As a real estate investor, I know that when someone dies, their mortgage debt doesn’t just vanish. Inheriting a home also means inheriting the mortgage debt. However, if the deceased borrower had mortgage protection insurance, that policy will pay off the loan. After the original borrower dies, the person who inherits the home may be added to the loan as a borrower without triggering the ability-to-repay (ATR) rule.
What as a Successor In Interest ?
Now, a CFPB rule gives “successors in interest” the same protections under federal mortgage servicing laws as the original borrower. A confirmed successor in interest is considered a “borrower” for purposes of the Real Estate Settlement Procedures Act (RESPA) loss mitigation rules.
If a successor in interest assumes a mortgage loan obligation under state law or is otherwise liable on the mortgage loan obligation, the protections that the original borrower had under the Real Estate Settlement Procedures Act (RESPA) and Regulation X apply to the successor in interest.
Who qualifies as a successor in interest? Those who qualify as a successor in interest include the following:
- A surviving spouse who acquires the property from the deceased spouse
- A joint tenant or tenant by the entirety who acquires the property from a co-owner who dies
- A child, grandchild, or other descendant who acquires the property from a parent or grandparent who dies
- A parent or grandparent who acquires the property from a child or grandchild who dies
- A surviving tenant who acquires the property from a deceased tenant in a leasehold
- A trustee in bankruptcy who acquires the property from a debtor in bankruptcy
- A personal representative of the estate who acquires the property from a deceased borrower
- A surviving family member who acquires the property from a deceased borrower
Most mortgage loans have a due-on-sale clause, also called an acceleration clause, which means that the lender can demand full repayment of the loan if the property is sold or transferred to someone else. However, the law allows a successor in interest to assume the loan without having to apply or qualify and continue making the payments.
What Happens To Your Mortgage When You Die?
It’s natural to assume a loan will be cancelled upon the death of a borrower. But more often than not, heirs to real property often find that they wind up inheriting both financial debt in addition to a home. Financial debt they frequently can’t pay off on time.
While you may think by selecting a beneficiary who can afford regular mortgage payments your physical estate can be kept intact, it’s actually more common for an heir to either sell property or let a creditor foreclose upon it. Generally speaking, it’s rare that an heir will suffer any sort of credit loss as a result of your mortgage debt—more commonly, credit damage can be the result of a co-signed loan or a failure of married couples to divide their assets.
If the home is worth more than the debt you owe, the difference goes to any beneficiaries. While this can be subject to the decision of an executor or legal representative, it’s not necessarily a bad idea to sign a clause in your will authorizing its sale for the sake of convenience for a designated heir rather than allowing potential property disputes to arise.
Who Pays the Mortgage During Probate ?
When going through the probate process, one common question that arises is who is responsible for paying the mortgage on a property. I suggest considering these 5 key points:
- Estate Responsibility: In most cases, the responsibility for paying the mortgage during probate falls on the estate of the deceased individual. The estate is a legal entity that is created to manage the assets and liabilities left behind by the deceased.
- Executor’s Role: The executor of the estate, who is typically named in the deceased individual’s will, is responsible for managing the estate’s finances, including paying off debts such as the mortgage. The executor should ensure that the mortgage payments are made on time to avoid any potential consequences, such as foreclosure.
- Insurance Coverage: It is important to review the homeowner’s insurance policy on the property. In some cases, the policy may include a provision that covers mortgage payments during the probate process. This can provide some financial relief and ensure that the mortgage is paid while the estate is being settled.
- Communication with Lender: It is advisable for the executor to notify the mortgage lender about the probate process and provide them with the necessary documentation, such as a copy of the death certificate and the appointment of the executor. This helps establish clear communication and ensures that the lender is aware of the situation.
- Sale of Property: In certain situations, it may be necessary to sell the property to settle the estate’s debts, including the mortgage. The proceeds from the sale can be used to pay off the outstanding mortgage balance. The executor should consult with legal and financial professionals to determine the best course of action.
If you haven’t clearly allocated your property to beneficiaries in a will or living trust, there’s a very good chance the property will have to go through probate. And one rule of thumb to keep in mind is the larger the debt, the greater the likelihood of having your home sold during the process. The probate process itself can be both lengthy and costly, and one that has the potential to open up old wounds. While Utah follows the Uniform Probate Code (which tends to simplify probate), it still has the potential to be needlessly complicated. Avoiding probate altogether by drafting a revocable living trust can help you avoid the process, but still cost beneficiaries an unwarranted tax burden.
