Dying with a mortgage: What happens to your home?

Elderly man and younger woman holding mortgage

Once upon a time, perhaps not so long ago, Americans were pretty sure they'd be free of most debt by the time they retired — at least free of that pesky mortgage that'd been hanging around for decades.

That fairy tale pretty much went poof along with the housing bubble.

The consensus now is that ever more of us will carry our home loans into retirement.

About 20% of homeowners age 65 and older held a mortgage on their home in the early 1990s, according to research published in 2012 by University of Michigan economics professor Frank Stafford and associates. By 2007, that number had risen to 30%.

A July 2012 study by AARP found that the amount of housing debt older Americans owe has exploded as well.

Families with mortgage debt

Age 1989 2010 % change
55-64 37.0% 53.6% 45%
65-74 21.7% 40.5% 87%
75+ 6.3% 24.3% 284%

The median amount of home loan debt for those 75 and older was just under $12,000 in 1989. By 2010, it was $52,000, the AARP study says. For those 65-74, it was $15,000 in 1989 but $70,000 in 2010 — a whopping 355% increase.

So what happens when the property lands in the laps of heirs?

The simple answer is that the mortgage comes with the house, says Stuart F. Ebby, a lawyer and real estate expert with the Philadelphia firm of Hangley Aronchick Segal Pudlin & Schiller.

But nothing is ever simple, right?

So here are five scenarios that could happen if you hold a home loan when you die.

In each of these instances, Frank Donnelly, chairman of the Mortgage Bankers Association of Metropolitan Washington, D.C., says heirs should contact the lender soon after a death to discuss their options.

While deciding what to do, it's important to keep the loan current, Donnelly says.

"You don't want it to go into foreclosure."

Most mortgages also require that the home be kept in reasonable repair, Donnelly says, so taxes and insurance should be paid up.

Scenario 1. Your heirs take over your loan.

In most instances, federal law allows for the transfer of the loan to a relative or other heir when you die.

Although most home loans contain a due-on-sale or acceleration clause that allows a lender to demand immediate and full payment upon transfer or sale of the home, transfers due to death are exempt.

This means your heirs would take on your home loan with the same interest rate and payment you have.

"It's just as though it were handed to you by a deed," though you may have to follow legal formalities, such as filing a will or letters of administration in probate court, says Ebby, who is also a lecturer in the University of Pennsylvania Law School.

Scenario 2. Your heirs refinance the home loan.

If heirs want to keep a home, Ebby says, in most cases they would simply refinance the loan. This is especially true if they can get a lower interest rate or reduced monthly payments.

If your heirs can't qualify for a new loan but can afford to make monthly payments, they can always keep the original mortgage.

Scenario 3. Your heirs get the property free and clear.

If your relatives are lucky, your estate may have enough funds to simply pay off the loan. In this case, you'll have to direct in your will that other assets in the estate be sold to retire the mortgage.

If you took out a mortgage protection insurance policy, that would automatically pay off any balance.

But should an older homeowner take out an insurance policy specifically for that possibility?

"The first thing you have to ask yourself is, does this make sense?" says Ebby, noting that insurance gets pricier the older you get. "And then you have to look at the surrounding circumstances."

If your heirs want to keep the property and can afford it, why bother with insurance? But if your heirs would be strapped, a life insurance policy would solve the problem.

"Usually," Ebby adds, "the cost of the policy isn't justified."

Scenario 4. Your heirs can't afford the monthly payments.

In this case, they can sell the home or, in the most extreme case, walk away.

In instances where the loan is underwater, walking away might be the wisest move.

"They can just give it to the lender," Ebby says. "And if it's really underwater, and it looks like it's going to stay underwater, it makes sense to walk away."

Otherwise — say, if there's a sentimental attachment to the home and heirs want to keep it — "then you have to try to get together with the lender and see if you can work something out," Ebby says.

In some instances, a lender might forgive some of the loan balance, Donnelly says.

If you have to sell a home that's worth less than what's owed, the lender could agree to a short sale in which the estate would not be liable for any deficiency.

In case of a short sale, the estate would be off the hook for any loss. In a foreclosure, on the other hand, the lender could seek to recoup losses from the estate.

"They normally don't do that because there's not enough there," Ebby says. "What's the point of going against the estate unless you can collect? And if the estate was in such poor condition that you foreclosed, what's the chance you would collect the deficiency?"

Scenario 5. You took out a reverse mortgage prior to your death.

This is another matter entirely. If there is no co-borrower — or the co-borrower is also dead or no longer living in the home — the loan comes due when the borrower dies.

