What Happens If You Inherit Mortgaged Property?
If a family member dies, and you inherit property, you may have a lot of questions, especially if the property has a mortgage on it. Alternatively, you may want to leave property to loved ones, knowing that property has a mortgage on it. How does this work, when property is passed on, but the property has a mortgage?
Is the Loan Excused?
Death does not excuse the amount owed on the loan. Although the lender may not be able to be paid back from the deceased borrower, the lender can still foreclose on the property, if the loan is not paid.
If you inherit the mortgaged property, you may have two problems: 1) the bank won’t even speak to you, because you aren’t the borrower, and thus, you will have no idea how to make payments, or 2) the loan could have a provision that the entire loan is considered to be in default, upon the death of the borrower, and thus, the entire loan is due. This is called a “due-on-sale” clause (even though the borrower died, and didn’t sell the house, the law still may apply).
Protections for Inherited Property
There are federal laws that may allow you to take over the loan, or qualify to continue to pay the loan, so that you can keep the home. You, as the person inheriting the home, may have the right under rules passed by the government, to apply for, and qualify for, a new loan, or to take over the existing loan.
However, the lender could deny you, based on your credit and your financial history.
If the loan has a due-on-sale clause, the lender may be prohibited from declaring the full amount of the loan in immediate default, if the property is being inherited by a spouse or child, and the relatives have to live in the home after it is inherited. These can be important considerations when you create an estate plan, to protect against these due on sale clauses.
Note that although the law requires banks to speak to those who inherit property, many banks will refuse to do so. It can help to have a will or other estate document that specifically says that someone is inheriting the property.
Note that all of this assumes that the person inheriting the property is not a co-borrower of the loan on the property. If the co-borrower is still alive, it will be much easier; the co-borrower simply continues making the payments, and the bank will talk to the co-borrower as it normally would.
However, if you are a co-borrower, and you were relying on the other, now-deceased borrower to make payments, you could end up being the one owing money to the bank if you can’t assume the payments.
If you aren’t a co-borrower, and you don’t want the property (for example, if there is no value or equity in the property), there is no harm in not paying the loan, and allowing the property to go into foreclosure.
Call the Torrance will attorneys at Samuel Ford Law today to discuss the best ways to leave your property to loved ones in your estate plan