How Can an Heir Take Title to a Deed That Has an Outstanding Mortgage?
Some types of debt disappear when a borrower dies. A mortgage is not one of them. If a borrower dies with a mortgage, the estate or heirs have to repay it. This doesn’t mean that a property with a mortgage can’t be inherited; it means that the inherited property comes with a mortgage that must be paid off. In some cases the mortgage has to be repaid in full soon after the borrower’s death. In many cases the heir can assume, or take over, the loan.
Mortgages Run With the Property
A mortgage is a type of secured debt. The property itself is a “security,” or a kind of collateral. Although it is the borrower who takes out the loan, it is the property that assures the lender that the loan will be repaid. Secured debt is not extinguished upon the death of the borrower; rather, it remains attached to the property until repaid. This is why a bank can foreclose on a property when the borrower doesn’t make his mortgage payments. It can take the security — in this case the property — in order to repay the loan.
The Due-on-Sale Clause
Before 1970, if you sold a house, the mortgage went with it. The new owner would simply take over the payments. As interest rates started to rise in the 1970s, banks wanted the opportunity to write new loans to new purchasers so they could increase the mortgage interest rates. In order to be able to do this, they started writing what are referred to as “due-on-sale” clauses into loans. “Due-on-sale” is a bit of a misnomer, because not only were the loans due when the property was sold, they became due upon any transfer of the property. So when an owner died, the loan came due.
Due-on-Sale clauses resulted in hardships to many families. If a family’s principal breadwinner died, the heirs were sometimes unable to qualify for a new mortgage. With the house sale as their only available recourse, they suffered not only through the death of their relative but also through the loss of their home. Congress addressed this situation with sections of the Garner-St. Germain Depository Institutions Regulation Act of 1982, which provided a number of exemptions to due-on-sale requirements. Relevant to heirs, the new law prohibited lenders from calling in a loan when a property was inherited by a relative of a borrower who had died. The new owners would still have to repay the mortgage, but could do so by taking over the monthly mortgage payments for the remaining term of the loan.
Heirs Who Aren’t Relatives
An heir who is not a relative will be faced with having to pay the mortgage off in full. There are a few options for this type of heir. First, he can contact the bank and ask if he can take over the loan. While a due-on-sale clause allows the bank to call the loan, it does not require it to do so. Second, the new borrower can look for a new loan. If he has good credit and steady income, and if there is equity in the house, the new loan will pay off the existing mortgage. Third, the new owner can use savings to pay off the loan. Finally, if all else fails, the new owner can sell the property to repay the loan, and pocket the difference between the sales price after commission and the mortgage.
Mary Gallagher runs Mary Gallagher Planning (mgaplanning.com), an urban planning and consulting business in San Francisco. She is the former assistant planning director for San Francisco and planning director for San Mateo. Gallagher has been writing about real estate, development and land use for numerous websites since 1995. She holds a master's degree in historic preservation planning from Cornell University.