The heirs will only inherit the home itself if the reverse mortgage balance can be paid off without selling the property.

To accomplish that, your heirs would have to pay off the balance with cash from the estate or another source, or take out a new loan.

The more likely outcome is that your heirs will inherit whatever equity is left after the home is sold and the lender repaid.

  • paul curran

    how long can you live in my home ,as i am 78yrs.old and ,do i have to sell afte i have reach the 15 yrs.with the reverse motage.

  • Monica Julian

    Either your spouse or some other family members will get stuck paying for it! That's why it's important to have life insurance in place! If you don't have any contact me MonicaJulian@Primerica.com and Ican help you

  • Manohar Jagasia

    Thank you! Interesting & informative "general" article- perhaps has a lot of caveats to it...Mortgage company & the state legal system come to mind!

  • karen Arcand

    My friend passed away 2 months ago and left a mortgage of $50,000. The attorney for her children told them not to pay the mortgage payments as it is in probate and can't be foreclosed on. They don't have the extra money to pay either.

    • john smith

      And the interest just builds on. If they don't have the money to pay the mortgage, then the house will be sold or foreclosed on at some point and they MAY get whatever is left after the sale or foreclosure (if ANYTHING) after the mortgage is paid from the sale. Likely nothing.

    • MsDonut

      I'm a foreclosure Spec and just to let your friend know that after 3 months of no payment the lender the (BANK) will start the foreclosure process. After 3 months this is when the lender (BANK) will add on late fees and other charges.
      She needs to contact the lender herself and inform them of his passing. After the 3 months she will have a much larger payment due in 1 large lump sum that will have late fees and interest added on. If she can please tell her to pay each month, she can be in trouble in the coming months.
      Good luck I hope this helped..

  • Sandra Williams

    Our home is only in my ex-husband's name. But we both still live in it. Can I get the house if he pass away before me? Or because we are no longer married, will it become a problem for me.

    • john smith

      If you are no longer married and he has not given it to you in a will, why in the world would you think there is any way you would get the house when he dies?
      I would have just as much chance of getting it as YOU. You are not a relative to inherit anything without a will.

      • unknown

        LOL

      • BrotherDave

        If she can get her ex to put her name on the title, that will work. Property can pass at death by either deed or title, not just will. In fact, passing property by will is often the worst way to do it.

        • john smith

          Well, obviously they would have done that if he had been willing.   But she did give little information there.

    • Trina Will

      look up garn-St Grmain Act of 1982, Maybe, there is help if your joint tenant on title.

    • BrotherDave

      I hope your name isn't on the mortgage either. That would be the worst of all situations: Not on title but on the loan and responsible for the debt! Sadly, there are cases where this was allowed to happen.

      If the house isn't heavily mortgaged already and underwater, get your ex-husband to put your name on the title. It is an easy and inexpensive process. Makes me wonder what kind of divorce representation you had.

      If it's any consolation, upon his death you have the option of taking his social security retirement if it is greater than yours, provided you were married to him at least 10-years and you have not remarried.

    • Dean McCabe

      It's an honest question and it does happen more widely than you might think Sandra. I would ask your ex-husband what are his plans for the house in the future and to whom he might bestow the property when he's gone. If you have paid for any structural changes or improvements on the house as part of an investment then have documentation supporting that. Without a will or an estate promissory then there is not much else you can do. Communication is key with your ex.

    • Gary Phelps

      A possible solution. If he is willing, consider a life insurance policy on his life for the amount of the mortgage. You can be the beneficiary. Either of you can be the owner and payer of the policy. Should he pass away before you, you could purchase any house that you desire.

    • Monica Julian

      Sandra you will not inherit the house unless he has a will in place that says he wants you to have the house. If he does not have a will and wants one then I can assist you all..
      To contact me my email is monicajulian83@gmail.com

  • Monica Julian

    This will not happen to you if you become y client. I help people not to have these type of situations happen to hem. Email me: MonicaJulian8@gmail.com for details

    • Lola

      I prefer to work with someone who speaks English well -- particularly in legal matters.

      • Monica Julian

        Hello Ms. Lola, I had some grammatical errors because I was typing to fast on my smart phone. I'm sorry I did not edit my comment before sending. However I speak English very well being that it is my first and only language. If I can be of service to you with any of your financial or legal needs please feel free to let me know by email. I would be more than happy to assist you.

        Warmest Regards,
        Monica

  • Dean McCabe

    I love it when people give advice and then show their wonderful personality to boot by scolding the poster. Nice stamp on it Smith.