After the death of a parent, children often are left to work through the financial details of their loved one’s estate. In the best of circumstances, a will is left behind that specifies where assets should be allocated. However, even when that is the case, there may be bills to pay and not enough money in the estate to take care of them all. The biggest of those debts is often the mortgage on the home the parent lived in. In most cases, the children aren’t responsible for paying the mortgage, but survivors still must know what they need to do to make sure everything is taken care of.
Keeping the House in the Family
The mortgage is attached to the house, not the person, so when the person living there dies, the lender expects the mortgage to be paid by the next occupant. In many cases, this becomes the problem of the surviving children. If the parent left the house to one of his heirs, that heir then would take over the mortgage.
Many mortgage contracts have a clause that allows the lender to demand full payment if the mortgage is transferred to someone else. However, if that transfer is to an heir, that clause won’t apply. Under federal laws, the lender can add an heir to the existing mortgage as a borrower without having to prove her ability to pay that mortgage. If you’re the heir taking over your parent’s mortgage, you should make sure you’ll be able to afford the monthly mortgage payments to avoid it going into foreclosure eventually. Taking out a new mortgage or refinancing to lower the monthly payments may be a better option. You also could find a renter for the property to pay all or part of the mortgage each month.
Selling the House
The easiest route for many surviving children simply is to sell the house and use the money to pay off the mortgage. Ideally, the home will sell for more than the mortgage balance due, at which point the heirs may be able to pocket the difference. It’s important to note, though, that you’ll owe estate taxes based on the value of the property at the time you take it over, so some money should be set aside for that.
Things become complicated if the home sells for less than the remaining balance on the mortgage, though. You have some options. You can ask the bank for permission to conduct a short sale on the property, which means everyone agrees to accept less than the mortgage balance. If the bank declines this offer, you simply can tell the bank to foreclose. In that case, though, the bank may bill the estate for the amount it lost in the foreclosure.
Going Through Probate
If the parent left a will, it’s important to know about the probate process. When a person dies, the assets are required to pass through the courts before being distributed. This happens whether the person has a will or not. Probate requirements vary from one state to the next, however. In West Virginia, for example, estates of less than $100,000 go through a much less-intensive probate process than those that are above that amount.
If the deceased parent had a will, that will designates an executor. If there is no will, the courts will appoint someone as the administrator of the estate. The executor will work with the courts, notify all appropriate creditors of the death and handle making sure the estate’s debts are paid. In the event of an outstanding mortgage, the executor will review the will and work to carry out the deceased’s wishes. If the home needs to be sold, the executor will set up an estate sale and make sure funds are distributed as necessary.
What Happens If the Mortgage Isn't Paid?
If the family chooses to do nothing about an outstanding mortgage, the bank still will want its money. If the home eventually goes into foreclosure, the bank can sue the estate for the amount. Often, though, the bank won’t come after the estate, especially if it’s fairly obvious there isn’t enough money for the bank to recoup its loss.
In some states, you may not have a choice as to what happens to the house. In Arizona, for instance, legitimate creditors are paid before any assets are distributed. So even if the house was meant to go to the children, if the deceased person had an extraordinary amount of debt without the funds necessary to handle it, the house may be sold to pay that off.
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