Dying with a mortgage: What happens to your home?

Elderly man and younger woman holding mortgage

Once upon a time, Americans were pretty sure they'd be free of most debt by the time they retired — at least free of the pesky mortgage that'd been hanging around for decades.

That fairy tale pretty much went poof along with the housing bubble back in 2007.

Although home values have recovered, it still appears more of us will carry home loans into retirement — or be forced to take on new mortgage debt by tapping our home equity just to live.

The percentage of homeowners age 65 and older holding mortgages increased from 22% to 30% between 2001 and 2011, according to a May 2014 analysis of data by the Consumer Financial Protection Bureau's Office for Older Americans.

Those age 75 and older took the biggest hit, seeing their mortgage debt more than double, from 8.4% to 21.2%, during that time.

On top of that, those over age 65 are holding higher balances on their loans. Between 2001 and 2011, the median amount increased 82%, from about $43,400 to $79,000.

Percentage of older Americans with a mortgage

So what happens when the property — and the debt — land 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 six scenarios that could happen if you hold a home loan when you die, and one that could catch your heirs by surprise, even if you've paid off the mortgage.

In each of these instances, Frank Donnelly, a mortgage banker with RBS Citizens Financial Group in 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.



Should you pay extra on your mortgage?

Paying off your home loan more quickly can save tens of thousands of dollars in interest charges. But before you start sending your spare cash to your lender, you need to make sure your overall finances are in order. Paying extra on your mortgage isn't always the smartest use of your money.


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 buy such a policy specifically for that possibility?

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

The exception to the rule would be if you know your heirs cannot afford the payments or qualify for a refinancing.

In that case, a life insurance policy would solve the problem.


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



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

In instances where the loan is underwater — when the home is worth less than the balance on the mortgage — 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."

foreclosure_for_sale_sign

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.

You can start by asking the lender to forgive some of the debt, Donnelly says. But that almost never happens.

Lenders are far more likely to accept a short sale that allows your heirs to sell the property for less than the outstanding debt, with the bank agreeing not to hold your estate liable for the loss.

If your heirs simply stop making the monthly payments and your home falls into foreclosure, the lender could sue your estate to recoup its losses.

But that, too, rarely happens.

"What's the point of going against the estate unless you can collect?" Ebby says. "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. A reverse mortgage is a lien on the home. 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.

houseontopdollarbills_mortgage_lg

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


Scenario 6. Your home is seized to pay other debts.



It might not matter what your heirs want to do with your home — even one that is paid off and has no mortgage — if you leave lots of other unpaid bills.

If a house is the only significant asset you leave behind, some states can require it to be sold to pay off non-mortgage debts.

In Arizona, for example, the deceased's "legitimate creditors are paid before any assets are distributed pursuant to the will," says Jeremy Sohn, an estate and trust attorney in Tucson.

The only way your heirs might avoid a forced sale is if they use their money to repay your debts, even though they're not directly liable for what you still owe unless they cosigned originally, Sohn notes.

But one way or another, the bills must be paid.

In other states, however, estate law doesn't allow creditors to force the sale of a house to collect non-mortgage debt.

Of course, that doesn’t mean creditors won't pester surviving family members for payment and suggest that selling the house is the "fair" or "moral" thing to do.

If this comes up, checking with an estate attorney is the only wise thing to do.

  • Lavonne Chambers

    My mom died and had a reverse mortgage on the property..my attorney put the deed I'm my name since I was going to get a loan to pay mortgage company off but I think he should not have done that because now lenders will not let me get a loan because the deed is in my name but the money owed is in my mom name..how can I get the corrected so that my name is not in the deed and I can get the property??

  • Ericka Michal

    When I was a mortgage loan officer, I had a client that paid the landlord's mortgage for 12+ months directly to the landlord's lender, from their (renter) bank account. They were able to refinance into their name, pay off the landlord's loan, and the remaining proceeds went to the landlord as part of a purchase and sale.

