Even if your name’s not on the actual mortgage, when you inherit a home with a mortgage, the bank considers whoever owns the home the debtor. In fact, many mortgages require the inheritor to notify the lender if the mortgagee dies.
The scary part is that the bank can and some will demand that the heir pay the remaining balance on the mortgage in full within 30 days. Others will work with you to help you refinance the loan or to work out payment arrangements for the balance due. Typically, if you’re a relative and are planning to live in the house (instead of renting it out), you’ll be allowed to assume the mortgage.
However, if you inherit a mortgage debt that you cannot afford to pay, the bank may end up foreclosing on the property. On the plus side, you will not take a hit on your credit report for the foreclosure since you were not the one who took out the loan. Of course, selling it is probably a better option, if that’s possible, as noted below.
Meanwhile, don’t assume this won’t be a problem. Conventional wisdom holds that when the elderly die, the mortgage is long paid off. However, according to the CFPB (Consumer Financial Protection Bureau), 30% of homeowners over 65 still have mortgage debthere as of 2014 with balances in the $40Ks to $80K.
Keep in mind that while you are deciding what to do, you have to keep the payments up including any taxes and insurance. Otherwise the bank may foreclose on you.
What if You Can’t Afford to Pay?
If you can’t afford to pay, your best bet is to try to sell it. In some markets that easier said than done. It may not be ready for resale. There may be thousands of dollars in repairs and upgrades that need to be done in order to make a healthy enough profit to inherit any money.
If you can’t sell it, you can work with the bank to work out an arrangement for a short sale. That way the bank repossesses the home and whatever they make off of it satisfies the balance of the loan.
Worst case scenario if you can’t afford to take over the mortgage, refinance, sell, or convince the bank to accept a short sale, you can just let the house go. Hundreds of thousands of homeowners during the housing collapse just abandoned their homes. Of course their credit reports took major hits but yours will not. Still, you will lose the house, so this is a last resort.
Depending on what state you live in you may have other options. You should talk to an estate lawyer before making a decision. But if often comes down to three broad choices:
• You Take Over the Loan – You can just keep paying on the mortgage just as the deceased did. Keep in mind you still have to inform the lender that you are taking over.
• Refinance at a Better Rate – If you have better credit you can refinance and get a lower monthly payment or to lower your interest payments.
• Let Go of the Home – You could let the home go and use the proceeds from the sale to pay any of the other debts of the estate if those are many.
Have more questions? Feel free to contact me anytime.