When a loved one passes away, often the most valuable asset in their estate is their home. This property can pass to their heirs or Will beneficiaries, but inheritance may come with strings attached in the form of a mortgage or home equity loan. Find out what happens when inheriting a house with a mortgage and the steps you should take to resolve the outstanding debt.
Who Pays the Debt When Inheriting a House with a Mortgage?
Inheriting a house with a mortgage attached can sometimes put an heir or beneficiary in a difficult financial position. That’s because a home mortgage isn’t treated the same as other debts your loved one may have owed when they died.
Generally, the personal representative of a deceased person’s estate sells property within the estate to settle the deceased’s debts. However, Florida law creates an exception when it comes to mortgages. The personal representative is not required to satisfy the mortgage out of the estate’s assets unless the Will specifically says so (most don’t).
Still, the death of the borrower doesn’t extinguish the debt owed on the property. Mortgages are secured debts -- meaning that if a borrower defaults, the mortgage company may foreclose on the property and sell it to satisfy what they are owed. That security interest remains attached to the property beyond the borrower’s death. As an heir, you are not personally responsible for the mortgage payments. However, if those payments go unpaid, the bank or lender will foreclose on the property. That leaves heirs with an often difficult decision to make -- whether to:
- Keep the property
- Sell it and keep the equity
- Allow it to pass into foreclosure
What to Do After You Inherit a House with a Mortgage
Before you can make that decision, you must understand the financial and physical condition of the real property and the balance of assets left in the estate. Here are some steps you can follow in deciding what to do with an inherited house with a mortgage.
Step 1: Determine the Equity in the Home and the Mortgage Balance
Before you can decide what to do with an inherited property, you need to know its value. The estate’s personal representative has an obligation to prepare an inventory of the estate’s assets and their fair market value. This should include the house. However, you can also speak to a real estate agent about the potential list price of the property, or have it formally appraised. If you believe there are repairs needed before the house could be listed on the market, you may also want to discuss those repairs with a contractor to get an estimate of the additional costs.
Once you have the value of the property, you must reduce that amount by each secured debt connected to it. This could include:
- First and second mortgages
- Home equity lines of credit
- Construction liens
- Judgment liens
- Tax liens
The amount that remains represents the equitable value of the house. It is also the amount (less closing costs and realtor fees) that you can expect to inherit if you choose to sell the property.
Step 2: Investigate Upkeep and Maintenance Costs
Next, you must consider the long-term implications of keeping the family homestead. The larger the property, the higher the utility and maintenance costs will be, both financially and in time commitments. There are many expenses to consider in addition to the mortgage:
- Utilities including natural gas, electricity, water, and sewer
- Property taxes
- Homeowners’ insurance
- Hurricane and flood insurance
- Repairs and upgrades to the property
- Landscaping and lawn maintenance costs
- Cleaning costs (in time or money)
Many heirs do not have the income or the means to take on the costs of the home. If your inheritance does not include enough money to support the property, you may need to consider selling it, or at least renting it out, rather than using it for your own family.
Step 3: Discuss Whether to Keep or Sell the Inherited House with Co-Heirs
Sometimes, a person’s Will names siblings or other beneficiaries as joint tenants, sharing ownership of and responsibility for the property. If you fall into this category, you will need to speak to your co-heirs about their intentions for the property, as well as your own. When selling an inherited house, with a mortgage or without, unless you have each co-owner’s signature, you will not be able to transfer the title to the buyer at closing.
Assuming the Mortgage vs Refinancing the Inherited Home
If you decide to keep the house, you will need to review the mortgage contract to see what your options are to take on the payments. The specifics depend on the type of loan your loved one had on the property, and on your own credit and ability to obtain financing:
- Continue to pay the existing mortgage
- Assume the existing traditional mortgage in your own name
- Take out a new loan and pay off the current mortgage
- Pay off a reverse mortgage
- Close out the home equity line of credit
You may need to coordinate with the estate’s personal representative to make this change. For security reasons, many banks will only work with or send documents to someone with letters of administration from the Florida probate courts.
Selling an Inherited House with a Mortgage
If you cannot afford the payments, or simply don’t want to own the inherited property, you can always sell it. However, there are some special considerations that go with selling an inherited house with a mortgage.
First, you may need to wait until the estate is fully distributed and closed or work with the personal representative and the court to sell it as part of the estate administration process. This can slow the sales process and warn off buyers, so it may be better to retain the property if you can afford to do so.
Due on Sales Clauses
Many loans include a “due on sale” clause, saying that as soon as the property is sold, the mortgage is due immediately. Federal law says this can’t prohibit you from inheriting a house with a mortgage. However, you need to be prepared to pay off your loved one's debt before signing the title over to the buyer.
Satisfaction of Liens
Similarly, any liens on the property must be satisfied at the time of closing so that the buyer can obtain “clear title” on the property. Buyers generally insist on title insurance to make certain there are no undisclosed liens that will interfere with closing.
Get Help Deciding What to Do with an Inherited House
After you inherit a house with a mortgage, it is important to have an experienced estate administration attorney by your side as you decide whether to keep, refinance, or sell the property. At Harrison Estate Law, P.A., our estate and probate team can help consider your options and meet all the probate court’s requirements prior to sale. Contact us here or call 352-559-9828 to get help today.