Whether or not you designate a beneficiary through a will or a living trust, the executor’s first priority will be seeing that your assets will be designated to any creditors—no matter how small the debt. And if there’s considerable mortgage, there’s always a strong possibility a lender can force a sale. Consider drafting a list of liabilities alongside your will, including:
- Accounts
- Outstanding bills
- Federal and state income taxes
- Home equity
- Lines of credit
- Loans against any life insurance policies or retirement accounts
- Mortgages
- Personal loans
- Property taxes
Divide these liabilities into two categories: ones you anticipate will be active during probate and ones which won’t be as immediate. You might find that by allowing an executor to sell a particularly large policy or investment account immediately on your death, your beneficiaries can use the assets to help pay off your mortgage policies.
Facing The Inevitable
Asset distribution is never something to take lightly. And without due preparation and consideration, your heirs may find they’ll wind up with a lot less than they expected.
More importantly, you need to think of the memory you’ll be leaving behind for your loved ones.
What About the Death Clause in Loan Agreement ?
When it comes to loan agreements, including car loans and promissory notes, there may be a specific clause known as the “death clause.” This clause outlines the steps that the lender will take in the event that the borrower dies. Here are some key points to understand about the death clause in loan agreements:
- Loan Default: If payments are missed on the loan after the borrower’s death, the lender may consider the loan in default. This means that the borrower’s estate or co-signers may be held responsible for paying off the remaining balance of the loan.
- Repossession: In the case of car loans, which are typically secured loans with the car acting as collateral, the lender may choose to repossess the car to recover their losses if payments are not made. However, if a surviving family member or friend wishes to continue making payments on the car, the lender may be willing to transfer the loan to their name or refinance the loan into a new one.
- Forgiveness of Debt: In some cases, the death clause in a loan agreement may state that the remaining balance of the loan, including any accrued interest, will be fully forgiven upon the borrower’s death. This means that the borrower’s estate or co-signers would not be responsible for repaying the debt.
- Successors in Interest: In the context of mortgage loans, a CFPB rule gives “successors in interest” the same protections under federal mortgage servicing laws as the original borrower. This means that a confirmed successor in interest, such as a surviving spouse or other qualified individual, may be added to the loan as a borrower without triggering the ability-to-repay rule. They would be considered a “borrower” for purposes of the Real Estate Settlement Procedures Act (RESPA) loss mitigation rules.
It’s important to note that the specific terms and conditions of the death clause in a loan agreement can vary. It’s recommended to review the loan agreement and consult with legal professionals to fully understand the implications and responsibilities in the event of the borrower’s death.
What if I am Living in the House When the Owner Dies ?
If you are living in a house when the owner dies, you may be wondering if you can continue living in the home. Here are some reasons why you may or may not be able to live in the house:
Reasons why you can live in the house:
- Inheriting the Property: If you are a surviving spouse or a confirmed successor in interest, you may be able to inherit the property and continue living in the home. If the property was owned jointly with right of survivorship, the surviving owner will automatically become the sole owner of the property. If there was a will or estate plan in place, the property will be distributed according to those instructions. If there was no will or estate plan, the property will be distributed according to state law.
- Paying off the Mortgage: If the homeowner had a mortgage on the property, the mortgage will need to be paid off or assumed by the new owner. If you are the confirmed successor in interest, you may be able to assume the loan without having to apply or qualify and continue making the payments.
- Homeowners Insurance: If you are living in a house when the owner dies, you will need to ensure that the homeowners insurance policy is updated. If there is no surviving spouse, the deceased person’s estate executor is responsible for the home insurance policy. The executor must act to change the home insurance policy and continue to pay the current premium or risk a coverage lapse, leaving the home uninsured.
Reasons why you cannot live in the house:
- Ownership of the Property: If you are not a surviving spouse or a confirmed successor in interest, you may not be able to inherit the property and continue living in the home. The property will be distributed according to the will or estate plan, or according to state law if there was no will or estate plan.
- Paying off the Mortgage: If the homeowner had a mortgage on the property, the mortgage will need to be paid off or assumed by the new owner. If you are not the confirmed successor in interest, you may not be able to assume the loan and continue making the payments.
- Probate Process: When the owner of a house dies, the property must go through the probate process. Probate is essentially the court-supervised act of paying debts, closing accounts, and distributing assets to heirs. The probate process can be complex and time-consuming, so it’s important to consult with legal professionals to ensure that everything is handled properly.
Do you need to have home owners insurance on a house that is paid off after the owner dies?
Yes, you may need to have homeowners insurance on a house that is paid off after the owner dies. Here are some things to consider:
- Policy Continuation: Once a homeowner dies, their homeowners insurance policy is still in effect. However, it can expire or be canceled if no one makes the premium payments. The existing policy will continue, but the insurer must be notified of the homeowner’s death so that the policy information can be updated.
- Ownership of the Property: If you inherit the home after the owner’s death, you will need to become the legal owner of the home before you can purchase homeowners insurance.
