. As long as your loved one is prepared to assume your mortgage payments, there should be no reason for a lender to object to this. The main issue is to put a legally sound agreement in place between the new owner and the lender, so the remaining balance is duly paid.
Follow the Scout’s Motto: Be Prepared.
Sound estate planning means taking the time to look ahead, anticipate the needs of others, consider the unexpected, and carefully prepare. Putting a plan in place for your mortgage debt will make things easier for everybody—in the event your debt outlives you.