The problem of inheritance: what happens to the mortgage after the death of the borrower

According to a report from the Federal Reserve Bank of New York, Americans have $12,35 trillion in home loan debt, accounting for 72,4% of all consumer debt in the country. With so much debt associated with decades-long mortgages, many borrowers unfortunately pass away without ever receiving a title to their home. What happens to mortgage debt when the borrower dies, the publication said CNBC.

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What happens when someone dies with an unpaid mortgage, are heirs responsible for the remaining payments, and how can borrowers prepare in advance to make the process easier for loved ones?

What happens to the mortgage after death?

Mortgage debt does not disappear when the homeowner dies. When a person dies, their assets and liabilities, including their mortgage, are included in the estate.

If there was a co-borrower on the mortgage, the surviving borrower must continue making payments.

If the family wishes to keep the home, they will need to continue making payments after ownership has transferred. If the family wants to sell the house, then it will have to make payments only until the house is sold.

If no one makes the mortgage payments after the home owner dies, the lender will simply foreclose on the home. However, if an heir is named who does not sell the house and does not make payments, the transfer of ownership may still be initiated by the management company, and foreclosure could cause serious damage to the heir's creditworthiness.

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What happens to the mortgage if you die without a will?

When a person dies without a will or trust, the court appoints an executor, usually a close relative, to distribute their assets and liabilities. Unless the home was transferred in a deed on death or was held in a trust, the mortgage is included in the unsettled estate. The executor can use the remaining assets to make mortgage payments until the house is sold or the heir pays off.

What happens to the mortgage when property is divided between several heirs

Often, a mortgage loan must be divided among several heirs. In such a situation, two scenarios are possible: the heirs come to an agreement on further actions or they do not.

If all the heirs want to take over the mortgage, they become co-borrowers and continue making payments. If all heirs wish to sell the property, they have the right to do so and use the proceeds to pay off the remainder of the mortgage.

However, if the heirs are not so unanimous, there are several options. If there are several heirs to the house, but only one of them wants to keep the house for himself, then he can “buy out” part of the remaining heirs.

Otherwise, if a group of heirs cannot reach a consensus, the court has the right to demand the sale of the property and use the proceeds to pay off the debt to the mortgage lender.

What happens to the collateral after the death of the borrower?

In the event of the death of a borrower with an outstanding mortgage, there are not many options. Surviving heirs must pay the entire loan balance or transfer title to the lender.

What happens if your spouse is not included in the mortgage agreement?

If spouses took out a mortgage together, then when one of them dies, the other automatically inherits the property and must continue to make mortgage payments to keep the house. However, if this spouse is not indicated in the contract, then in order for him to retain the property, it is necessary to formalize the transfer of ownership.

Once title passes to the surviving spouse or any other successor, the inheritor must continue making payments until he decides what to do with the house.

How to Take Over a Mortgage on an Inherited House

The first step to assuming the mortgage is to notify the mortgage lender of the borrower's death as soon as possible. Surviving borrowers must tell the lender and who legally inherited the home, after which the lender will require legal documents from each of them.

Upon notification to the lender, surviving co-borrowers automatically assume responsibility for the mortgage.

In the case where the heir to the home is not a co-borrower on the mortgage, he or she will have to work with the mortgage servicer to initiate the transfer of ownership. If you have a death certificate and documents confirming the right of succession, such as a will, this process should be quite simple.

The heir will continue making payments where the original homeowner left off to prevent foreclosure. Payments may be required even before the mortgage account passes to the heir.

If the deceased has designated beneficiaries in their bank account (which is required or highly recommended when opening an account), then the heirs can access the funds within a few days of submitting the death certificate to the bank. This allows heirs to quickly use the property remaining after the testator's death to make mortgage payments (and pay off other outstanding obligations).

It happens that the heir wants to stay in the house, but cannot afford the monthly mortgage payments - in this case, refinancing can be used. This allows you to change the loan to a longer term or lower the interest rate.

How to prepare

Losing a loved one is always emotionally difficult. But there is no need to aggravate the loss with a financial burden. So by planning ahead, homeowners (and everyone else) can make life easier for those they leave behind.

Mortgage insurance

Mortgage insurance is insurance on the life of your home. If you die with your mortgage debts unpaid, the insurer will make payments directly to your lender to cover some or all of the remaining loan. However, such policies often have high premiums and are generally not available to those who purchased their home little more than a few years ago.

A regular life insurance policy offers a similar payout, but in this case the money is left freely for the beneficiaries to use as they wish, such as paying off a mortgage, while mortgage protection insurance is paid directly to the lender.

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Life insurance

Life insurance helps pay off debt and protect loved ones in the event of an unexpected death. There are different types of life insurance, such as term life insurance, which expire after a certain number of years and charge lower premiums. Universal life insurance covers it forever and can accumulate more value over time.

Estate planning

In your will, you can specify who gets your home (and therefore your mortgage). If you don't have a will, the distribution of the house (and the rest of your property) rests with the executor. If you want to bequeath something to someone who is not your legal relative, you will need a valid will in order for them to legally inherit your property.

If you don't already have a will, you should seriously consider making one. Of course, it's unpleasant to think about, but having a will greatly simplifies the process of transferring property to loved ones, allowing them to distribute responsibilities and assets. It also makes the process cheaper and allows your heirs to avoid legal costs when transferring property.

Mortgage debt does not disappear when the homeowner dies. Leaving behind a strong financial legacy that includes a will and life insurance will make the process of passing on assets to your loved ones easier.

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