- Probate Process: When the owner of a house dies, the property must go through the probate process. Probate is essentially the court-supervised act of paying debts, closing accounts, and distributing assets to heirs. During this time, you may want to get coverage in the executor’s name, especially if you plan on selling the property.
- Mortgage Protection Insurance: If the homeowner had mortgage protection insurance, that policy will pay off the loan in the event of their death. This can help ensure that the home remains in the family and that the mortgage is paid off.
14 Step Checklist To Know What To Do When Someone Dies
1) Notify The Authorities Immediately
Typically, if the deceased was in a hospital or under hospice care, this responsibility falls to the staff member who first discovers the body. However, if the deceased dies at home or without medical care, it is necessary to call 911 to legally pronounce the body dead. If it exists, have a do-not-resuscitate document ready for the state of Utah (found here) or notify authorities ahead of time.
2) Arrange For Transportation Of Your Loved One
Be aware of any arrangements that need to be made for an autopsy or organ donation prior. If no autopsy is necessary, a mortuary or crematorium can be contacted for admission. Be aware that legally, both must be able to give an estimate of necessary costs.
3) Notify Friends And Family
Be aware that this will likely be one of the most strenuous and emotionally grueling parts of the process. Be prepared to give as much honest information as you have, but keep it short and simple. Arrange for face to face communication if you can.
4) Arrange For A Caretaker For Pets, Children And Other Dependents
You’re likely going to have emotionally too much on your plate as you will any additional physical burden. Even if it’s only temporarily, this should likely be a task you delegate to someone you trust.
5) Notify The Employer Of The Deceased
If your loved one was still working. Ask about details of remaining pay, life insurance, benefits or any necessary details you or your family may need to know.
6) Arrange For Proper Burial, Cremation Or Funeral Services
It’s more common than not that arrangements will be stipulated in any will or testament. Still, the prospect is likely going to be very emotionally taxing for you. Try to have a close friend or family member on hand to contact proper facilities and accompany you (they can also be beneficial in helping you compose an obituary.)
7) Contact Religious, Military Or Fraternal Associations
Oftentimes, if a loved one was an active member they can help offset the cost of burial through subsidized benefits (or provide actual funeral services themselves.) There may also be additional benefits such as grief counseling, pensions and charitable services they can offer you.
8) Assess The State Of Their Physical Property
In the case of a parent, if this was a home you grew up in there may be some very personal memories attached, so again; this may be a task you should be accompanied with by a friend or family member. Sort through mementos. Clean up any trash, throw out food, collect mail… the physical state of the property can play a specific role in the administration of their will.
9) Locate And Keep On File Your Loved One’s Will
As well as any pre-planned or pre-paid funeral arrangements and necessary information for the death certificate. As in the example we gave earlier, you should also contact their attorney (or hire your own) to discuss the specifics of the will to avoid any complications further down the road.
10) Obtain A Death Certificate
These will be provided to you at a funeral home. You will need multiple copies for probate courts, government entities, insurance agencies, banks and utility providers.
11) Register The Will For Probate In The District Court Of The Deceased’s Particular City Or County
Please note that by Utah state law, a probate case may not be filed for at least five days after death; and it must be filed within three years.
12) Appoint An Executor Of The Estate
Whose duties may include:
- Collecting money owed to the estate or paying taxes and mortgages on property owned
- Managing the estate and making repairs where needed
- Filing estate income tax returns and submitting problems to the court
- Distributing the estate in accordance with the will or the law
- Submitting a final accounting statement
- Establishing any necessary bank accounts for distribution of funds
13) Contact The Following:
- A trust and estates attorney to transfer assets
- Police (to have them periodically check vacant property for security reasons)
- Any of your loved one’s investment advisers for information on holdings
- Their bank for account information
- A life insurance agent for claim forms
- Social Security (800-772-1213; www.ssa.gov) and other agencies from which they received benefits to stop payments and ask about survivor benefits
- Utility companies, to change or stop service, and postal service, to stop or forward mail
14) Arrange For The Potential Sale Of Physical Property
This can actually be one of the more time consuming tasks of estate liquidation. In the case of inheriting a home, it can take months (and sometime years) after the estate has been executed to transfer property, arrange for mortgage payments and make necessary repairs. You may want to discuss the option with other family members in order to gauge their input.
Wrapping it Up
Hopefully you now have a clear understanding and checklist to follow to give you the confidence to know what to do with your mortgage and house when someone dies. The pain of grief is a universal burden; but one that we all endure and interact with in unique ways. The process of losing a loved one is painful enough; but when it comes to arranging final details, you don’t want any additional burden. Gary Buys Houses is a trusted home buying company in Utah and Gary specializes helping people in tricky selling situations to quickly and easily sell their homes for cash, no appraisal needed. Contact Gary today and get an offer on your home.