Inheriting Mortgaged Property

In most instances, the estate debts must be fully paid during the succession proceedings.  However, some debts such as mortgages are not easily paid in full.  Clients often ask if they have to refinance when they inherit property with a mortgage.  Heirs generally have a few options when inheriting mortgaged property.  The property can be sold and the sale proceeds can pay off the mortgage.  Other assets in the succession can be used to pay off the mortgage.  The succession can be renounced, in which case the property will likely be foreclosed on if there are no other heirs to pay the mortgage.  Finally, the mortgage can be assumed and the loan taken over by the heirs.  An heir who accepts ownership of mortgaged property becomes responsible for paying the mortgage just as they would if they were the purchaser.

What is a “due on sale” clause?

Mortgages often include a “due-on-sale” or “due-on-transfer” clause that requires full repayment of the loan in the event of a change in ownership.  This clause most often applies when selling a property.  It also applies when someone donates mortgaged property, meaning the bank has the right to call the loan.  Until 1982 this was also the case for succession property.  Now the Garn-St Germain Act prevents mortgage lenders from calling loans on most inherited property, even if the mortgage includes a due-on-transfer clause.  This federal law was enacted to ensure that heirs could inherit property and take on the existing mortgage rather than the loan balance becoming due immediately when the owner died.

What if there is a reverse mortgage?

The situation is a little different if the owner had a reverse mortgage on the property.  A reverse mortgage is a type of loan for people who have significant equity in their home.  It is often used by retirees as a source of retirement income.  Reverse mortgagors receive periodic payouts based on the amount of equity in their home, and they don’t have to pay on the principal of the loan until they sell or die.  An heir who inherits a reverse mortgage must payoff the loan or refinance the balance within six months.  However, if there is a surviving cosigner, the loan doesn’t become due until the cosigner also passes or sells.

Estate planning considerations:

How a mortgage is provided for after death can be influenced by a last will and testament.  For example, a testator may will a property to an heir “free and clear” in which case the mortgage must be paid off with other estate assets so that the heir receives the property unencumbered.  This may be the case when a person wishes to reward a particular heir who took care of them at the end of their life.  Each estate plan is different which is why it’s imperative to work with an experienced attorney who can guide you through the options regarding your property.

inherit property with a mortgage