What to do if you inherit a house with a mortgage
Key takeaways
- A deceased person’s mortgage becomes the responsibility of the person inheriting the home.
- The heir has several options, such as moving into the home and assuming the mortgage, buying out other heirs if they also inherited a portion of the property, or selling the house and using the proceeds to pay off the mortgage.
- Even if they plan to sell the home, the heir usually needs to continue making mortgage payments, but they should contact the lender to understand their obligations and the correct procedures.
Often, when a family member passes away, their relatives inherit a home and the mortgage that goes along with it. This can be a confusing and even stressful situation that raises many concerns. Does the mortgage still need to be repaid? What if the home is underwater? And what happens if there is no will in place?
We’ll explore what happens when you inherit a mortgaged home, your options (buy, sell or rent) and how special circumstances, like a home with a reverse mortgage, can affect those options.
What to do when you inherit a house with a mortgage
Your choices to handle an inherited home and any associated debt range from selling the home to taking over the mortgage payments yourself. Each choice comes with its own set of financial considerations.
Before making a decision about what to do with the home, review the mortgage terms. Understanding its parameters can help you decide what to do with the home. As you review mortgage documents, zero in on the outstanding balance, the size of the monthly mortgage payment, the mortgage’s interest rate and whether it’s a fixed or variable rate.
Step 1: Seek the assistance of an attorney
First things first: It’s smart to get help from an attorney specializing in elder law or estate planning. This is especially true if there are several (and possibly) contentious heirs, properties located in multiple jurisdictions or big money at stake. An attorney can help sort through the next steps, including any legal requirements and filing procedures associated with inheriting a house with a mortgage.
Step 2: Keep making mortgage payments
Despite the borrower’s demise, the mortgage on the home still needs to be repaid and kept current while the estate gets straightened out. If mortgage payments are not made, heirs may face late payment fees or risk losing the home to foreclosure if too much time passes without payments.
So it’s important to find out the details — who the mortgage lender or servicer is, if statements arrive by mail or email, and how payments are handled (manually or auto-pay). If any arrangements need to be changed, now’s the time to change them.
Step 3: Move in and assume the mortgage
The long-term options available include moving into the home and assuming the mortgage in your name, in which case you would simply continue paying the monthly mortgage bills.
If you decide to assume the loan and transfer the home’s deed to your name, the lender or servicer should be willing to work with you. This is because heirs have significant leverage in dealing with a mortgage in an estate situation, thanks to the Garn-St. Germain Depository Institutions Act of 1982 (Garn-St. Germain Act).
The Garn-St. Germain Act is a law that protects relatives who inherit property with outstanding mortgages. In particular, this act bars lenders from enforcing the due-on-sale clause. Often a part of mortgage contracts, due-on-sale clauses require full repayment of the loan in the event of a change in ownership.
Step 4: Buy out other heirs
If other beneficiaries inherited a portion of the property, you may need to buy them out if you want to move into the home yourself. This process, known as an estate buyout, may require obtaining a home appraisal to determine its current value and agreeing on the price that will be paid to the others for their share.
You may also need to take out a loan to access enough cash to pay off any other heirs in a buyout. Special types of financing for this process exist, known as probate or estate loans.
Step 5: Sell the home
Beneficiaries could jointly choose to sell the inherited home instead. This may make dealing with the outstanding debt easier by using the proceeds to pay off the mortgage. If there are remaining proceeds after the sale is finalized, the money can be distributed amongst the heirs.
The deceased individual’s will may provide instructions regarding distribution of sale proceeds amongst heirs. There may also be state laws surrounding how to distribute proceeds.
If you do decide to sell, make sure you understand whether there will be tax consequences. There may be capital gains taxes to consider stemming from a sale. This tax is paid on proceeds that are above the home’s original purchase price (aka the property’s tax basis) — in other words, any profit on the sale.
