Who’s responsible for a mortgage after the borrower dies?

It’s a topic that can feel dark to think about, but it’s important for any homeowner to understand what happens to a property after someone dies. If the home is paid off, then the inheritance of the property is typically decided by a will or probate proceedings. But it’s also possible that the homeowner may not have yet finished paying off the mortgage and there is still a balance due.

Navigating loss is stressful enough as it is, and the idea of adding unpaid mortgage debt can only add to the weight of it. Whether you’re making your own estate plan or you’ve recently inherited a home, here’s what to know about what happens to a mortgage when a homeowner dies.

What happens to your mortgage debt if you die?

If a homeowner dies and still has mortgage debt, that debt will need to be repaid. After you die, any debts you have are typically paid from your estate. Before your heirs receive any inheritance, the executor of your estate will use your assets to pay off your creditors. Mortgage debt works a bit differently depending on how you structured your loan.

If you have a spouse or partner who was a co-borrower or co-signer on the loan, they will become responsible for paying the mortgage. If you had an individual mortgage with only your name on the loan, your spouse or heirs are not legally obligated to continue to make payments. However, that mortgage debt will still need to be settled. Your spouse or heirs can either assume the mortgage or sell the home to pay off the mortgage. If no one takes over the mortgage after your death, your mortgage servicer will begin the process of foreclosing on the home.

Inheriting a house with a mortgage

If you’ve inherited a house, here are some of your options:

• Assume the mortgage and continue payments
• Refinance the mortgage to your name and potentially score better terms
• Sell the home to pay off the mortgage
• Sell your share of the home to other heirs

Typically, when a mortgaged property transfers ownership, a due-on-sale clause – or alienation clause  – is activated, and the remaining mortgage balance must be paid immediately. However, there are laws that allow heirs to inherit the title of a home and become its legal owner without triggering the due-on-sale clause.

So, if you’ve inherited the home of a loved one, you can assume their mortgage and continue making monthly payments, picking up right where they left off. Heirs should also be able to continue making payments to keep the mortgage current even if they haven’t legally assumed the property’s title.

If you’ve inherited a home and you were a co-signer on the mortgage, you become responsible for the mortgage regardless. Whether you’re a spouse or an heir, it’s important to contact the lender to let them know the homeowner has died to help avoid any financial consequences. Late payments can incur fees, and the lender could begin the foreclosure process if too many payments are missed.

How to get information on the mortgage

To take over the mortgage of a house you’ve inherited, you’ll need to talk to the loan servicer. This is how you can find out the monthly mortgage payment amount, the outstanding loan balance, and number of years left on the mortgage. You’ll likely need to provide proof of death and documents that indicate you’re the rightful heir to the home. The servicer should provide information about how to continue making payments and your options for assuming the loan.

You just inherited a house, so what should you do?

Inheriting a home while you’re still processing a loss can be overwhelming. Here are some steps to take:

• Notify the mortgage servicer in writing.
• Include a copy of the death certificate.
• If there is an executor of the estate, provide their paperwork and contact information
• Decide what you want to do with the house

Some state laws require you to contact the mortgage company within 30 days of the homeowner’s passing. If you are the sole heir, you’ll have the final say over what becomes of the home. If there are multiple heirs or you aren’t the executor of the will, this can get complicated, especially if everyone involved can’t agree on what to do with the home.

We’ll talk about what to do when the situation is fairly straightforward, such as an adult child inheriting a deceased parent’s house or a surviving spouse taking over a loan they weren’t originally on. If your situation is more complex or you anticipate conflict among the heirs, speaking with a lawyer may be a good idea.

Can you sell the inherited house?

One option is to sell the home to pay off the mortgage and split any leftover funds among the heirs listed in the will. If you want to keep the home, work with the servicer to get the mortgage transferred to you.

If you can’t afford the monthly mortgage payments under its existing loan terms, ask the servicer about loan modification, which may help you stay in the home and avoid foreclosure.

If there was a reverse mortgage on the property, the loan amount is due after the borrower’s death. If an heir wants to keep the property, they must repay the loan. Otherwise, they can sell the home or turn the deed over to the reverse mortgage servicer to pay off the debt – which is known as a reverse mortgage foreclosure.

Can you refinance an inherited home?

