What to know when you inherit a mortgage

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When a family member dies, there are often questions about wills, inheritances and how best to deal with financial affairs. It can be a stressful and complicated time, especially when it comes to real estate. What happens if you inherit your loved one’s home? What if they still have payments to make on their mortgage? We’ll explore these and other questions you may have below.

When you inherit a mortgage

In many situations, when a family member dies, the heirs inherit both a house and the mortgage that goes with it.

First of all, it is a good idea to seek the help of an attorney who specializes in senior citizen law or estate planning. This is especially true if there are disputed heirs, properties located in multiple jurisdictions, or large sums at stake.

Despite the borrower’s death, the mortgage still needs to be paid off, so if you’ve inherited it, you’ll need to decide how the loan and property will be treated. You may face late payments (or non-payment) when settling things, or you may not even be aware of the outstanding debt, who the lender or manager is, or what balance is left.

Once you know your location, you have several options.

If you move into the house you may be able to assume the mortgage and continue to pay it. You may also consider doing a refinancing of collection and pay that way.

You can choose to sell the house instead, which can make it easier to repay the loan using the proceeds. If there is more than one heir, such as siblings, you may also want to consider buying them back.

There is good news with these options. First, heirs have significant leverage on a mortgage in an estate situation. The Garn-St. Germain of 1982 (Garn-St. Germain Law) provides protections for heirs, among other provisions, which can help them assume an existing loan.

Second, the odds of having to federal property taxes are small. As a perspective, in 2016 there were 2.74 million deaths in the United States, but only about 12,400 estates filed for estate tax returns, according to the IRS. In 2020, an estate must be worth at least $ 11.58 million before federal inheritance tax takes effect.

Aside from federal liability, 17 states and Washington, DC also have an inheritance tax, an inheritance tax, or both. In addition, depending on what you do with the house, there may be capital gains taxes to be considered arising from a sale.

When you assume the mortgage

If you assume the loan, the lender or administrator must be willing to work with you. This is because although most mortgages cannot be assumed, the Garn-St. The Germain Law allows heirs to take out a loan for several reasons, including the transfer of property to a relative upon the death of a borrower.

More often than not, mortgages include a liability for assignment or liability for assignment clause which requires full repayment of the loan in the event of a change of owner. In certain estate situations, this law prevents the lender from recalling the loan, even if it has such a clause.

The Consumer Financial Protection Bureau also has new guidelines for lenders that generally allow the name of an heir to be added to an existing mortgage when the borrower dies.

In addition, surviving spouses benefit from special protections to ensure that they can keep an inherited home. In many states this includes holding title as “full rental” or, in communal property states, “communal ownership with right of survivorship”.

If you decide to take on the mortgage and make the payments, it is important to work with the lender or administrator to update all documents so that you become the new borrower for the loan.

When you inherit a reverse mortgage

When there is a death that involves a reverse mortgage, or a home equity conversion mortgage (HECM), your options vary depending on the situation of the deceased borrower.

If you inherited a reverse mortgage from a parent, for example, your options include paying off or refinancing the balance and keeping the house, selling the house for at least 95% of the appraised value, or acceptance of a deed in lieu of foreclosure, explains Mike Roberts, founder of MyHECM.com and author of “The Reverse Mortgage Revealed: An Industry Insider’s Guide to the Reverse Mortgage”.

According to Roberts, there is a six-month window for paying off the balance, which can be extended if the heir is actively working to pay off the debt.

“If the reverse mortgage is not repaid [by the one-year mark], the lender is required by HUD to begin the foreclosure process, ”says Roberts. “The word ‘foreclosure’ has very negative connotations, but it is a normal part of settling a reverse mortgage once the last borrower or non-borrowing spouse dies.”

If you’re a surviving spouse and have taken out a reverse mortgage, nothing will change, says Roberts. But let’s say the deceased borrower has an unmarried partner. If the partner is on the loan, they can continue to live in the house. Otherwise, their options are limited.

“[The] the heirs will dictate what happens to the house and whether the significant other can continue to live there, ”says Roberts.

Also note that when you take out a reverse mortgage, you are responsible for paying for home insurance and property taxes and for maintaining the house. When a borrower with a reverse mortgage dies, those payments stop.

“Once the last surviving borrower or the non-borrowing spouse dies, taxes and insurance stop being paid, unless an heir decides to continue the payments,” says Roberts.

When the mortgage is underwater

There are cases where the value of the inherited home is less than the outstanding mortgage debt, meaning the home has negative equity or is “”submarine. “As an heir, this can be a determining factor in whether you keep it or sell it.

If the mortgage is a non-recourse loan, that is, the borrower does not have to pay more than the value of the house, the lender may have few options outside of foreclosure. The same generally applies for a reverse mortgage.

“The most that will ever have to be repaid is the home’s value,” says Roberts. “The heirs are fully protected if the house is not worth enough to pay off the entire HECM balance. “

When there is no will

In some cases, a borrower dies without a will. This virtually guarantees new levels of complications and costs when managing a home with a mortgage (or any other asset), so it’s best to speak to a lawyer or legal clinic about your specific situation.

On the other hand, it is in your best interest to protect your possessions and ensure that your wishes come true after your death. Wills, living wills and other legal documents are of critical importance. If you are looking for legal help, the National Academy of Elder Law Lawyers (NAELA) is a good place to start and has a search tool to help you find lawyers in your area.

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