After the mortgage holder dies, there is frequently confusion in the family and heirs as to what the next steps are to be taken. Most people expect to pay off their mortgage and live in their house during retirement. Unfortunately, life doesn’t always go according to plan. If a homeowner dies before paying off the mortgage, it could have implications for the estate and the person’s heirs. Discussing the future and preparing for that possibility can make the transition easier on family members.
After the mortgage holder dies, the handling of the mortgage depends on various factors, including the laws and regulations of the specific country or state where the property is located, the terms of the mortgage contract, and the deceased owner’s estate planning arrangements.
One of the first steps to take is the consult with an attorney experienced in estate matters is highly recommended. The attorney can help navigate the legal process, which might include going through probate court to settle the deceased owner’s estate and transfer property ownership.
How to Determine Value After the Mortgage Holder Dies
The heirs should have the property appraised to determine the real value of the property. There may be more equity than they originally expected. The appraisal is important for estate tax purposes, but may not reflect the up to date value of the property in the given market. Appraisers make their determinations based on the past six months (or less) of sales data. The market may have changed significantly in those six months, but the appraiser can’t capture or reflect current market data. In a market that is rapidly increasing, that is a good thing and a negative one. You typically want a lower valuation for estate purposes – and some times, a backward looking appraisal will be in your best interests. Smaller capital gain equals lower inheritance tax. If you are planning on holding on to the property then an appraisal will probably suffice.
However, if you are planning to sell the property after the mortgage holder dies, then you want the most up to date market value – and that would be from a local real estate professional.
Notify the Lender After the Mortgage Holder Dies
Notify the lender: The first step is to inform the mortgage lender of the owner’s death. Lenders usually have specific procedures for handling such situations, and they will likely request documentation such as a death certificate. This will be a good idea, even if your intent is to hold on to the property.
Review the Contract for the Mortgage
Review the mortgage contract: The heirs should carefully review the mortgage contract after the mortgage holder dies to understand the terms and conditions, including any clauses related to the death of the borrower. Some mortgages may have provisions for transferring ownership to heirs or beneficiaries, while others may require the loan to be paid off immediately upon the owner’s death.
Who Is Responsible for Paying the Mortgage After the Owner Dies?
Who Is Responsible for Mortgage Payments After the Borrower’s Death?
After a homeowner dies, the loan still needs to be repaid. The mortgage company is not going to give a grace period while everyone figures out who is going to make next month’s mortgage payment. Heirs who were not party to the mortgage are not financially responsible for making payments, but those payments still need to be made in one way or another to avoid having the house go into foreclosure.
If the homeowner has a surviving spouse who co-signed the mortgage, he or she becomes responsible for payments. Similarly, any other individual who co-signed the loan will be responsible for making payments, regardless of whether that person has an ownership stake in the house.
If there is no co-signer, other family members can choose to take responsibility for the mortgage after the homeowner dies. They may want to refinance the loan to get better terms (if that is an option with rates changing frequently up or down.)
What if No One Can Pay the Mortgage After the Mortgage Holder Dies?
If someone has co-signed the mortgage, then they are legally obligated to pay the monthly mortgage payment or they will face a huge ding in their credit score. This is their mortgage now, even if they don’t have an ownership interest in the property. Everyone else is an optional payor. If the heirs are unable or unwilling to take on the mortgage, the executor can use funds from the estate to pay off the loan, or the house can be sold. If the house sells for more than the amount owed on the mortgage, the balance can be used to pay off debts or can be passed on to heirs.
If the house is worth less than the amount owed, the executor may negotiate a short sale or allow the house to go into foreclosure The lender may be willing to accept a deed in lieu of foreclosure, which means the heirs voluntarily transfer the property to the lender to satisfy the mortgage debt without going through the foreclosure process. Again – the heirs should talk to an attorney and a realtor before taking this step. They may not fully understand the implications of a deed in lieu of foreclosure and they may also not understand the full value of the property. There may be more value there than realized.
How Does the Owner’s Death Affect a Reverse Mortgage?
If the owner had a reverse mortgage, it is more complicated. Typically the reverse mortgage must be repaid after the mortgage holder dies because a reverse mortgage is different than a conventional mortgage.
What happens to the reverse mortgage will depend on several factors, including:
- Whether you have a co-borrower on the reverse mortgage loan,
- When you took out the reverse mortgage, and
- Whether you were married when the loan documents were signed and continued to be married up until your death.
When there is a co-borrower on the loan, both you and the co-borrower receive the benefits of the loan and are responsible for meeting the obligations of the loan. If one borrower dies, the co-borrower will be able to remain in the home and receive loan payments as long as they meet the obligations of the reverse mortgage loan.
It’s a good idea to check with your reverse mortgage servicer to make sure your loan records are accurate and that you and your co-borrower are both on the loan. Call your servicer to find out what names are listed on your loan. See your reverse mortgage loan statement for the servicer’s phone number or address and ask them to send you this information in writing for your records.
Your non-borrowing spouse may stay in the home if they pay off the loan. They may also be able to stay in the home without paying off the loan, depending on when the loan was originated (meaning when it was taken out) and whether they qualify as an Eligible Non-Borrowing Spouse under HUD’s rules. An Eligible Non-Borrowing Spouse will not get any money from the reverse mortgage. The process of qualifying to be an Eligible Non-Borrowing Spouse may be difficult. Your non-borrowing spouse may want to get help from an attorney or a HUD-approved housing counseling agency.
If there is no surviving spouse, borrowing or non-borrowing, other family members may choose to pay off the reverse mortgage loan, and they can keep the house.
Planning Ahead for the Death of the Homeowner
If possible, the homeowner can set aside money in a savings account or another financial instrument that family members can access after his or her death. That will help them continue to make mortgage and tax payments until they decide whether to keep or sell the house. This does not have to be the full amount of the mortgage owed, but simply enough to pay the mortgage for several months up to a year in order to allow the family to make a decision about how to proceed with the property in question.
Life insurance can provide funds that can be used to pay off a mortgage in the event of the homeowner’s death. That can allow heirs to stay in the house debt-free or to move out and start over.
In some cases, it might make sense to put the house in a trust or an LLC or to add relatives’ names to the title to avoid the time and expense of going through probate. It’s important to discuss the legal and tax implications with an attorney and an accountant. This will not avoid the need to continue making the mortgage payments but it will make it easier to transfer the title to the property.
Planning Ahead Is Preferable
Death is inevitable. The better family members plan for it, the smoother the transition will be for surviving relatives. Whether you own a home or a loved one does, have an honest discussion and seek advice from professionals so you can make the best decisions as a family.