What happens when you inherit property from a loved one and the property is encumbered by a mortgage?
As you may already assume, the mortgage does not simply disappear. It must be repaid, but there are several different approaches available to pay it off. The administrator of the estate is responsible for settling all debts prior to making distributions to beneficiaries. To settle a mortgage debt, the administrator will discuss the options available with the beneficiary of the property to determine which approach works best for that situation. A few options include:
Assuming the Mortgage or Refinancing the Loan
If you as the beneficiary want to move into the property and assume the mortgage, the first step is to review the terms of the loan and contact the lender. Many mortgages contain terms referred to as “due-on-transfer” which means that the mortgage must be paid in full in the event of a change in ownership. If this is the case, the lender may require you to refinance the loan rather than assume it. There are certain laws that assist family members in overriding this term and continuing to assume the mortgage. The Consumer Protection Bureau issued guidelines to lenders that allow them to add a beneficiary’s name to the mortgage when the borrower passes away.
Refinancing may be the best option for keeping the property if you have good credit, money on hand to pay the closing costs and the property appraises for more than the loan amount. The situation may be more difficult if the value of the home you inherited is less than the outstanding mortgage debt. Again, looking to the terms of the mortgage, it must be determined whether the mortgage is considered a non-recourse loan. If it is a non-recourse loan then the borrower is not obligated to pay more than the value of the home. If it is not a non-recourse loan, the lender may choose to initiate foreclosure to attempt to collect as much as possible from a new buyer.
Selling the Property
You may decide it is best to sell the property, pay off the mortgage and keep any remaining equity as a cash distribution. This is often the simplest, cleanest approach especially when there are multiple beneficiaries.
Reverse Mortgages
You may also find yourself in the situation where rather than inheriting property with a traditional mortgage, you inherit property subject to a reverse mortgage. A reverse mortgage is when a lender makes monthly payments to the homeowner so that the homeowner can enjoy the cash flow and liquidity of his or her home equity. The payments accrue into a reverse mortgage that must be repaid upon the death of the borrower.
Inheriting property subject to a reverse mortgage offers you a choice to either pay off the balance and keep the home (this can be done through refinancing), or sell the home for at least 95% of the appraised value. If you are a surviving spouse and listed as a co-borrower on the reverse mortgage, the reverse mortgage stays in place and you continue to receive monthly payments.
If you recently inherited property encumbered by liens or mortgages, contact the experienced estate administration attorneys at Stouffer Legal in the Greater Baltimore area to discuss all the options available. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com
