There’s nothing more difficult and disruptive than losing someone you love. The heartache, emptiness, and financial stress can be truly hard to bear. While pushing through the stages of grief, you may also have responsibilities to manage the newly inherited house, like sorting through belongings, making repairs and deciding to sell the house or rent it out. What do you do if there is a mortgage? Who will be the personal representative in the probate proceedings? Regardless, there are decisions to make, and there may not be a will to provide guidance on next steps.
Your mind starts to fill with all kinds of questions. Do you have to keep the inherited home? Who is responsible for paying the mortgage? What do you do if you can’t afford the home?
FHA, VA, USDA Conventional Mortgages
Let’s start by assuming the estate has a plan in place for mortgage payments. Ideally, there is a will involved. The executor or personal representative of the estate needs to use investments, life insurance, or other assets to pay off the mortgage. So you would be inheriting the home without a mortgage to pay! You’re then able to take your time to think about whether or not you want to keep it.
Let’s assume you have a mortgage to pay. Federal law states the mortgage must remain in effect when it passes from one person to another because of death. This negates any due-on-sale clause, meaning banks cannot demand the full payment of the loan’s outstanding balance before transferring the property. So, you can take over the mortgage and assume the current monthly payments, or you can refinance the mortgage.
Though, chances are you have your own mortgage to pay. In this case, selling the inherited home may be best.
Afraid a mortgage lender may not speak to you about a loved one’s mortgage? Don’t be. As of April 19, 2018, a federal rule requires servicers to communicate with “successors in interest.” A successor in interest is someone who receives property:
- upon the death of a relative or joint tenant
- as a result of a divorce or legal separation
- through certain trusts, or
- from a spouse or parent.
Under the rule, successors in interest get the same protections as the original borrower
Inheriting a home with a reverse mortgage?
Reverse mortgages are common among older adults who are looking to pay off their current mortgage and have access to cash. The way it works: the homeowner(s) can live in the home and access reverse mortgage benefits so long as they keep up with property taxes, insurance, and home maintenance. The loan becomes due when the homeowner(s) move out of the home or pass away.
As the heir, you must pay the reverse mortgage, which requires selling the inherited home. Because it’s government-insured, you never owe more than the home’s worth. After the home sale, if equity is leftover, you receive it as an inheritance.