What Happens to Debts Upon Death?
Things change after the borrower’s death, but perhaps not as much as you might expect. The loan remains in place and must be repaid, just like any other loan. However, the stakes can be higher in the case of mortgage debts, as family members may live in the home or have emotional ties to it. The deceased could handle the mortgage in several ways, some of which may be more appealing than others.
Maintaining Mortgage Payments
It is essential to make arrangements for your monthly payments upon your death. This prevents the lender from imposing penalty fees and starting the foreclosure process. The surviving spouse, your executor, or anyone else can make the payments while settling the estate. Automatic payments may also work, provided you have funds available. Financial institutions may freeze accounts after your death, so others may need to set up new payment methods.
Passing the Home to Relatives
The estate is responsible for settling the debts, but property is unique. Under federal law, lenders must allow family members to take over the mortgage when they inherit the residential property. This prevents lenders from calling for payment under a due-on-sale clause, which would be triggered when transferring ownership to heirs. Heirs do not need to prove their ability to repay the loan before taking over the mortgage.
Paying Off Debts and Refinancing
Heirs are not obligated to retain the mortgage after your death, but the final decision lies with the executor of the estate. They can refinance the loan if a better loan is available, or they might simply pay off the debt completely. If you have substantial assets in your estate at your death, the executor paying off the debt allows heirs to take the home freely and without any obligations.
Married Couples
For most married couples, the process is straightforward. If both spouses own the home and applied for the loan together, the surviving spouse usually takes over everything (homeownership and loan responsibility).
Co-Signers
If anyone co-signed for the home loan, they will be responsible for repaying the debt, regardless of whether they live in the house or have an interest in the property.
Selling the Home
In some cases, heirs may not be able to take over the mortgage. Whether they cannot afford the payments or do not want the property, they can always sell the home.
Fair Value
If the home is worth more than what is owed on it, the difference can go to the heirs. The executor can sell the property and use the proceeds to pay off other debts or distribute assets to the heirs. Additionally, if a single heir takes over the mortgage and homeownership, they can keep the difference.
Negative Equity
If you owe more than the home is worth—and no one is willing to take over the payments—the executor may be able to negotiate a short sale with your lender. If all else fails, the lender can simply proceed with foreclosure, and none of your loved ones will be liable for the debt—as long as they did not co-sign on the mortgage.
Reverse Mortgages
Reverse mortgages are different since you do not make monthly payments. Reverse mortgages convert the equity of the home into cash. Home Equity Conversion Mortgages (HECMs) are the most common of these types of loans, which must be repaid after the last borrower (or eligible spouse) dies or vacates. After that, heirs will receive a notice of the amount owed from the lender. If they want to keep the home, they will have 30 days to repay the full loan balance or 95% of the appraised value of the home—whichever is less. If they wish to sell the home, the lender will take the proceeds as repayment for the loan.
How to
Preparation
The basic planning for your estate will make things easier for everyone. Talk to a local attorney, explain what you hope to achieve, and ask how to do it in the best way possible. The sooner, the better. A simple will might be sufficient, or you may use additional strategies.
Life Insurance
Life insurance may provide a quick cash injection to help your heirs pay off your mortgage or continue making monthly payments. This money can give everyone options, including the surviving spouse who may or may not want to keep the home. If a co-signer helped you get the approval, you can relieve them of liability.
Ownership Options
With the help of qualified professionals, evaluate whether it makes sense to hold your real estate in a trust or a business entity like a limited liability company. Additional owners can also be added to the title. Any action that keeps your home out of probate can help reduce costs and ease the transition for heirs. However, these changes may have significant legal and tax consequences, so consult a local attorney and accountant before taking any action.
Maintaining Cash Liquidity
Especially if your family members will have difficulty making payments after your death, set aside liquid funds for them. This will help reduce pressure and paperwork, and they can sell the home at a fair price if that is what needs to happen. At the same time, they will need to pay the mortgage, maintain the property, and stay updated on taxes.
Talking About It
Discuss your intentions with anyone who will be affected by your death. It may not be pleasant, and it may be harder for some people than others, but communication can go a long way in preventing pain when the inevitable occurs. Find out if your loved ones want to keep the home or if they prefer to move on. If you have multiple heirs, clarify who will get what and under what circumstances. For example, if one person will get the home, will the estate pay off the mortgage, or will this person inherit the mortgage debt along with the property?
Frequently Asked Questions
What debts are forgiven upon death?
Most often, debts are not automatically forgiven upon the debtor’s death. Debts are paid from the deceased person’s estate. If the estate cannot cover all debts, co-signers and, in some states, spouses may be responsible for payment. Otherwise, they may be left unpaid.
What happens to the house when the owner dies without a will?
Generally, if a person dies without a will, assets like their home will first go to any legal co-owners. If there are no legal co-owners, property ownership will be determined through the state’s probate process. The transfer of property in this situation is governed by inheritance laws in each state, and it can be a complicated process. For any significant assets, it is always best to have a will so you can ensure your heirs receive any property you intend to give them – and in a timely manner.
Is there mortgage insurance in the event of death?
If you want to ensure that your heirs won’t have to worry about selling the home and paying off the mortgage upon your death, you may want to consider a type of life insurance called “mortgage protection insurance.” This insurance will pay off the remaining mortgage balance upon your death so that no one else will be responsible for those debts.
Source:
https://www.thebalancemoney.com/what-happens-to-your-mortgage-when-you-die-4158246
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