When a loved one dies, there are always questions about wills, inheritances and how to manage all of their legal and financial affairs. It’s worse if there’s no will and no estate planning has been done. This recent Bankrate article, “Does the home you inherited include a mortgage?,” says that things can get even more complicated, when you inherit a house with a mortgage.
Heirs often inherit the family home. However, if it comes with a mortgage, you’ll want to work with an estate planning attorney. If there are family members who could become troublesome, if houses are located in different states or if there’s a lot of money in the estate, it’s better to have the help of an experienced professional.
Death does not mean the mortgage goes away. Heirs need to decide how to manage the loan payments, even if their plan is to sell the house. If there are missing payments, there may be penalties added onto the late payment. Worse, you may not know about the mortgage until after a few payments have gone unpaid.
Heirs do have several options:
If the plan is for the heirs to move into the home, they may be able to assume the mortgage and continue paying it. There is also the option to do a cash-out refinance and pay that way.
If you plan to sell the home, which might make it easier if no one in the family wants to live in the home, paying off the mortgage by using the proceeds from the sale is usually the way to go. If there is enough money in the estate account to pay the mortgage while the home is on the market, that money will come out of everyone’s share. Here again, the help of an estate planning attorney will be valuable.
Heirs have certain leverage, when dealing with a mortgage bank in an estate situation. There are certain protections available that will give you some leeway as the estate is settling. More good news—the chance of owing federal estate taxes right now is pretty small. An estate must be worth at least $11.58 million, before the federal estate tax is due.
There are still 17 states, including Illinois, and Washington D.C. that will want payment of a state estate tax, an inheritance tax or both. If you inherit a house, the value of that property might be taxable. There also might be capital gains tax liability from the sale of the home.
If you decide to take over the loan, the lender should be willing to work with you. The law allows heirs to assume a loan, especially when the transfer of property is to a relative, because the borrower has died. Surviving spouses have special protections to ensure that they can keep an inherited home, as long as they can afford it. In many states, this is done by holding title by “tenancy by the entireties” or “community property with right of survivorship.”
If you inherit a house and there is a reverse mortgage on the property, options include paying off or refinancing the balance and keeping the home, selling the home for at least 95% of the appraised value, or agreeing to a deed in lieu of foreclosure. There is a window of time for the balance to be repaid, which may be extended, if the heir is actively engaged with the lender to pay the debt. However, if a year goes by and the reverse mortgage is not paid off, the lender must begin the foreclosure process.
Nothing changes if the heir is a surviving spouse, but if the borrower who dies had an unmarried partner, they have limited options, unless they are on the loan.
What if the mortgage is “underwater,” meaning that the value of the inherited home is less than the outstanding mortgage debt? If the mortgage is a non-recourse loan, meaning the borrower does not have to pay more than the value of the home, then the lender has few options outside of foreclosure. This is also true with a reverse mortgage. Heirs are fully protected, if the home isn’t worth enough to pay off the entire balance.
If there is no will, things get extremely complicated. Contact a Chicagoland estate planning attorney as soon as possible.
Reference: Bankrate (Oct. 22, 2020) “Does the home you inherited include a mortgage?”