If you die money on 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 generally has the right to take over payments and keep the home. Alternatively, the terms of a will may direct 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 is taking over the mortgage and there is no provision to pay it off, the lender can foreclose on the property and sell it.
A financial advisor can help you deal with mortgage challenges during the estate planning process.
What happens to your mortgage after you die?
Mortgages, unlike most other debts, generally do not have to be paid from a deceased person’s estate. With credit cards, auto loans, and similar debts, family members are usually not directly responsible. Instead, debts will be settled with funds from or generated by the sale of estate assets before anything is distributed to heirs.
When the deceased person was married, the situation is different in the communal states. Community-owned states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, surviving spouses may be responsible for paying off mortgages as well as other debts assumed by a spouse who died during the marriage. Note that debts assumed before the start of the marriage are not normally the responsibility of the surviving spouse. However, the details vary widely from state to state.
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With a mortgage, only the specific property securing the loan is affected. Unless otherwise specified in the will, other estate assets may be distributed to beneficiaries by probate rather than being applied to the mortgage.
While the mortgage debt survives the deceased, the responsibility to repay it does not automatically transfer to anyone other than a surviving spouse in a community property state, again unless there is a co-signer. . If there is a co-signer, this co-signer remains responsible for the mortgage debt after the death of the other co-borrower.
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While spouses are protected from lenders demanding full mortgage payment if the original borrower dies, the same is not true for unmarried partners. A roommate or other unmarried partner may have to leave a home if the original borrower dies without a will naming them heir to the property.
Situations related to mortgages after death
The main thing to know about mortgages taken out before you die is that no one will be required to repay the loan unless they have agreed to do so. However, your heirs and beneficiaries will have the option of keeping the property and continuing to pay 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 whatever remains can be distributed to the beneficiaries named in the will. If the sale proceeds are less than the loan balance, this may represent a loss for 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 as it was before the death of the other co-borrower. The co-signer will therefore be responsible for making payments or otherwise fulfilling the terms of the mortgage.
If the co-signer does not want the property or the loan, the property can be sold and the proceeds can be used to pay off the mortgage. If the proceeds are not enough to pay the mortgage, it will be up to the co-signer to make up the difference or resolve the issue with the mortgage company.
Mortgage documents usually contain an enforceability clause. This clause requires that the full amount of the loan be paid in the event of a transfer of ownership, as would be the case when a will grants the house to a beneficiary. However, the legal protections given to spouses and the self-interest of the lender mean that heirs who want to keep a home often can.
If there is no co-signer, one or more of the heirs may want to keep the property and take over the mortgage. This will require notifying the lender of the death of the original borrower and possibly renegotiating the terms of the mortgage to make payments more affordable.
If the heir who wants to keep the house cannot afford to pay, the lender may be willing to consider modifying the loan, such as extending the term, to make payments more affordable. Of course, if more than one beneficiary is entitled to a share of the property, it will likely require more discussion between the heirs to find an acceptable way to divide the property.
If no one has co-signed the loan and no one wants to take over the payments, the lender 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 if the borrower dies. If such a policy exists, the heirs will own the house free and clear, absent any other lien. Sometimes spouses can also buy life insurance policies on top of each other to provide funds to pay off mortgages and other debts.
A mortgage survives after the death of the borrower, but unless there is a co-signer or, in communal property states, a surviving spouse, none of the deceased person’s heirs are liable for payment of the mortgage. Those in line to receive an inheritance may be able to take over the payments and keep the house. A life insurance policy may repay the loan, or a will may specify that estate assets repay it. Otherwise, the lender can seize and sell the house.
Advice on mortgages
Careful planning with the help of a financial advisor can significantly reduce the costs of settling an estate. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
Use SmartAsset’s free mortgage calculator to get an estimate of your monthly mortgage payment with taxes, fees and insurance.
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