Yes, you can refinance the mortgage on a home you’ve inherited. With this option, you pay off the original loan with a new loan. This could potentially give you more favorable terms – like a lower interest rate and smaller monthly payment. However, you’ll need to qualify for the new loan with your own credit history, income, and assets.

What if there are multiple heirs of a property with a mortgage?

If you’ve inherited a property with siblings or other heirs, you’ll first need to determine what percentage of the home each heir has been given. If all siblings have been given equal share and want to keep the home, they can co-own the property as either joint tenants or tenants-in-common.

With joint tenancy, if one co-owner dies, the surviving co-owners inherit their stake in the property. With tenancy-in-common, if one co-owner dies, their interest in the property can be inherited by their heirs.

In an ideal world, all siblings would agree on what to do with the property, whether that means co-owning it or selling it. But what happens if you want to keep the home and the other heirs do not? You could buy out their stakes, but only if you have the money to do that.

A refinance can help you free up funds to buy out the other heirs and assume ownership of the property. But be mindful that buying out the other heirs will make you solely responsible for all mortgage payments.

What happens if you let a lender foreclose the house? 

If you inherit a house and make mortgage payments or settle the loan debt, the lender will begin the foreclosure process. If the house is worth more than the loan balance, then you have equity in the home that you’d be giving away. Selling the home or getting bought out by another heir would be a way you could liquidate that equity.

If the home is underwater, that means the loan balance is greater than what the home is worth. Heirs are not personally liable for inherited mortgage debt, so your credit wouldn’t be negatively impacted by letting the home go into foreclosure.

Preventing problems 

The death of a loved one can be a challenging time as the family grieves and figures out what to do with the property left behind. Planning ahead can help avoid disputes and ensure dependents are provided for after a death.

Mortgage protection insurance in case of death

One way to avoid issues with your mortgage after death is to purchase mortgage protection insurance (MPI), sometimes called mortgage life insurance. Unlike regular life insurance that gets paid to your beneficiaries, MPI is paid directly to your mortgage lender to cover some or all your remaining loan balance after your death.

MPI can help ensure that your loved ones won’t be burdened by outstanding mortgage payments after you die. However, there are a few drawbacks to consider. Many insurers require enrollment in a mortgage protection insurance plan within a few years of closing on a home. For older homeowners who have lived in their homes for many years, it may be challenging to get a policy. Monthly premiums can also be expensive. Depending on their circumstances, some homeowners may prefer to invest in a traditional life insurance policy, which gives their heirs the flexibility to use the payout as they see fit.

Estate planning

Having a will or a trust lets you dictate who receives what from your estate when you die. It’s also an important tool for homeowners who want to ensure their home gets passed down to the person or people they want to have it.

Creating an enforceable will is especially important if you have loved ones who aren’t related to you but whom you’d like to have a right to the home. Without a will, state laws will determine who inherits the property. Generally, these laws only consider the closest legal relatives eligible to inherit parts of an estate. For example, if you’re cohabitating and your partner isn’t a co-owner, they may lose the home after your death if you don’t include them in your will.

When you’re estate planning, consider refinancing your home to lock in a lower interest rate. A lower interest rate may lower the financial burden of the outstanding mortgage payments your heirs assume.

FAQ

Here are the answers to some more specific questions about what happens to a mortgage when you or a loved one passes away.

What happens to a property when a loved one dies but there is no designated will executor? 

If the will does not name an executor, then the probate court will appoint an administrator to manage the estate.

Do you inherit all the personal belongings in the house that you inherit? 

When you inherit a house, you typically also inherit its contents, unless the will explicitly states that certain items go to other individuals.

Will you need to pay capital gains tax if you sell the house you inherited? 

You may need to pay a capital gains tax on a house you’ve inherited if its value has increased in the time you’ve owned it.

The bottom line: Know what to expect when inheriting a house with a mortgage

Thinking about your death or the death of a loved one is never easy. But you and your heirs can take comfort and find peace of mind knowing you’re taking steps to plan for the eventual transfer of your property and payment of any outstanding mortgage balance. Speaking with an estate planner or financial adviser can help you decide which options may be best for your situation.

If you want to refinance your mortgage as part of your estate planning or you’ve inherited a home from a loved one, we can help. Start your application with Rocket Mortgage®. We can help you navigate your options during this sensitive time.