How to Handle Inheritance Property With a Mortgage

By Jonathan Layton, J.D.

How to Handle Inheritance Property With a Mortgage

By Jonathan Layton, J.D.

Most people apply for a home mortgage with the expectation that it will be paid off during their lifetime.  But not everyone achieves that goal.  Sometimes a homeowner dies before the mortgage is paid off, leaving behind a debt to go with their legacy.

Find out what you can do if a loved one dies and leaves you inheritance property with a mortgage, and what kinds of options you have for your new property.


What Becomes of the Assets and Debts of the Decedent?

When a homeowner dies, any existing debts – including any outstanding mortgage amounts on the home – don’t just disappear; they are not simply forgiven. The remaining mortgage balance must be paid off by the estate (if the will so directs) or by the individual who inherits the property (the “inheritor”). 

But there are other options available to the inheritor, such as refinancing the mortgage, allowing it to be assumed by another person, selling the property, or altogether declining to accept the property.

Inheriting a Property With a Mortgage

If an heir or beneficiary inherits a property with an outstanding mortgage balance, they may or may not be saddled with the mortgage debt as well.  It depends on how the will was written.

If the deceased had other assets, like cash, stocks or bonds, the decedent may have specified in the will that the inheritor shall inherit the house “free and clear” of the mortgage.  In these situations, the executor pays off the mortgage using the estate’s assets before the property deed is transferred.

If, however, the decedent’s primary asset at the time of death is the house, or if the decedent specifies in the will that the inheritor receives the house, subject to paying off the remaining mortgage balance, the inheritor will be left with little choice but to deal with the mortgage debt once title passes.

I Just Inherited a House, What Are My Options?

When someone you love dies, any property they owned is typically distributed to their heirs or beneficiaries, according to the terms of the will. If the person dies intestate (that is, without a will), the decedent’s assets are typically distributed to the decedent’s next of kin. The assets may include the decedent’s home.

There are a number of options available to anyone who inherits a property with a mortgage.

Assume the mortgage.  Suppose the inheritor of the home has the financial ability to assume the terms of the existing mortgage.  In that case, they may continue making the monthly payments just as though they were the initial borrower. 

Once the inheritor receives legal title to the home and has agreed to continue to make the mortgage payments, they can then decide to live at the property, use it as a second home, or otherwise dispose of the property as they please.

Refinance the mortgage. Another option for the inheritor is to apply to a bank to refinance the terms of the existing mortgage. This is often a smart move if, for instance, the current mortgage interest rate is exorbitant. 

Allow the mortgage to be assumed by someone else. The inheritor may decide to simply allow the existing mortgage to be assumed, or taken over, by a family member, relative, friend, or even a complete stranger.

Allow foreclosure. There is no legal obligation to continue making mortgage payments for a property, especially if the amount of the mortgage exceeds the appraised value of the home.  You can’t be forced to repay the mortgage.

Suppose the amount of the existing mortgage is greater than the appraised value of the property.  In that event, the inheritor may wish to notify the executor or administrator of the estate that they have elected not to keep the property and be burdened by the debt.  In that instance, the executor or administrator will then have the authority to dispose of the property in any reasonable manner.  If there are not sufficient funds in the estate to pay off the outstanding mortgage balance, the executor or administrator may find it beneficial to simply allow the lender to foreclose on the property and list it for sale

Sell the property. The inheritor may also choose to try to sell the property, rather than take on the mortgage debt. 

Due-on-Sale Clause

One issue that may arise is whether the terms of the mortgage require that the outstanding mortgage amount be immediately paid in full to the lender at the time of the decedent’s death.  If  so, this issue must be resolved at the outset of inheriting a property with a mortgage.

Mortgages sometimes include a provision wherein, if the property is transferred from one owner to another – including as a result of the death of the original owner/borrower – the mortgage balance must be immediately repaid to the lender at the time of transfer. This provision is called a “due-on-sale” clause.  If the outstanding balance is not paid in a timely manner, the due-on-sale clause allows lenders to foreclose upon the mortgage loan at the time of transfer to the new owner.

If the decedent's mortgage contains a due-on-sale clause, the lender may send you a notice of intent to foreclose upon inheriting the property.  But don’t panic because federal relief may be available.

Assuming the Mortgage Loan

Federal law provides certain protections to individuals who may not necessarily want to take ownership of a home with an outstanding mortgage balance.

In 1982, a federal law addressed, in part, some of the issues associated with due-on-sale clauses. The Garn-St. Germain Depository Institutions Act was enacted to protect individuals who inherit property with an outstanding mortgage balance. The Act provides that, despite a due-on-sale clause in a mortgage, the lender must allow the inheritor to assume the loan in certain cases.

Another recent rule may also assist inheritors to assume the loan.  In 2018, the Consumer Financial Protection Bureau enacted a rule to protect family members who inherit a home with a mortgage. Under the rule, when a decedent dies, lenders must offer the inheritors the ability to apply for a modification of the terms of the original mortgage loan.  Prior to the rule, an inheritor was generally saddled with the same mortgage loan terms and conditions as the original borrower (decedent) had in place at the time of death.

If you have questions about inheritance and how it could impact you, or if you need assistance in exploring the full range of options available to inheritors of property with an existing mortgage, or otherwise navigating the (legal) probate process that follows the death of a loved one, the attorneys at LegalZoom are prepared to help.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.