When taking out a mortgage loan, you are well aware that it is not a short term loan. Mortgage loans can sometimes pan over an entire lifetime and still not be paid. What happens then?
When getting a mortgage, you should always plan ahead to make sure that your family and loved ones are burdened with debt after you are gone. However if you are still left wondering, “What happens to my mortgage if I die?” then we have the answer for you.
What Happens to a Mortgage if the Mortgagee Dies?
If you have taken out a mortgage on your home but you pass away unexpectedly, it will not change things much for your mortgage. The loan will still exist and would still need to be paid off, just like any other loan. However, with housing debt, stakes can be higher as your loved ones may live in the same house and might have some emotional attachments to it.
There are several ways for the survivors to handle the mortgage. Keep on reading to find out what happens to a home loan if the borrower dies.
- Continue making mortgage payments.
If you had made arrangements for the monthly payments before you died, it can end up preventing the lender from applying penalty fees and starting the foreclosure process. If you have a surviving spouse, an executor or any acquaintance, they can make the payments for you while they settle the estate.
You can also opt for automatic bill payments before your death and make sure that your funds are still available even after you are gone. This is a crucial step because financial institutions end up freezing accounts which is why you need to make sure you have set up new payment methods.
- Passing the home.
It is mainly the estate that is responsible for paying off debts. However, federal law states that lenders must allow family members to take over the mortgage of the residential property if they inherit it. This can lead to lenders failing to demand payment under a due-on-sale clause which is typically triggered when ownership is transferred to the heirs.
The heirs inheriting the property are not required to prove they have the ability to repay the loan before they take over the mortgage.
Although the final decision is with the executor of your will, heirs are not typically required to keep your mortgage in place after your death. The executor can either refinance the loan if there is a better option available or pay off the debt entirely. Paying off the loan will allow your heirs to take the home without any debt burdening them down.
The process of paying off the mortgage for married couples is fairly straightforward. If both spouses had bought and applied for the loan together, the surviving spouse would generally take over ownership of the house and responsibility for the mortgage after the death of the spouse.
In the case of joint mortgage, what happens if one dies?
If you co-signed with someone for the home loan, your co-signer will be liable for paying off the loan. This applies regardless of whether they live in the home or have an ownership interest.
However, in some cases, the mortgage may not be taken over by the heirs. This could be because they might not be able to afford the payments or do not want the property. However, the best option would be to sell the home.
If your home is worth more than is owed, your heirs can have the difference. Your executor would have to sell the property and use the proceeds from the sale to pay off any other debts you might have or distribute the assets to your heirs.
Alternatively, if the mortgage and ownership of the home is taken over by an individual heir, that person can choose to pocket the difference.
But if you owe more than your home is worth and nobody is willing to take over the mortgage, your executor can negotiate a short sale with your lender. If the sale does not work, the lender can simply foreclose. This way your loved ones will not be responsible for the debt. However, please note this will only work if nobody has co-signed on the mortgage with you.
There are also reverse mortgages that are different from normal mortgages as they do not require monthly payments. Home Equity Conversion Mortgages (HECMs) are the most common types of reverse mortgage loans. These need to be paid off after the last borrower or eligible spouse either dies or moves out.
In case that happens, your heirs will receive a due and payable notice from the lender which will inform them that they have 30 days to pay off the full loan balance or 95% of the home’s appraised value if they want to keep the home. Heirs can choose to pay whichever amount is less. However, if they do not want to keep the home, they can sell it and the lender will take the proceeds from the sale and keep it as repayment for the loan.
Moreover, it might end up not making a difference what your heirs want to do with your home. Even if your home has no mortgage and has been paid off, you could still end up losing it if you leave other bills unpaid or have other debts and loans.
If you are leaving behind your house as the only significant asset, some states require it to be sold to pay off any non-mortgage debts you might have.
For example, in Arizona, before your assets are distributed pursuant to the will, all legitimate creditors are paid. Your heirs can avoid a forced sale, however, they would have to use their money to repay your debts even if they are not the ones directly liable for the amount owed. Unless they have co-signed with you. But one way or another, your bills would have to be paid.
How can you Prepare?
If you plan for what will happen after your death, you can make things easier for everybody. You can choose to speak with a local real estate attorney and describe what exactly you want and how you can make it happen.
You can either draft a will or opt for additional strategies such as:
Life insurance can provide you with some quick cash that can help your heirs pay off your home loan or pay the monthly payments. The money obtained from life insurance will give your family members options, for example, a surviving spouse can decide whether or not they want to keep the home. If it was a co-signer that helped you get approved, you can get them off the hook by this method.
- Ownership options.
You can take the help of qualified professionals and evaluate whether or not you should hold your real estate in either a trust or a business entity like an LLC. You can also have the option of adding additional owners to the title. This can help you reduce costs and smooth out the transition for your heirs as it can keep your home out of probate. However, these changes can have significant legal and tax consequences which is why you should consult with a real estate attorney and CPA before you take any action.
- Keep liquid cash.
This is a way to make funds available to your family when they would already be having a hard time making payments after your death. This way, they can minimize the stress and paperwork and if they need to sell the home, they can do so at a fair price. However, until the home is sold, they would have to pay the mortgage, maintain the property and keep up with the taxes.
You should discuss all your options and your intentions with a close one that will be affected by your death. Although it is not fun talking about something like this and it can be harder for some than others, communication, especially in a situation like this can go a long way and help prevent heartache when tragedy strikes.
You should find out if your family wants to keep the house or whether they would prefer to move out. This will give you a clear view of what needs to be done.
If you have more than one heir, you should clarify who will get what and the conditions with it. For example, if one heir is getting the house, will the estate be paying off the mortgage or does that heir inherit the mortgage loan along with the property? You can either choose to put this in a will or tell them yourself.
So now that you have the answer to the question, “What happens to my mortgage if I die?”, you know what you need to do in order to prepare for it otherwise your loved ones will be burdened with the debt after you are gone.