What Happens to Real Estate With a Mortgage When the Owner Passes?
Debt does not simply go away when the debtor passes, which is true of a mortgage. Therefore, the beneficiaries will inherit the property and the existing debt if a home still carries a loan. Various situations may arise, contingent upon the specific terms of the mortgage. For example, beneficiaries may take over the mortgage or sell the property and keep the profits. Remember, planning for the transfer of real estate with a mortgage after your passing can simplify the process for your loved ones.
Unpaid Mortgages on Inherited Homes
For two spouses who co-signed a home loan together, a surviving spouse must continue to make mortgage payments after their partner passes. Furthermore, in community property states, including California, the surviving spouse will be responsible for paying back a mortgage even if it was taken out alone by the deceased spouse. However, outside of co-ownership, co-signers, and community property spouses, a decedent’s loved ones do not become personally responsible for making mortgage payments unless they receive ownership of the property, as in one of the following scenarios:
One Beneficiary Inherits the Property Through a Will, Trust, or Deed
A person can leave a house to a loved one after their death under the terms of a will or trust. In such cases, the mortgage is also transferred, and the beneficiary is obligated to pay off the mortgage or sell the property and apply the proceeds to pay off the mortgage.
Sometimes, beneficiaries can assume the existing mortgage, taking over its responsibility and transferring it to their name. They will continue to make monthly mortgage payments. Moreover, specific lenders may collaborate with the new borrower to refinance the loan, enabling adjustments to the terms.
Multiple Beneficiaries Inherit the Property Through a Will, Trust, or Deed
When multiple beneficiaries inherit a property through a will, trust, or deed, they share the same choices regarding an inherited mortgage as a single heir. They can collectively assume the mortgage as co-borrowers, settle the mortgage, or sell the property and use the sales proceeds for mortgage repayment. However, the decision must be agreed upon by all beneficiaries. If the group cannot come to a collective decision, the court may intervene by ordering the sale of the property and a subsequent division of the proceeds.
Heirs Inherit the Property Through the Probate Process
When an individual passes away without an estate plan, the fate of the mortgage on their property becomes subject to probate proceedings to determine the rightful heirs. The estate becomes responsible for settling the mortgage, and the court-appointed executor must manage the property’s affairs, including the mortgage. Heirs may assume the mortgage, sell the property to cover the loan, or collaborate with the lender to explore other options. The specific outcome can vary based on local laws and mortgage terms. Overall, having an estate plan helps avoid a complex and lengthy probate process and provides clarity for your beneficiaries in managing the unpaid mortgage.
Make a Plan to Pass on Your Home
A family home holds cherished memories; leaving it to children is a common way to continue a family legacy. However, when the family home still has a mortgage, it adds complexities that need consideration in an estate plan. Your plan can include provisions allocating funds to help loved ones with an inherited home or specify how to distribute proceeds if sold. Moreover, refinancing the mortgage as part of your estate plan can secure better beneficiary terms. Please consult with our team of estate planning attorneys to gain invaluable guidance tailored to your situation. Contact us today to schedule your complimentary consultation and begin your journey to a secure legacy for your loved ones.