There are a lot of things to consider before getting into a mortgage, however, one of the biggest concerns is what happens to your debt when you die.
Knowing what happens to your estate when you pass away is an important part of estate planning. And no, you don’t have to be rich to have an estate.
Everything you own from your car to your clothes makes up your estate. For most people their house (even if they have a mortgage) makes up a big part of their estate.
Unfortunately, when you die your debt doesn’t die with you. All your liabilities and assets become part of your estate, and someone will have to settle that.
An important part of the process is taking inventory of everything you own, and deciding who amongst your heirs will get what.
In other words, it’s important that you create a will, as this is a basic form of estate planning. If you have created a will, then you’ve already chosen an executor who will handle the task of dividing your estate.
However, if you die before you’ve had the chance to write a will, then your state court will appoint someone to settle your estate. They’ll typically choose a spouse, adult child or close family relative.
Whoever is chosen will need to find out who is named on the deed of the house, and whether you established a living trust or transfer-on-death deed to keep your home out of probate (court). This can save heirs any court fees and can simplify the transfer of property to their ownership.
If you’re the property’s sole owner, and you have a will which states that you will be passing on your home to an heir, here’s what would happen next.
If you’ve named an heir to your home in a will, they will not have to take over your mortgage under the condition that they are not co-borrowers or co-signers on your loan. However, federal law does allow your heir(s) to take over the mortgage of the property.
For example, if you leave your house to your son, the mortgage servicer must allow him to request to become the new mortgage borrower.
When taking over a mortgage, you do not have to qualify/demonstrate that you have the ability to repay the loan. This rule also applies to spouses, however, most spouses are co-borrowers/co-signers already.
The due-on-sale clause included with mortgages usually requires the mortgage to be paid in full when the ownership of the property has been changed. However, it does not apply when an heir takes over ownership.
If you die with other debts that cannot be repaid from your estate, state law may require the executor of your estate to sell your property to help pay those debts off.
If the sale of the property exceeds the debts owed, then whoever is named to inherit your home will get the excess money.
If you are worried about other debts, a life insurance policy can help. It can repay any debts you still owe at death so your heir can inherit your home without having to sell.
It’s important to remember that your heir does not have to pay off your mortgage. Your mortgage servicer can foreclose and sell your home to get back any money they are owed.
It can take several months to sort out someone’s affairs after they die.
If you don’t want the home to fall into foreclosure whilst the estate is still being settled, it’s important that you keep paying the mortgage payments. These payments can come from the estate, the deceased’s accounts or from life insurance proceeds.
Top Tip: If you want your heir(s) to be able to access your accounts as soons as possible, payable-on-death accounts do not have to go through a lengthy process before heirs can access funds.
These are usually accessible within days of death, but keep in mind that creditors can have claim to any assets in payable-on-death accounts if you owe any other debts besides a mortgage.
Alternatively, you may be able to pay off the mortgage after the owner has died, however, this is not a decision to rush into.
Mortgage’s are low-interest loans, and any other asset’s from the estate or from a life insurance policy can be put to much better uses than paying off the mortgage debt.
If you cannot afford the mortgage, but want to keep the home, you may be able to refinance for a lower monthly payment. Here are some ways to do this:
– Negotiate a longer-term loan
– Refinance into a lower rate
– Ask the mortgage service to modify the loan
Bear in mind that refinancing a mortgage means that you will have to qualify for the new mortgage. This means you will need to have a good credit score and prove you have a steady income.
If the house has increased in value since the deceased purchased the home (or when they last refinanced the mortgage) it may be worth selling the home.
However, if it is worth less than the mortgage balance, the heir(s) will not be able to sell the property, unless a short sale is agreed.
If that is the case, the heir can keep making mortgage payments until the house value is the same as the mortgage debt before reselling, or let the lender foreclose on the property.
If the deceased was the sole owner and mortgage borrower, then the heir may decide to let the lender foreclose on the home.
However, if the heir has already agreed to take over the loan, or the loan has a co-borrower who is still alive, then their credit score will suffer some pretty dire consequences.