When you inherit a home, its tax basis will be stepped up to reflect the home’s current market value, which often entirely eliminates any capital gains taxes that may be due. Any major sums spent on the home, such as renovations or big repairs, can also add to the tax basis (decreasing any sale proceeds). However, if you wait several years to sell the property and it continues to increase in value, you may be responsible for capital gains taxes.
Step 6: Research “death tax” consequences
Federal estate tax — paid out of the deceased person’s assets — is something for the estate executor to deal with, but you might also want advice from your attorney. In 2024, an estate must be worth at least $13.6 million before the estate tax kicks in. So, the odds of owing federal estate taxes are somewhat small. In 2021, 6,158 federal estate tax returns were filed, and of those, just 2,584 returns (just over half) were taxable, according to the Tax Foundation.
Aside from federal liability, some states have estate taxes of their own. Some also have inheritance taxes, which the heirs are responsible for paying. All told, 17 states and Washington, D.C., also have either an estate tax, an inheritance tax or both.
Inheriting a house with a reverse mortgage
When a death involves a reverse mortgage, your options vary according to the circumstances of the borrower who passed away. Mike Roberts, founder of MyHECM.com and author of “The Reverse Mortgage Revealed: An Industry Insider’s Guide to the Reverse Mortgage,” says there are a few ways to handle inheriting a house with a reverse mortgage:
- Pay off the balance: If you can pay off the balance in full, you can take possession of a home.
- Refinance: You can refinance the inherited reverse mortgage into a traditional one, paying off the balance owed when you refinance.
- Sell the home: You can sell the home for 95 percent of the appraised value.
- Agree to a deed in lieu of foreclosure: By giving the lender the deed to your home, you will walk away from the home without owing anything on it.
If you inherit a house with a reverse mortgage, time is not on your side. A six-month window to repay the debt can be extended if the heir is actively working to pay off the loan, says Roberts.
“If the reverse mortgage isn’t paid off [by the one-year mark], the lender is required by HUD to begin the foreclosure process,” says Roberts. “The word ‘foreclosure’ carries very negative connotations, but it’s a normal part of settling up a reverse mortgage once the last borrower or non-borrowing spouse passes away.”
If you’re a surviving spouse and you’re on the reverse mortgage, nothing will change, says Roberts. (Even if you aren’t on the mortgage — a “non-borrowing spouse,” in mortgage lingo — you still can keep the home). But say the borrower who passed away has an unmarried partner or a new spouse who moved in after the reverse mortgage was taken out. If the partner is on the loan, they can continue living in the home. If not, their options are limited.
“Once the last surviving borrower or non-borrowing spouse dies, the taxes and insurance cease being paid unless an heir chooses to continue the payments,” says Roberts. “[The] heirs will dictate what happens to the home and whether the significant other can remain living in it.”
Note, too, that when you take out a reverse mortgage, you’re responsible for continuing to pay homeowners insurance and property taxes and keeping the home in good shape.
Inheriting a house with an underwater mortgage
There are cases when the value of the inherited home is less than the outstanding mortgage debt, meaning the home has negative equity or is “underwater.” As the heir, this may be a determining factor as to whether you keep it or sell it.
A good first step is to double-check that the home’s appraised value is correct. If it is less than the outstanding mortgage balance, you might consider requesting a short sale or a deed in lieu of foreclosure with the lender.
If the mortgage is a non-recourse loan — meaning the borrower doesn’t have to pay more than the home’s value — the lender may have few options outside of foreclosure. The same generally applies for a reverse mortgage.
Who inherits the mortgage if there isn’t a will?
In some cases, a borrower passes away without a will in place. This condition of “dying intestate” virtually ensures new levels of complication and cost when handling a home with a mortgage (or any other assets), so it’s best to speak with an attorney regarding your specific situation.
On the other hand, it’s in your best interest to protect your assets and ensure your wishes are fulfilled after your passing. Wills, living wills, trusts and other estate-planning documents are crucial. If you’re seeking legal help, the National Academy of Elder Law Attorneys (NAELA) is a good resource with a look-up tool to find attorneys in your area.
