When a family member passes away, relatives often inherit a house and the mortgage that comes with it. This can be a confusing and stressful situation, raising many concerns: Do I still need to pay off the mortgage? What if the house doesn’t cover the mortgage balance? What if there is no will?
We look at what happens if you inherit a home with a mortgage, your options (buy, sell, rent) and how special circumstances, such as a home with a reverse mortgage, affect those options.
What to do if you inherit a house with a mortgage
Options for dealing with an inherited home and the debt that comes with it range from selling the home to taking over the mortgage payments yourself. Each choice comes with its own financial considerations.
Before you decide what to do with a house, check the terms of your mortgage. Understanding the terms can help you decide what to do with a house. When reviewing your mortgage documents, look at the outstanding balance, your monthly mortgage payment, the mortgage interest rate, and whether it’s a fixed or adjustable rate.
Step 1: Seek the help of an attorney
First of all, it’s wise to get the help of an attorney who specializes in elder law and estate planning. This is especially true if there are (and there probably will be) multiple contested heirs, if the property is in multiple jurisdictions, or if there’s a lot of money involved. An attorney can help you sort out your next steps, like the legal requirements and application procedures if you inherit a home with a mortgage.
Step 2: Continue making mortgage payments
Even if the borrower passes away, the mortgage must be paid and no defaults made while the estate is being liquidated. If mortgage payments are not made, the heirs may have to pay late fees or risk losing the home to foreclosure if too much time goes by without payments.
So it’s important to find out the details, such as who your mortgage lender or servicer is, whether your statements will arrive by mail or email, and how your payments will be handled (manual or automatic payments). If you need to change any arrangements, do so now.
Step 3: Move in and assume the mortgage
A longer-term option is to move into the home and assume the mortgage in your own name, in which case you just need to continue making monthly mortgage payments.
If you decide to take over the loan and transfer the deed to the home into your own name, your lender or servicer should be happy to work with you because the Garn St. Germain Depository Institutions Act 1982 (Garn St. Germain Act) gives heirs significant influence in the handling of mortgages in an estate.
The Garn St. Germain Act protects relatives who inherit real estate that still has a mortgage on it. Specifically, this law prohibits lenders from enforcing amortization clauses. Amortization clauses are often part of mortgage contracts and require the loan to be repaid in full if there is a change of ownership.
Step 4: Buy out other heirs
If other heirs inherit a share of the estate, you may need to buy the house if you want to move into it yourself. This process is called an estate buyout, and it may involve getting an appraisal of the house to determine its current value and agreeing on a price to pay for the other person’s share.
You may also need to take out a loan to get enough cash to pay other heirs during the purchase. There is a special type of financing for this process called a probate loan or estate loan.
Step 5: Sell your home
The heirs can also sell the inherited home jointly. The proceeds from the sale can be used to pay off the mortgage, making it easier to settle the outstanding debt. Any money remaining after the sale is completed can be divided among the heirs.
The deceased person’s will may contain instructions for dividing the sale proceeds among his or her heirs, and there may also be state laws regarding how the proceeds should be distributed.
If you do decide to sell, make sure you understand if there are any taxes due on you. A sale can result in capital gains tax, which is paid on any proceeds from the sale that exceed the original purchase price of the home (i.e., the tax basis of the property).
If you inherit a home, your tax basis will be increased to reflect the home’s current market value, and you’ll often be completely exempt from any capital gains tax you might have to pay. Any significant expenses you incur on the home, such as renovations or major repairs, will also increase your tax basis (though any capital gains you may have made on the sale will be reduced). However, if you wait a few years to sell the property and it continues to increase in value, you may end up owing capital gains tax.
Step 6: Investigate the impact of “inheritance tax”
Federal estate taxes are paid from the deceased’s assets and handled by the executor of the estate, but you may need the advice of an attorney. In 2024, an estate must be worth at least $13.6 million before estate taxes are levied, so the chances of paying federal estate taxes are somewhat slim. According to the Tax Foundation, 6,158 federal estate tax returns were filed in 2021, and only 2,584 of them (just over half) were subject to tax.
In addition to the federal tax, some states have their own estate taxes. Some states also have inheritance taxes, which heirs are responsible for paying. In total, 17 states and Washington, DC, also impose estate and/or inheritance taxes.
Inheriting a house with a reverse mortgage
When a reverse mortgage involves death, your options vary depending on the circumstances of the deceased borrower. Mike Roberts, founder of MyHECM.com and author of “The Truth About Reverse Mortgages: An Industry Insider’s Guide to Reverse Mortgages,” says there are a few options if you inherit a home with a reverse mortgage.
- Pay the balance: If you can pay off the remaining balance in full, you can own the home.
- Refinancing: You can refinance an inherited reverse mortgage into a conventional one, paying off the outstanding balance at the time of refinancing.
- Selling a House: Homes can be sold for 95 percent of their appraised value.
- agree Deed in lieu of foreclosure: By giving the lender the deed to your home, you can let go of it without incurring any debt.
If you inherit a home with a reverse mortgage, time is not on your side: If your heirs are actively working to pay off the loan, they can get an extended six-month grace period to pay off the debt, Roberts says.
“If the reverse mortgage is not paid off (by the first year), the lender will begin foreclosure proceedings as mandated by HUD,” Roberts says. “Although the word ‘foreclosure’ has a very negative connotation, foreclosure typically occurs in the liquidation of a reverse mortgage when the last borrower or non-borrowing spouse passes away.”
If you’re the surviving spouse and have a reverse mortgage, nothing changes (you’re called the “non-borrowing spouse” in mortgage lingo), says Roberts. But say the deceased borrower had an unmarried partner or a new spouse who moved in after the reverse mortgage was taken out. If that partner had a loan on it, they can keep living in the home. If they didn’t, your options are limited.
“Upon the death of the last tenant or non-tenant spouse, taxes and insurance payments stop unless the heirs choose to continue the payments,” Roberts says. “They then get to decide what to do with the home and whether their spouse can continue to live there.”
Also, keep in mind that if you take out a reverse mortgage, you’re still responsible for continuing to pay home insurance and property taxes and keeping the home in good condition.
Inheriting a house with a mortgage that is behind
Sometimes an inherited home may be worth less than the amount still owed on the mortgage, meaning the home has negative equity, or is “under water.” As an heir, this may be a factor in your decision to keep the home or sell it.
A good first step is to double-check that the appraised value of your home is accurate. If the appraised value is lower than your mortgage balance, consider asking your lender to enter into a short sale or deed in lieu of foreclosure.
If the mortgage is non-recourse (a loan that doesn’t require the borrower to pay more than the home is worth), the lender may have few options other than foreclosure. The same is generally true with a reverse mortgage.
If there is no will, who inherits the mortgage?
In some cases, a borrower may die without leaving a will. This “dying without a will” situation will almost certainly add a new level of complexity and cost to dealing with a home with a mortgage (or other assets), so it is best to consult with an attorney about your specific situation.
On the other hand, it’s in your best interest to protect your assets and ensure your wishes are carried out after you pass away. Wills, living wills, trusts, and other estate planning documents are important. If you need legal help, the National Association of Elder Law Attorneys (NAELA) is a great resource with tools to help you find an attorney in your area.
