December 1, 2023

Mortgages: Mortgages — Inheriting a Home, and a Loan

“It’s like getting a gift with a string,” said Judith D. Grimaldi, a principal of Grimaldi Yeung, an estate planning law firm in Brooklyn. Thirty-one percent of people 65 and older, in fact, have home mortgages, according to the Census Bureau.

“Most of my clients just end up selling the house,” Ms. Grimaldi said, “taking the proceeds and saying, ‘Thank you, Mom.’ ”

But if the beneficiary wants to keep the home, just who is responsible for paying the mortgage until the estate is settled can fall into something of a “gray area,” said Deirdre R. Wheatley-Liss, a tax lawyer at Fein, Such, Kahn Shepard in Parsippany, N.J.

Under federal law, the mortgage must be allowed to remain in effect without changes when it passes from one person to another because of a death. This negates any due-on-sale clause in the mortgage.

Who pays generally depends on the deceased relative’s will, and also who among the survivors has the ability to maintain the mortgage, the experts say.

The will might stipulate, for example, that the heir receive the home, free and clear, Ms. Wheatley-Liss said, which may mean that the executor will be directed to sell stocks, bonds or other assets in the estate to pay off the mortgage. (If there is no will, state law will come into play.)

The survivors, meanwhile, should look at the inheritance of property from a practical, economic perspective. “You need to look very strongly at whether you can afford to maintain the mortgage and maintain the property,” Ms. Wheatley-Liss said.

Although there may be some emotional attachment to the home, having it appraised can help determine whether it’s worth keeping. “The question would always be: ‘Are you protecting equity?’ ” said Michael McHugh, the president and chief executive of Continental Home Loans in Melville, N.Y.

An estate lawyer or financial adviser can provide advice on estate taxes and other expenses associated with the property.

The survivors should contact the lender early on to let it know that the borrower has died and that they are the heirs, or the executor of the estate, and to determine the loan’s status. Mr. McHugh suggests sending the lender a copy of the death certificate and a letter from the estate’s lawyer.

It is also important to determine whether the deceased relative has stayed current on the property taxes, if they are not paid through the lender.

But what if the mortgage is delinquent — overlooked in a final illness? If the payments are behind by 60 days or so, it is possible to catch up. If it’s 90 or more days late, the property may already be in foreclosure proceedings, Mr. McHugh said. Depending on state laws and lender practices, the lender could either demand full payment of all the back payments, or continue with the foreclosure.

Some family members ask about whether they can “walk away” from the property if it is underwater, or worth less than the mortgage balance, Ms. Grimaldi said, noting that such requests are more common in this shaky economy. They can do this and allow the foreclosure to show up as the estate’s responsibility and record, she said. But care is needed if the estate has other assets, like a second home or an investment portfolio, which the lender could come after to satisfy the debt.

In some cases, negotiating with the lender for a short sale on the property may be the best solution. In a short sale, the lender agrees to accept less than what is owed on the mortgage.

If the deceased relative had a reverse mortgage on the property — one that paid him or her a stipend and accrued a balance — the heirs could pay off the mortgage balance in full; sell the property and pay off any balance with the proceeds; or refinance.

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