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In most cases, children are not obligated to pay a deceased parent's debt. However, if the child wishes to keep a home with a mortgage, the child may be responsible for making the payment. Even if the child isn't directly responsible, the estate is often required to satisfy debt. If the mortgage remains unpaid, the lender can foreclose or file a claim against the estate.
Mortgage Remains in Effect
If the deceased parent is married, the surviving spouse is typically responsible for satisfying the mortgage. When there is no spouse, the children are usually the next in line to inherit any assets. A parent can assign the property to a child in a will, entitling him to any equity in the home. Under federal law, the mortgage is allowed to remain in effect when passing to a beneficiary upon death. This means the beneficiary can continue making the mortgage payments until the loan is repaid. The child inheriting the home can also choose to sell the home and pay off the mortgage if she cannot afford to continue paying the house payment.
Wills and Probate
A will specifies who inherits a home. If the designated beneficiary cannot afford to assume the payments, the assets must be liquidated to cover the mortgage. All debt must be settled before beneficiaries can receive an inheritance from the estate. A beneficiary also has the right to decline assets willed to her. If there is no will, state law is applied. In many cases, the estate must be probated to settle debt and divide remaining assets. During probate, it is important to keep the mortgage current. It is the estate's responsibility to pay the mortgage, and no extensions are granted during probate.
Any assets the parent has are included in the estate. However, creditors can only seize certain assets to cover debts. The deceased party's homestead property is exempt. For example, if the mortgage is on a secondary or investment home, the lender cannot place a lien on the primary home without a mortgage. Additional assets that are exempt from probate include payable on death accounts, transfer on death accounts, in trust for accounts, life insurance policies, health savings accounts and retirement accounts, such as an IRA or annuity. These assets automatically transfer to the named beneficiary. If there is no beneficiary listed, the assets become property of the estate and subject to probate.
Defaulting on the Mortgage
Since a mortgage is secured debt, the lender can repossess the home if the beneficiaries fail to pay. When a mortgage goes unpaid, the lender initiates the foreclosure process by filing a claim against the estate. When a home is foreclosed, any equity in the home is lost. If the sale proceeds from a foreclosure are not enough to cover the balance owed, the lender may choose to seek a deficiency judgment. In a judgment against an estate, the personal representative is named and served.
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