What Happens When You Inherit a House with a Mortgage?

Inheriting property can be complicated, both emotionally and financially. This is especially true when your inheritance is a house. You are likely still dealing with the loss of your loved one, and now must make decisions about what happens to their home. Those decisions are even more challenging if there is a mortgage on the property. What happens when inheriting a house with a mortgage?

If the deceased did not have a will, or had a last will and testament but not a trust, their property, including their real estate, will have to go through the probate process. Probate is a court process that involves settling the deceased person’s debts and distributing their remaining assets. Sometimes property in the deceased person’s estate must be sold off in order to pay off their debt. However, a mortgage on a house or other real estate is a debt secured by the property, and is handled differently.

Before you decide what to do, there are a number of questions to think about. Have you inherited the home by yourself, or are there other heirs whose rights and needs must be considered? If so, is there disagreement between heirs that might lead to probate litigation? Do you want to keep the house if possible, or do you prefer to sell it? What type of mortgage is on the house: a traditional mortgage or a reverse mortgage? Is there equity in the house you are inheriting, or is it underwater? Answering these questions will help you begin to decide on a course of action.

Inheriting a House with a Mortgage

When you learn that you have inherited a house, you may not be immediately aware if there is a mortgage on the property. You need to find out whether there is a mortgage, what kind, and who the lender is. You may be able to do this by looking through online property records for the county where the property is located or by going to the office of the county Recorder of Deeds. A probate attorney may also be able to guide you through this process.

You can contact the lender to determine what type of mortgage is on the property and what the mortgage payoff amount is. If it is a traditional mortgage, you have a number of options. Depending on your circumstances, you might decide to:

• Sell the house, pay off the mortgage, and keep the remaining funds
• Keep the house and pay off the mortgage immediately using other assets
• Keep the house and assume the mortgage in your own name
• Keep the house and continue to pay on the existing mortgage
• Walk away from the house and allow it to go into foreclosure

Many mortgages have a “due on sale” or “alienation” clause, meaning that the mortgage must be paid off when the house is transferred to a new owner. However, there are federal laws in place that prevent a due on sale clause from applying to someone who inherits the property in most cases. As a general rule, you should be able to take over the loan and continue making payments.

When inheriting a house that is worth more than is owed on it, there is equity in the home. If you allow it to go into foreclosure, you are leaving money on the table when you walk away. However, because neither the home nor the mortgage are in your name, doing so will not negatively affect your credit.

If you are not sure whether to keep or sell the house, consider whether it makes financial sense for you to keep it. Is it located in an area in which you want to live? Does the house otherwise meet your needs? Can you afford the property taxes? Does the house need a lot of repairs or updates, and can you afford them?

Inheriting a House with a Reverse Mortgage

You have probably seen ads on television for reverse mortgages. With a reverse mortgage, the homeowner remains in the home, no longer makes mortgage payments, and receives a monthly payment. However, when the homeowner dies, the reverse mortgage must typically be paid off in full. For this reason, you have fewer options when inheriting a house with a reverse mortgage.

If you want to keep the house, you will need to come up with the money to pay off the mortgage. If you can’t do that or don’t want to, you can sell the house. You can then repay the mortgage payoff amount on the reverse mortgage, and pocket any sale proceeds above and beyond that amount. You can also choose to let the house go into foreclosure.

What to Do if You Inherit a House That is “Underwater”

If the mortgage payoff amount is more than the house is worth, the house is said to be “underwater.” If you sell it, you probably will not be able to get enough money to pay off the loan, much less have any left over for yourself.

If your finances permit, you might choose to keep the home and take over the loan. Eventually, you will pay down the debt on the house to the point where it is no longer underwater, and/or the value of the house might increase so that it is worth more than what is owed. At that point, you may be able to refinance the loan, perhaps with a more favorable interest rate or terms.

If you can’t keep paying on the house or don’t want to, you have a couple of choices. You could let the home go into foreclosure. However, if you do this with a house that is underwater, the mortgage debt will not be satisfied. The lender may come after the deceased owner’s estate to recover the rest of the amount they are owed, which could decrease your inheritance and that of any other heirs.

You may also be able to do a “short sale,” in which the lender allows you to sell the home for its fair market value, even though that is less than the amount owed. You must get a written agreement from the lender to accept the amount of the short sale in satisfaction of the mortgage debt. Otherwise the lender may try to come after the deceased person’s estate for the difference.

Another option is “deed in lieu of foreclosure.” This is just what it sounds like: the lender accepts the deed to the property in satisfaction of the debt, and does not foreclose on the property. Many people prefer this option to allowing their loved one’s home to be foreclosed on.

When inheriting a house with a mortgage on it you will likely have many questions about next steps, we invite you to contact our law office to schedule a consultation. Attorney Suzy Fanning can help you evaluate your options, particularly if you are out of state, there is a dispute among heirs over the property, or there are other complicating factors.