What Happens To A Mortgage When The Borrower Dies?
Preparing financially and legally for your own death probably isn’t the most uplifting activity, but nonetheless, it’s an important task, especially if you have a spouse or dependents you want cared for when you’re gone.
Some of the most common considerations revolve around the process of designating a successor for the title of your home and making plans for what will happen with your mortgage upon your passing.
Because each state has different rules on how title transfers, either by will or probate, it’s important to talk to an attorney and determine your state’s laws and what you need to do based on the way you want your successor to hold title.
Who Assumes The Payment?
There are a few different people who could possibly inherit your title, depending on who you indicated in a legal will: a spouse (co-borrower), a co-signer or a designated beneficiary.
Should you have a surviving spouse, federal law allows them to take over the mortgage, rather than paying the full balance back to the mortgage company, assuming they’re able to provide proof of financial ability and credit-worthiness.
Should you leave your title to a successor, it’s important to remember that this individual only inherits the title of your home, not the mortgage. Until the inheritor goes through the assumption process, there is no personal obligation on that individual to make the loan payments. In other words, that individual’s credit isn’t linked to the payments needed to make the loan, so they aren’t legally bound to pay the existing loan amount.
The Difference Between An Heir And The Executor Of An Estate
It should be noted that there’s a difference between an heir and the executor of an estate, because only one has the authority to make final decisions on an estate.
The heirs are those who may receive money under the will, but they don’t have power over the estate or the sale of assets. Usually these individuals are family members or someone the client had listed as beneficiaries in a will.
An executor is designated to administer the estate and make sure all claims are paid and that the remaining property goes to the heirs. Because of the power an executor holds, an executor can consult with heirs regarding the estate or sale of assets but isn’t obligated to do so. The executor has the ultimate authority to make final decisions concerning the estate.
Oftentimes when there is a larger family concerned, one heir, or a dependent of the client, will be made the executor, while any other dependents remain heirs. Should there be a dispute between the executor and heir(s), a judge can make a final decision on the estate.
The executor can choose whether to pay off the remaining mortgage balance by selling the home, dividing the money from the sale between the heirs, resuming payment of the loan in the deceased individual’s name, or refinance the mortgage into their own name.
Who Has Authority?
Perhaps the most important thing you need to do when making your plans is to get everything in writing.
By establishing a clear-cut will, you’ll ensure your home will pass to your designated relative or heir and that you have a designated executor who can be the ultimate decision maker. However, the decision maker still isn’t liable for the loan until they go through the assumption process.
For this reason, communication is key when determining who will become the executor of your estate. Be sure to have an open and honest conversation with your heir or beneficiary and to make your intentions known. It’s also helpful to make sure they know where and how to find your mortgage documentation.
Depending on what state you’re in, the inheritor may need to go to court for probate to ensure they’re appointed as the executor and have the right to make decisions on the estate.
Only one person can be named the executor. So if a deceased family member had multiple dependents or beneficiaries and no designated executor, the courts will try to ensure that each person is represented when considering the estate.
What Are The Options?
If upon your passing, no one has been designated to inherit the loan and no one pays, the lender will still need to collect the debt. Therefore, the lender usually ends up selling the home to recoup the debt. This means if someone intends to keep the home, they must continue to pay the mortgage.
It’s important to note that lenders don’t automatically require full repayment of the loan or initiate foreclosure upon a client’s passing. The client’s family is more than welcome to send in payments to keep the loan current and in good status.
The best thing to do upon the death of a family member is to first contact the servicer of the loan. Servicers typically require a death certificate and verification that you’re the inheritor of the house.
Talk To A Home Loan Expert Today
Rocket Mortgage offers various options to clients’ family members when they inherit a home.
For example, if a client dies and someone wants to pay the loan but doesn’t have the ability to do so, Rocket Mortgage can often offer loss mitigation modification options, completed in conjunction with an assumption, to put the loan in the heir’s name while working to make the payment more affordable to the heir.
Assumption options are also available to heirs who want to pay the loan’s current payment and have that payment reflected on their credit.
To elaborate, if the heirs want to assume the loan so that the payments they make will appear on their credit, they are entitled to do so without becoming financially responsible for the loan. Until an assumption takes place, no one is responsible to make payments on the home in the eyes of the lender or the credit bureaus. If a payment isn’t made, the home will go into default, and foreclosure could begin.
Talk It Out
There are a lot of factors that go into these types of preparations. It’s important to consider how your decisions today will affect your loved ones when you’re gone.
On top of your mortgage, consider any other debts that you may leave behind for your family upon your passing. Your own death often isn’t the most uplifting discussion topic, but talking about it now may give you and your loved ones some peace of mind in the future. So take a moment and consider what happens to your debts when you die and make time to openly and clearly explain your situation to your family members.