What Happens If I Inherit a House With a Mortgage?

For many people, their home is the biggest asset they own. It’s also one of the most likely to be encumbered by debt (a mortgage), and to have great sentimental value. Those factors often lead to difficult decisions for heirs when the homeowner dies. One of the most common questions we hear from heirs is, “What do I do if the house I inherited has a mortgage?”

Unlike credit card debt and some other types of consumer debt, mortgage debt is secured debt—secured by the mortgaged property. If the debt is not satisfied in some way, the lender can take the property. The good news if you inherit a house with a mortgage is that you have options, whether you wish to sell or keep the house. Your decision will be shaped by your circumstances. Let’s take a look at the decision-making process when you inherit a house with a mortgage.

Considerations When You Inherit a House with a Mortgage

The fundamental decision you need to make when you inherit a house with a mortgage is whether to keep the house or sell it. If you were living with the deceased person (decedent), perhaps as a caretaker, selling the house means losing your own home, so you might have a strong desire to keep it. If you are the decedent’s adult child living across the country with no intention of moving back, selling it might be the obvious choice. Sometimes the decision is not so clear.

Some considerations when you are deciding whether to sell or keep an inherited house are:

• Are you the sole heir, or did you inherit the house jointly? If there are other heirs, do they agree with you as to whether the house should be sold or kept? If not, can the heirs who want to keep the house afford to “buy out” the interests of those who do not? It may take time to resolve these issues, and in the meantime, the house will need to be maintained.
• What is the market value of the house?
• What is the amount of the mortgage on the house? Are there other debts to think about, such as unpaid property tax?
• What type of mortgage is on the house—traditional mortgage or reverse mortgage?
• What are the specific terms of the mortgage on the inherited house?

Selling When You Inherit a House with a Mortgage

It’s not uncommon for heirs to decide to sell when they inherit a house with a mortgage, often because it’s not practical or desirable for them to live in the home. In that case, the path forward is relatively clear. If the house has a traditional mortgage, you can sell it, pay off the mortgage, and keep the remaining proceeds of the sale.

What if you decide to sell an inherited house, but the proceeds of the sale are not enough to cover the mortgage balance on a traditional mortgage? As a general rule in Ohio and many other jurisdictions, heirs are not responsible for the mortgage shortfall on the sale of an inherited house. However, there are exceptions, so you should speak with a probate attorney to understand what would happen under the facts of your situation.

If you inherit a house with a reverse mortgage and want to sell, it is important to read and understand the terms of the reverse mortgage before taking action. A reverse mortgage provides the homeowner who takes it out with funds, often in a monthly payment. Because those payments are considered a loan, they are not taxed as income. Unlike a traditional mortgage, the debt grows over time rather than shrinks.

You will want to promptly notify the lender of the death of the homeowner. As long as you abide by the terms and conditions of the reverse mortgage, you should be able to sell the house. As with a traditional mortgage, any proceeds of the sale above and beyond what is needed to satisfy the mortgage belong to the heirs of the estate. However, if there is a shortfall in repayment of the reverse mortgage, heirs are generally not liable for it.

Options When You Want to Keep an Inherited House with a Mortgage

Let’s say you inherit a house with a mortgage and you want to keep it. You will need to pay off the mortgage to do so. There are a number of ways that can happen. Obviously, if you have the funds to pay the remaining balance on the mortgage in full, you can do that; then you will own the house outright. If available, you might consider liquidating other assets you inherited in order to be able to pay off the house.

If you cannot pay off the mortgage in full or prefer not to, you have other options. One is to assume the existing mortgage, which means to step into the shoes of the original borrower and continue making payments. Not all mortgages are assumable, and if the one on your inherited house is, you will still need the approval of the lender and will need to sign an assumption agreement. Assuming a mortgage can be a good choice if the original mortgage had favorable terms.

Some mortgages have a “due on sale” clause that makes the entire mortgage balance due before a transfer of the property can take place, requiring the transferee to obtain financing. However, a federal law has made due on sale clauses generally inapplicable in the case of a transfer to an heir after a death.

If you prefer not to assume the existing mortgage or are unable to, you may decide to refinance the existing mortgage in your own name. This is a good option if you have strong credit and can obtain favorable terms. Refinancing also makes good sense if interest rates are lower than at the time the original mortgage was taken out.

Legal Guidance When You Inherit a House with a Mortgage

Fun fact: the word mortgage arises from the Old French word “morgage,” which itself comes from the words “mort” (dead) and gage (pledge). It means that a loan transaction does not die unless the debt is paid off or the borrower fails to make payment, at which time the lender can take steps to reclaim the mortgaged property.

In short, there is a lot on the line when you inherit a house with a mortgage, and you need to understand your legal and financial responsibilities. To get the guidance you need to make the best decision, contact Gudorf Law Group to schedule a consultation.