    As I understand it, paying the lender directly from your account for 12+ months gives you a claim on the property. If this is so, would that not also allow for a refinance of a deceased loved one's home into the heir(s)' name?

  • tara

    I was advised by a lawyer at the time of my Moms death to put the house in my name even though the loan remains in my her name. He said that is what I should do and to not tell them of her passing. I have kept the pymts up but I can no longer do so. It has been suggested that what he did may have not been right and that is is less the honest. Help

  • B. Smith

    Hello. My mom recently passed on this year on Feb 1st. I was put on the deed as joint tenant with rights of survivorship, in Jan of this year and I am on all her bank accounts. However, the mortgage is in her name but I plan on continuing to pay. Is this ok?. I'm kinda lost because they just canceled her home insurance due to her being deceased. Will they find out about the mortgage being in her name and her being deceased?. Thank you for any information that you may be able to provide. It stressed out about it all.

  • Timothy Moore

    I have my grandmothers home that my dad and Uncle sign off on. There was no lien and I was put in my wife's name the bank will not talk to me and say because I own the home I have to pay by August of this year or they take it. My father and uncle where in charge of her estate and didn't pay the bank. Can the bank still take the home even if my wife name is on it and where not on the loan

  • LauraandJoe Amedeo

    what do I do if I have put my home in my sons name and my son passes away before I do?

    • Carly J Worden

      put the home in both your names

  • pete aball

    I own 2 homes a rental and my own, they both have balances of around $50,000 and are worth around $90,000 each right now. I have no relatives living in the USA, I want my Son to have both the houses if anything happens to me. but im not sure if he can even take over the financing or can i put him on both the mortgages, so he is the joint owner? and would that make it easier for him to do whatever he wants to if anything happens to me? I'm worried the bank might just sell them and give him no rights at all

    • nickysue

      purchase a life insurance policy and make your son the beneficiary with enough money to pay off the homes, honestly i wish my mother had a life ins policy, even enough to just pay off her home, instead she did not and her bf was living in the home until recently and it got forclosed on for non payment, so now us kids have lost my mothers home that she has had for many years, a life insurance policy is the best way to go about making sure there is money to pay off the homes & MAKE A WILL leaving everything to said son

  • david fellows

    I am single no kids so what difference does it make.

  • Carly J Worden

    I inherited a house with my bother 50/50 too. You are each responsible for it. My brother had no money so I took out what he owed me when we sold it and then gave him his share.

  • Karen Francis

    My husbamd passed away on May 2nd there was no will, i am not on the deed or the mortgage. We were living off of his ssd. I have had alot of health problems and per dr. I have been unable to work, my ssd appeals hearing will not be until the end of this year. With the help of my cousin and sister i am able to pay the house payment. I know i have to file probate i am not concerned there but i am terrified to contact PNC mortgage i am afraid they have the right to take my home. I am afraid they will make me show proof of income, make me refinace or remortgage in order to keep the home. I dont know how to approach them if this is not the case based on my rights as his wife under the law. I thought i would fall under the Garn St. Germain law legally goving me the right to keep my husbands mortgage and terms without any requirments for income, refinance, or remortgage (i would not qualify) . I have read horror storeies of companies forcing this on those who have lost their spouse. Any direction would help me. I dont want to lose our home. Thank you

  • http://bunbeatingfun.com/missionStatement-R.htm Greg Edwards

    Had the Nazi's restrained themselves to kill only those demons who who threw women and children out of their own homes... they would be far better remembered today.

  • MING

    Mother passed away No will, i've been paying her mortgage for thee past 3 years . her mortgage ,she owes $80000 .
    i pay her home equity loan every month which she owes $20000
    and her hm ins. WHAT HAPPENS IF I STOP PAYING ON HOME EQUITY LOAN THAT SHE TOOK OUT ? Will lender allow me to just transfer deed? in state of az law states that if home value is $10000 or less i do not have to go through probate. is this so?

  • intrepidsoul

    Can you let me know what happened to you, I'm in the same boat.