If you die owing a mortgage, the mortgage remains in effect. If you have a co-signer, the co-signer may still be obligated to repay the loan. A spouse or other family member who inherits a home is generally entitled to pay and maintain the home. Alternatively, the terms of a will may stipulate that estate assets be used to pay off the mortgage, and sometimes a life insurance policy will pay off the mortgage if the original borrower dies. If no one will assume the mortgage and there is no possibility of paying it off, the lender can seize the property and sell it.
A financial advisor can help you navigate mortgage-related challenges during the estate planning process.
What happens to your mortgage after you die?
Mortgages, unlike most other debts, usually do not have to be repaid from a deceased person’s estate. With credit cards, car loans and similar debts, family members are generally not directly responsible. Instead, debts will be paid with funds from or generated by the sale of assets in the estate before anything is distributed to heirs.
When the deceased was married, the situation is different in community property states. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, surviving spouses may be responsible for repaying mortgages and other debts incurred by the deceased spouse during the marriage. Please note that debts incurred before the marriage began are normally not the responsibility of the surviving spouse. However, the specifics vary significantly from state to state.
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With a mortgage, only the specific property that secures the loan is affected. Unless otherwise stated in the will, other assets of the estate may be distributed to beneficiaries through probate rather than being applied to the mortgage.
Although the mortgage debt survives the deceased person, the responsibility to repay it does not automatically transfer to anyone other than the surviving spouse in a community property state, again unless there is a cosigner. If there is a co-signer, that person remains responsible for the mortgage debt after the death of the other co-borrower.
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While spouses are protected against lenders demanding full payment of a mortgage upon the death of the original borrower, the same is not true for unmarried partners. A domestic partner or other unmarried partner may be forced to leave the home if the original borrower dies without a will naming them as heir to the property.
Mortgage situations after death
The main thing to know about mortgages taken out before your death is that no one will be required to repay the loan unless they signed up to do so. However, your heirs and beneficiaries will be able to keep the property and continue paying the mortgage. If the house is worth more than the mortgage, it can be sold and the proceeds used to pay off the loan. Then what remains can be distributed to the beneficiaries indicated in the will. If the proceeds of the sale are less than the loan balance, this may represent a loss to the lender, but it is not the heirs or estate’s responsibility to make up the difference.
If there is a co-signer, the mortgage will still be in effect just as it was before the other co-borrower died. It will therefore be the co-signer’s responsibility to take care of the payments or otherwise comply with the terms of the mortgage.
If the cosigner does not want the property or loan, the property can be sold and the proceeds put toward paying off the mortgage. If the proceeds are not enough to pay the mortgage, it will be up to the cosigner to make up the difference or work it out with the mortgage company.
Mortgage documents typically contain a due date clause. This provision requires payment of the entire loan amount if ownership of the property is transferred, such as when a will grants the house to a beneficiary. However, the legal protection afforded to spouses and the personal interest of the creditor mean that heirs who wish to keep a home can often do so.
If there is no cosigner, one or more heirs may want to keep the property and take over the mortgage. This will require notifying the lender of the original borrower’s death and potentially renegotiating the mortgage terms to make payments more affordable.
If the heir who wants to keep the house cannot afford the payments, the lender may be willing to consider modifying the loan, such as extending the term, to make the payments more affordable. Of course, if more than one beneficiary is entitled to a share of the property, this will likely require more discussions among the heirs to establish an acceptable way to share the property.
If no one cosigned the loan and no one wants to take over the payments, the creditor can start the foreclosure process. After taking possession of the home through foreclosure, the lender can sell it to recover the loan.
Some loans include a life insurance policy that will pay off the loan in the event of the borrower’s death. If such a policy exists, the heirs will own the house free and clear, absent any other constraints. Sometimes spouses may also purchase each other’s life insurance policies in order to provide funds to repay mortgages and other debts.
The mortgage survives after the borrower’s death, but unless there is a cosigner or, in community property states, a surviving spouse, none of the decedent’s heirs are required to pay the mortgage. Those in line to receive an inheritance may be able to take care of the payments and keep the home. A life insurance policy can pay off the loan, or a will can specify that the estate’s assets pay it off. Otherwise, the lender can foreclose and sell the home.
Careful planning with the help of a financial advisor can significantly reduce the costs of liquidating an estate. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, start now.
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