What Happens If You Inherit A House With A Mortgage?

9 Min Read
Updated Feb. 14, 2024
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Couple inheriting house and taking keys.
Written By Victoria Araj

The death of a loved one can be an incredibly difficult experience to manage, especially when faced with a pile of legal documents to sort through, including the deceased’s last will and testament.

You may learn that you’ve inherited a house. Owning this property may change your life, but it may also present challenges, especially if the house has a mortgage. So, what happens next? We have a few strategies for you to consider when managing an inherited mortgage.

How Do You Inherit A House With A Mortgage?

You can inherit a house in one of two ways: through probate or as the beneficiary of a trust. Each option affects how the house is inherited and how control of a mortgage gets passed on to a beneficiary.

Inheritance Through Probate

Probate is a legal process that distributes an individual’s assets as outlined in their will or according to state law if they died intestate (without a will). The estate executor manages the estate’s affairs and assets while in probate.

If the deceased (or decedent) has debts, their remaining assets, including their home, may be sold to pay them off.

Once all debts have been settled, the remaining assets are distributed among heirs and beneficiaries. If the home wasn’t sold by the executor, you may inherit the property – and it may have an outstanding mortgage balance. During the probate process, you or the executor will be responsible for keeping up with the mortgage payments until the estate is settled.

Inheritance Through A Trust

Property can be passed to a beneficiary through a trust created by the decedent. As part of their estate planning, the decedent (sometimes called the grantor) may decide to bypass probate and set up an irrevocable or a living trust. When a trust is set up, the trust beneficiary becomes the automatic owner of the property when the grantor dies. Inheriting a home through a trust can often make it easier to assume the mortgage and start making payments.

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Considerations When Inheriting A Mortgage

When you inherit a home with a mortgage, carefully review its terms. Knowing the terms can help inform your next step.

Mortgage Terms

Before deciding to keep the house and take on the mortgage, assess the terms and current state of the mortgage, including:

  • What’s the current market value of the home?
  • What’s the remaining mortgage balance?
  • How many payments remain?
  • How much are the monthly mortgage payments?
  • What’s the interest rate on the mortgage?
  • Is the interest rate fixed or adjustable?

Let’s say the interest rate is fixed and lower than current market rates when you inherit the home. If you like the mortgage terms, it may be in your interest to accept the inheritance and continue making the payments. Maybe you want the home but also want better mortgage terms.

Consider keeping the home and applying for a cash-out refinance. If you qualify, you may get better terms, and you can convert the home’s equity to cash to pay for any repairs or improvements.

Due-On-Sale Clause

You may encounter a due-on-sale clause (or alienation clause) in your inherited mortgage note. The due-on-sale clause states that when an owner sells or transfers property ownership, the mortgage lender can demand repayment of the entire mortgage note.

However, most states follow the federal government’s guidelines and won’t apply the clause when a property is transferred between spouses, from parents to children or when an heir or beneficiary inherits a home.

Mortgage Protection Insurance

Check if the deceased was paying mortgage protection insurance (MPI). If they were, it may help because the insurance company will cut a check and settle the remaining mortgage balance with the lender, paying off the home.

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How To Handle Inheriting A House With A Mortgage

You can explore a couple options after inheriting a house with a mortgage: sell the home to pay off the mortgage or keep the home and assume the mortgage.

Let’s look at what you should do before you take your next step.

1. Contact The Mortgage Servicer

Read carefully through the deceased’s mortgage documents. If you can’t find a copy of the paperwork, look for anything that indicates the mortgage servicer. You or your family attorney are required to contact the servicer to notify them of the death, and they’ll likely require a copy of the death certificate.

After verifying the death and updating their documents, the servicer can tell you how much is left on the mortgage and the monthly payment amount. At this point, you’ll have the information you’ll need to decide whether to take on the mortgage.

2. Do The Math

To properly evaluate the financial implications of inheriting a home, you must calculate the home’s equity and property value, consider the remaining balance on the home loan, keep in mind the monthly mortgage payment, estimate the monthly cost of maintenance and think about the home’s condition, particularly the costs of any major repairs.

The executor of the estate should have access to the decedent’s bank accounts and housing expenses and bills. They can tell you how much you should expect to pay every month for various expenses, like utilities. And you may want to hire a home inspector to examine the home and give you an idea of the repairs it needs.

3. Consider Your Tax Situation

When you inherit a property, your tax obligations will depend on whether you sell the house, keep it as a primary residence or vacation home, or use it as a rental property.

When you inherit a home, you benefit from the home’s stepped-up cost basis, which can save you thousands if you ever sell the property. You wouldn’t benefit from this tax break if you became the owner of the home while the owner was alive. But, if you inherit a home and then turn around and sell it, you’ll owe very little in capital gains taxes because of the stepped-up cost basis.

If you keep the home, you’ll be responsible for the mortgage and property taxes. You won’t have to deal with capital gains taxes until you sell the property.

If you use the home as a rental property, you’ll enjoy the tax advantages of real estate investing, like deducting the cost of repairs and maintenance from your tax return.

4. Ask A Professional For Advice

Talk to a real estate attorney and ask them all your burning questions. Inheriting a home with a mortgage can get complicated. Seek assistance from an expert during this process – and most importantly – don’t sign or agree to anything you don’t understand.

If you plan on selling the home, consult a listing agent. They should be able to tell you the value of the inherited property and how fast it may sell. Even if you don’t plan on selling, knowing how much you might earn from selling the home can be valuable information to have. You may even want to consider how much you might earn if you rent the property.

5. Keep Paying The Mortgage Or Pay The Mortgage Off

Keep making on-time mortgage payments, or you may lose the home through foreclosure.

If you can afford it and it makes sense for your financial goals, you may want to pay off the mortgage completely. Paying off a mortgage frees up your monthly cash flow and ends your obligation to the lender.

What Happens When You Inherit A House With A Mortgage: FAQs

Scan through these frequently asked questions if you have more questions about what happens when you inherit a home with a mortgage. And remember, before you make any major decisions, please consult a professional.

What if the decedent had a reverse mortgage on the home?

A reverse mortgage lets homeowners who are at least 62 and have at least 50% home equity convert a portion of their equity into cash. When a homeowner has a reverse mortgage, the portion of equity the lender advanced to the homeowner (plus any outstanding interest) must be repaid when they move, sell the home or die.

If you keep the inherited home, you can refinance the loan, using your new mortgage to pay off the reverse mortgage. If you plan on selling, you’ll need to use the proceeds to pay off the remaining loan balance.

What if more than one party inherits a home with a mortgage?

When several people inherit a home, the easiest course of action is to sell it to pay off the mortgage and split any remaining proceeds. If one beneficiary decides they want to keep the home, they may have to buy the other beneficiaries’ shares of the property.

Another scenario can be that the beneficiaries decide to own the property as joint tenants or tenants in common, dividing access to the property equally.

What kinds of tax deductions can I claim if I inherit a house?

You can write off the mortgage interest and property taxes on your tax return like you would with any property. If you have a primary residence and an inherited property, there may be a limit to the amount you can claim on your tax return. The Tax Cuts and Jobs Act of 2017 placed a $10,000 limit on the combined amount of state income tax and local property taxes a homeowner can deduct from their federal income taxes.

The Bottom Line

Inheriting a house can feel like a gift or a financial burden. Take time to assess your options. And get the professional guidance you need to make an informed decision that aligns with your finances and financial goals.

If you decide to keep the home and it needs some work – or you want to keep it long enough to make improvements and sell it – options to fund your repairs and renovations.

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You can get a real, customizable mortgage solution based on your unique financial situation.

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