Inheriting a House With a Mortgage: What You Should Know

6 steps to take after inheriting a house with a mortgage

Your immediate responsibilities depend on a few factors:

• Your legal status as an heir, co-heir or part of a trust
• The type of mortgage on the property
• How has the property been passed to you

In the first 30 days, you need to establish whether you're an heir, executor or trustee. Then gather documents to notify any other key parties, including the mortgage lender, and secure the property.

1. Confirm your legal authority and contact an attorney

People with legal authority to access mortgage information are direct heirs (usually children, grandchildren or other relatives), executors and court-appointed representatives. You should contact an estate planning attorney to help you navigate through the process and gather the necessary paperwork.

Before you contact the lender, make sure to have the will, trust documents or court orders showing your authority. If you know there’s a risk of foreclosure and you’re simply waiting for legal authority, you can make a payment on the account. In most states you can do this without the legal authority.

2. Understand the mortgage and inheritance method

Identify the mortgage type from any mortgage or loan documents left in, or connected to, the will and probate documents:

• Conventional and FHA mortgages: The Garn-St. Germain Act protects most family members from due-on-sale clauses that would require heirs to pay conventional mortgages in full. Instead, spouses and heirs may be able to assume the mortgage with minimal fees.
• Veterans Affairs (VA): These government-backed loans offer simplified inheritance and assumption processes for family members. VA funding fees are 0.5% of the mortgage value, plus a processing fee, depending on the lender.
• Reverse mortgage: In this case, the lender will likely give a due and payable notice, after which heirs have 30 days to buy, sell or turn the home over to the lender to satisfy the debt.

Every mortgage type has different obligations for heirs. How you inherit also makes a difference.

• With a trust, trustees gain immediate access.
• Probate can delay heirs taking control by three to 12 months (but not payments, so they need to be maintained, unless you can get a payment freeze that long).
• In the case of there not being a will (intestacy), these can often take 6 to 18 months to resolve.

3. Gather important documents quickly

Obtain at least two certified copies of the death certificate for $5 to $30 each. You’ll need these for the mortgage servicer, insurance company and courts. At the same time, you need to collect:

• The most recent mortgage statement
• Property tax bills
• Home insurance policies
• Utility statements

You could also request a property title report to search for additional liens or debts, similar to a title search you’d get when buying a house.

4. Notify the mortgage provider and continue payments

Contact the mortgage lender within 30 days of the owner’s death to avoid unintended default or a forced sale. If you can, request a temporary payment freeze.

Make at least the minimum mortgage payment to avoid late fees and protect the estate's credit. Missed payments can trigger foreclosure warnings in as little as 60 days.

If you can’t continue making payments — because you’re paying for your own property, whether owned or rented — contact the lender within 10 working days to request forbearance or payment plans.

» SEE NEXT: What is a notice of default?

5. Update the homeowner’s insurance

Notify the insurance company of the owner's death within 30 days. Like with mortgage payments, it’s important to continue paying premiums to avoid a lapse in coverage. And consider switching to a vacant home policy if the property will be unoccupied.

If the estate goes through probate, maintain clear contact with the insurer to make sure you have the correct coverage for the property and the home remains insured.

6. Physically secure the property

If you aren’t moving in, then you need to ensure the property is secure and prepared for vacancy.

Change locks and inspect all entry points within seven days to reduce the risk of theft or vandalism. Maintaining utilities, like electricity, water, and gas, is important to prevent damage from frozen pipes or other issues.

Ideally, the house needs to run as if someone were living in it, especially in the winter months. Even if it means having the heating and lighting come on and off automatically, while monitoring the house remotely.

Should you keep, sell or transfer a house with a mortgage?

After inheriting a house with a mortgage and assuming legal ownership, your next decision is whether to keep, sell or transfer it to another heir. Here are some factors to consider:

Calculate the home’s net equity

Start by ordering a certified appraisal to establish the current market value. Calculate net equity by subtracting the mortgage balance and any outstanding liens (taxes, other mortgages, loans or any other claims on the property's value) from the potential sales price.

Example:

Current market value - (Mortgage balance + home equity loans + home equity line of credit + liens) = Home net equity

If you inherit a house with a $375,000 market value, $200,000 left on the mortgage and a $20,000 home equity loan, the home’s net equity is $155,000.

$375,000 - ($200,000 + $20,000) = $155,000

Estimate selling costs

Real estate agent commissions, closing costs and repairs typically total 5% to 8% of the sale price. On a $300,000 home, expect $15,000 to $24,000 in selling costs. And it may take more than 30 days to sell the home.

Consider keeping the home

If you want to keep the property and can qualify financially, request assumption or refinance options from the lender. Some situations allow heirs like the spouse or surviving children to assume the mortgage with minimal underwriting and proof-of-income requirements.

Keeping the home means taking on costs like mortgage payments, taxes, insurance and maintenance. Consider whether you'll live in the house or rent it out.

Understand transfer or disclaimer options

Another option is to gift the property to another party or refuse the inheritance entirely.

Both options carry potential tax or legal consequences, so you should work with a real estate attorney and/or tax professional to reduce your tax liability as much as possible. It’s also important that you formalize a disclaimer within your state's deadline, which is usually nine months.

Tips for assuming, refinancing or selling an inherited house with a mortgage

If you decide to keep the home, you’ll need to work with the lender to assume or refinance the mortgage.

Gather required documents

Collect proof of heirship, such as a court order, will or trust. Obtain the death certificate and recent mortgage statements. Complete the lender's assumption or refinance application, which may require a credit score of 620 or higher. Collect any documents that prove your earnings.

Request a payoff statement

Always request a written payoff statement from the lender and review all charges before closing any transaction. Payoff statements remain valid for 7 to 30 days. In most cases, the processing time runs 30 to 60 days.

Must-have documents and communication tips for heirs with a mortgage

Make sure to send all official papers and requests using certified mail with a return receipt for legal proof. Even if a lender uses an online portal, be sure to send official documents in the most secure way possible, with as much postal insurance as possible.

If you either want to keep the property or sell, but the loan is already underwater, here’s what you need to think about.

What to do if the inherited mortgage is delinquent or underwater

If the mortgage is already behind on payments or the home is worth less than the loan, you have limited, but essential options.

Respond quickly to lender notices

Respond to lender letters or emails within 10 days to maximize options for forbearance or modification. Sticking your head in the sand doesn’t help in this scenario. Most lenders require a written hardship letter and financial documentation for loan modification programs.

Do a short sale

Short sales typically take 60 to 120 days and require lender approval. In a short sale, the lender agrees to accept less than the full loan balance when you sell. This may limit damage to your credit compared to foreclosure.

Evaluate deed-in-lieu instead of foreclosure

In a deed-in-lieu situation, you voluntarily transfer the property to the lender to satisfy the debt. This option avoids foreclosure proceedings but still impacts credit. Investigate this option only after consulting with a real estate attorney to understand your liability.