What happens to a home equity loan on inherited property?
Key takeaways
- A home equity loan on an inherited property remains in place even after the original borrower’s death.
- While the heir is not personally liable for the loan, they will need to keep up the repayments, or else the lender might foreclose on the property.
- Options for managing the loan include assuming payments, refinancing, or paying it off — either out of pocket or by selling the home.
Inheriting a house can feel like a windfall. After all, with home values at record highs, you are most likely now the owner of a valuable asset. But before you start counting all of your residential riches, it’s important to know that you may also inherit any debts associated with the property — such as a home equity loan, aka a second mortgage.
Second mortgages in particular have special nuances. Understanding what happens to a home equity loan on inherited property can be key to making smart decisions about that property. Here’s how it all basically works.
What happens when you inherit a house?
Handling a bequeathed home gets complex if the property is being used as collateral for a debt, like a mortgage or a home equity loan. The first thing to know: Such home-secured debt does not automatically disappear when the original borrower dies, because it’s attached to the property, not the individual (as, say, a personal loan would be). That means it remains in force until it’s paid off, regardless of who the homeowner is. While you, the heir, are not personally liable for the loan, you (or someone) will need to keep up the loan repayments, or else the lender might foreclose on the home.
So what are some of your options in this situation? Assuming the loan payments might be the right choice for you (if the lender agrees). Or perhaps you are leaning toward selling the property to settle the debt. We’ll dive into each of those possibilities and more in just a bit, but first…
How do I determine if my inherited property has a home equity loan?
One of the first things you should do when you inherit a property is review the paperwork left by the deceased: their will, trust agreements, etc. Ideally, they organized all their documents ahead of time. If not, you may need to search their papers or computer for billing statements related to a home equity loan or their bank statements for recurring payments.
Another effective method is to search the property’s title to see if there are any liens outstanding on the place (a second mortgage will show up as one, just as a primary mortgage would). While an attorney can help you with that process, that’s not the only benefit of hiring a lawyer.
“You want to understand where in the inheritance process you are,” says Mike Gifford, CEO of Splitero, a home equity investment firm. “The property doesn’t automatically go to the heir.”
First, if you’ve inherited the home via a bequest in a will, that will has to be reviewed and validated through probate. Once it does, and you officially inherit and become owner of the home, a new deed would need to be filed with the county recorder’s office.
Keep in mind: There are other ways to inherit. If the home's title indicated TOD (transfer on death) or it was placed in a revocable trust, it would pass to the heir without having to go through probate.
First step: Notify the lender
Armed with that information, your next step is to contact the home equity loan lender. You will want to do so promptly, before any loan payments get missed.
Before doing so, you will need to get a few things in order. You will probably need to show proof of the original borrower’s passing, like their death certificate, and then of your inheritance: an executed will or probate-related documents. While it would help to have the home equity contract or agreement itself, it’s probably not crucial, as the lender will have a copy. But having a reference or account number off the billing statements would speed up the process.
Having actual or imminent title to the home is important, because “the first thing the bank is going to say is ‘who owns the property?’” Gifford notes. “While it could be the next person in line, it could also be in trust,” for example.
Options for home equity loans on inherited property
Your choices about the home equity loan depends on what you decide to do with the property. If you want to keep the home, you will have to figure out how to manage the payments (one solution could be: Rent out the home to cover them). If you decide to sell the home, you will be required to pay back the loan in full.
Take on the existing loan payments
If you plan to keep the house, you could ask the lender about a loan modification or deferment options while the estate is being settled. You can also ask them about taking over the payments of the loan. That can be a great (not to mention the simplest) option if the loan terms are attractive, and you qualify for them.
It’s important to note: Lenders are not automatically required to let you assume the loan. Primary mortgages come with protections for inheritors to assume payments under the original terms, but unfortunately, that’s not the case with home equity loans.
“It’s certainly something that needs to be discussed with the lender and the attorney,” says Gifford. “A change in ownership could be a thing where the bank says, ‘we want our money back. We need to get paid back.’”
Settle the home equity loan
If you don’t want to keep the existing home equity loan, you have three options.
If you have the financial means, the simplest solution might be to pay the lender back in full. Doing so lets you own and use the property free and clear.
You can also settle the loan by refinancing it (taking out a new loan to pay for the old one). By refinancing, you have the opportunity to start fresh, with potentially better terms, like a more favorable interest rate. However, you must qualify for the new loan based on your creditworthiness, your financial situation and the lender’s criteria.
Finally, you can sell the home, and use the proceeds to pay off the home equity loan. In fact, as with any lien, you would have to settle up with the lender at the closing, before the buyer takes possession and before you reap any profit. Again, you might want to ask the lender for deferment or forbearance options, so you don’t have to make loan payments while the home is on the market.
Bottom line on inherited properties and home equity loans
Inheriting a house can be complex and overwhelming — especially if it’s saddled with major debt, like a home equity loan. While that is certainly a complication, deal with it in proper order. “Understand what your goals are with the property, then you can understand what your options are” with the debt, says Gifford.
Basically, those options boil down to assuming the loan, paying off the loan, or refinancing the loan. Have them in mind — along with the rough costs of each — before you contact the lender. Of course, the presence of the debt could influence your decision about keeping vs. selling the home. And the lender has a say in you assuming the loan (or not). But being clear in your own mind about your ultimate aim can help you negotiate better.
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