A homeowner's death doesn't necessarily have to affect his mortgage. In many cases, it remains in full force and effect, and the terms remain the same. If no one makes the mortgage payments after the homeowner's death, the mortgage lender can foreclose, just as it could during his lifetime. If someone does make the payments, however, typically nothing changes. Responsibility for the payments usually comes down to the terms of the decedent's will.
When spouses co-own their home and they're both on the mortgage, the death of one merely shifts the burden for payment to the survivor. Contractually, both are legally liable for the loan balance. If one co-signer defaults, the lender can pursue the other for payment. If one owner dies, the lender has the same recourse. Some homeowners take out life insurance policies to pay off the mortgage balance so the surviving spouse doesn't find herself in a position where she can't make the mortgage payments on her income alone.
Terms of the Will
The terms of the decedent's will sometimes dictate what happens with his home's mortgage. He might direct that his executor sell other assets to pay off the loan so the home can transfer to a beneficiary free and clear of any liens. If the will makes no specific mention of the house at all but only distributes the decedent's overall estate to his beneficiaries, his executor may have to sell the home so beneficiaries can each have their share of the home's equity. The mortgage would be paid off at the time of sale. The executor may need court approval to do this.
Transfer to Beneficiary
If the decedent bequeaths his home to a named beneficiary but doesn't address the issue of its mortgage, the mortgage automatically transfers to the beneficiary under federal law. However, the beneficiary must be a relative of the decedent for this to occur. The mortgage lender has no recourse but to accept ongoing mortgage payments from the new owner; it can't change the interest rate or call the loan due because the property is changing hands. If the decedent leaves his home to someone other than a relative, the mortgage company can require refinancing, which could affect the interest rate and other terms of the loan. The beneficiary only gets the property if he takes responsibility for the mortgage as well.
If the decedent was behind on his mortgage payments when he died – and particularly if the mortgage balance is greater than the property's value – the executor of the estate might elect to allow the home to go into foreclosure. The executor would typically need the court's approval to exercise this option as well. However, if there's no equity in the home for distribution to the estate's beneficiaries, the executor would hurt the estate by throwing good money after bad to continue making payments. The lender must file the foreclosure lawsuit against the estate – it can't hold the executor or the beneficiaries liable. However, if the estate has other assets, the lender can force liquidation of those to try to recapture some of its money.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.