Although it may sound complicated – and there can be a lot of moving parts – inheriting a property with a mortgage is actually relatively simple if there aren’t any abnormal circumstances in the mix. In most cases, if you’re bequeathed real estate that’s still secured by a mortgage, you just take over the mortgage payments or sell the property if you can’t afford it.
The complexities, however, often lie in the specific wording of the deceased’s will or trust, the role of the executor and trustee in the transference and the financial situation of the party passing the property along (i.e., are they up-to-date on their property taxes?).
Even If You Wouldn’t Normally Qualify for the Mortgage, You Can Still Take Over
One of the most common questions people have when inheriting a home with a mortgage is, “Can I keep the same rate and terms for which my relative qualified?”
The answer is “yes” thanks to the Garn-St. Germain Depository Institutions Act of 1982. Prior to this act, some lenders would enforce a “due-on-sale” or “acceleration” clause in the mortgage. Those clauses essentially allowed mortgage lenders to demand full payment of the outstanding home loan balance in the event the initial mortgage holder died. In a situation where spouses weren’t cosigners on a mortgage, the surviving spouse could potentially be forced to move if they couldn’t come up with the funds to pay off the mortgage outright, which put a lot of people in difficult situations. The act addresses this issue and makes it easier for people to pass along real property to heirs.
The Executor and Trustee’s Roles
One of the reasons people need to be so careful with who they choose to name as trustees and executors in their will or trust is that these people have many responsibilities to fulfill. Continuing to make payments on secured debt, such as home or car loan payments, is just one of those duties.
Although secured property can be passed down through inheritance, the loan must still be paid during the transition period. It can take time to go through the probate process or analyze a complex will or trust to ascertain where assets go and how debts are to be paid. During that time, the executor or trustee should continue making mortgage payments on behalf of the deceased and the person to whom the property is being bequeathed prior to transfer of ownership from the deceased’s estate to the intended inheritor.
What If I Can’t Afford the Payment?
This is certainly a possibility for many families. Ideally, a family member wouldn’t leave you an asset you couldn’t afford, but it does happen. Homes are expensive, and between maintenance and repair costs, mortgages and property taxes, maintaining ownership of the property may not be feasible. You have several options if you’re passed down property secured by a loan you can’t afford.
Attempt to Refinance – Refinancing may or may not be an option depending on your financial situation. Any refinance terms would be based on your credit rating and ability to maintain the mortgage rather than the terms the original owner received. If your credit isn’t as good and you don’t have the same level of income, you may not be able to secure a more advantageous rate or term.
Rent Out the Property – This is a better option for many people, as the rent you charge tenants may cover the added expenses you couldn’t afford. Receiving rental income may be a way for you to eventually pay off the mortgage without having it negatively affect your own finances and quality of life.
Sell the Property – This is the other commonly pursued option for many people who inherit property. If you already have a house and a mortgage and you don’t want to deal with the hassles of managing a rental property, selling the inherited home may be the best solution for you. Selling the property will also turn whatever equity your loved one had in the home into liquid money you can use for whatever you want once the sale has been finalized and the mortgage is settled with the lender.
When Things Get Complicated
Things aren’t always so simple. What if your relative had taken out a reverse mortgage? Reverse mortgages generally have clauses in them that require the estate to repay the loan in a set amount of time, often six months.
What if there are back property taxes owed or liens on the home? Technically, the executor or trustee should be paying the back taxes and other debts while settling the estate, but that’s sometimes easier said than done if the capital just isn’t there. You may still be able to sell the home as long as the buyer is willing to pay the back taxes as part of the sale contract.
If things start getting complicated, it may be in your best interest to speak with an estate planning or real estate attorney about your options.
Need Help Refinancing a Home You Inherited or Just Need Questions Answered?
The mortgage advisors at our Pinnacle Capital Mortgage offices in Arizona, California, New Mexico, Oregon, Utah and Washington have experience helping people acquire home loan financing, refinancing mortgages and dealing with confusing mortgage issues such as inheritance. If you’re inheriting a home with a mortgage or you just have questions about how the process works, feel free to contact a local office near you.