Due on Sale
The mortgage documents signed by the borrower at the closing of a sale or refinance often include a due-on-sale clause which states the entire loan is due and payable if the borrower transfers the property to someone else. When the original borrower dies and leaves the house, upon which a loan is secured, to a beneficiary, ownership is legally transferred. If the due-on-sale clause is included in the mortgage or refinance agreement, you might be required to either pay off the mortgage or sell the property.
Federal law, specifically the Garn-St. Germain Depository Institutions Act of 1982, allows an exception to the due-on-sale clause when a property transfers by inheritance. The law allows a close relative who inherits property to assume payments on the mortgage and retain ownership of the property. A joint tenant, who shares title to the house, may also assume the mortgage; the most common situation involves a surviving spouse who still lives in the residence. If the property is inherited by a non-relative, the mortgage lender may still be able to enforce the due-on-sale clause. In practice, lenders often allow anyone capable of making payments to keep the property and simply assume the mortgage.
If a relative does not inherit the property and the lender intends to enforce the due-on-sale clause, the lender must provide a notice of acceleration and give the new owner at least 30 days to satisfy the accelerated loan. The law allowing relatives or joint tenants to assume a mortgage applies only to properties with less than five dwelling units. Thus, an apartment building with five or more dwelling units is not covered and the mortgage due-on-sale clause would be enforceable no matter who inherits the property.
A lender still has the right to foreclose on an inherited property if the new payer on the loan fails to maintain payments or is unable to sell the home to satisfy the outstanding amount on the mortgage. A lender may be especially vigilant if the new owner fails to meet the credit guidelines imposed on the original owner. If interest rates rise or an improving real estate market boosts home values, the lender may have an even stronger motivation to foreclose on the home.
If an inherited property is subject to a reverse mortgage agreement, the original owner agreed to receive cash for the equity in the home and repay the loan when he moved out. If the owner passes away, the estate must repay the reverse mortgage within a limited time, usually six months. If the property passes to you as a beneficiary, you will have to repay the amount advanced to keep ownership of the home. Otherwise, you will have to obtain a new mortgage or sell the property to satisfy the reverse mortgage.