What happens to a mortgage when someone dies?

Mortgage debt after death

When someone dies with debt, their estate is typically responsible for repaying owed amounts. This is the case with most types of debt, including credit card debt and personal loans.

However, the process can be slightly different for mortgage debt if the person who died is the only person listed on the home loan. In situations where there is no co-signer or co-borrower on the loan, nobody is legally responsible for repaying the mortgage. And if nobody makes a claim for the property or takes over the mortgage upon death, the mortgage company will eventually begin foreclosure proceedings and take back the home.

In most cases, though, an heir or a group of family members who inherit the property will want to figure out a way to access the equity in the home (if there is any). This typically happens through a sale of the inherited home — though the process of fixing up a home to sell and getting it to the closing table can take months, a year or even longer.

In that scenario, the family member or group of family members who inherit the home can continue making mortgage payments while they figure out their next steps. According to tax resolution specialist Kristine Stevenson of TaxCure, the mortgage lender doesn't care who makes the payments, or how, assuming no illegalities.

Stevenson added that if the title of a home is transferred to a beneficiary, a new mortgage must be sought to pay off the existing mortgage and make that transfer. This is "similar in a divorce situation," she said.

Essentially, the deceased owner must be removed from the title for the new owner, who will take out a new home loan to pay off the old one and begin making payments based on the new loan terms.

What to do if you’ve inherited a mortgage

If you've inherited a home and the debt that comes with it, you can consider different options depending on the situation. For example, mortgage expert Brian Quigley of Beacon Lending in Colorado pointed out that it's common for someone to die with a mortgage and a life insurance policy. In this case, you could use the life insurance proceeds to pay off the home loan and make the process much more seamless.

If you are already a co-signer on a home loan with the deceased, this also makes the process easier since you're already legally responsible for repayment. In that case, you can pick up or continue making payments on the home without making any changes to the mortgage. If you already have the title to the house you inherited, you can also continue making payments on the home loan as it stands.

Other options to consider if you've inherited a home can vary but may include:

Selling the home

As mentioned, the mortgage company doesn't care who is making payments on a home while it's being prepared for sale after the owner has died. If you inherit a home with a mortgage and you want to sell the property to access equity, you can pay the mortgage until the property is sold and you can use the proceeds to pay the remaining loan balance.

When there are multiple heirs, selling the property and distributing the remaining funds among them is a common way to pass on an inheritance.

Assuming or refinancing the mortgage

You can also assume the mortgage as it currently stands, according to federal law. Quigley said that if you're considering assuming the mortgage, communication with the mortgage lender is crucial to the process.

You may also refinance the mortgage in your own name, which would lead to getting a brand-new home loan with a different interest rate, monthly payments and loan terms. If multiple heirs inherited the home and one person wants to purchase it, they can use the new mortgage to “buy out” the other heirs as well.

Letting the home go

There may be instances in which family members do not want to deal with a home after someone dies. If, for example, the mortgage amount owed is more than the home is actually worth, it would make sense for surviving relatives to prefer walking away.

In a scenario where someone dies and they are the sole owner of a home, it's possible to stop making payments on the property and let it go instead. In that case, the mortgage lender will eventually repossess the home through foreclosure.

If you inherited a home with a reverse mortgage

An entirely different set of rules applies if you inherit a home that has a reverse mortgage — a type of home loan that lets older homeowners (ages 62 and up) use the home as collateral for a loan.

If you inherit a home with a reverse mortgage and there are no co-borrowers, you (and potentially other heirs) will need to pay the full loan balance on the home to keep it. If you want to sell the home, you will need to pay the full loan balance or at least 95% of the home's appraised value first if the amount owed on the home is more than it's worth.

If, on the other hand, the loan balance is less than the home value, you can sell the home to repay the loan and keep the difference. In either scenario, the Consumer Financial Protection Bureau (CFPB) says heirs who inherit a home with a reverse mortgage have only 30 days to satisfy the current mortgage in full, sell the home or turn the property over to the lender.

Planning ahead for your mortgage after death

If you want to ensure your heirs aren't left with a financial mess when you die, having a plan for your mortgage is a solid first step. There are several strategies you can consider in this case to make the process easier for them.

• Have an adequate life insurance policy: Life insurance proceeds can be used for income replacement or debt payoff when you die. Having coverage that's sufficient to cover your mortgage and other debts can make your death significantly less stressful for your heirs.
• Have an estate plan: Having a will or trust set up ahead of time can make it easier for your assets to pass on to your heirs. Without a will in place, state laws will ultimately decide who inherits your property.
• Purchase mortgage protection insurance (MPI): Mortgage protection insurance (MPI) is a type of insurance that can pay off your home if you die or become disabled. This coverage may or may not be worth purchasing, and it will depend on your unique financial situation.

Bottom line

Inheriting a home with a mortgage can seem stressful, but there are ways to move forward, whether you want to sell the home or keep it. This applies whether you inherit a home as a sole heir or with several other family members.

The right way to move forward depends largely on the financial situation at hand and what you want to happen with the property. According to Quigley, it can make sense to consult with legal and financial professionals who can help you navigate the process and make informed decisions based on your unique situation.