What Happens To A Mortgage With Inherited Real Estate?

What Happens To A Mortgage With Inherited Real Estate?

When it comes to inheriting real estate, is the mortgage also included? Or does the trustee or executor pay the mortgage off before the property is transferred to the new owner? Well, simply put, the mortgage stays with the property.

If the property is in a trust or estate, the executors should keep making the mortgage payments before the title is transferred to the person inheriting it, using the trust or estate funds. This will help to prevent incurring late fees, or even lead to the default on the mortgage, and even trigger a foreclosure proceeding.

Refer to the Will or Trust for Guidance

The trust or will document should always be used for guidance. This means that if the document stipulates that the estate or trust funds be used to pay off the mortgage, then the path is clear. Nonetheless, most wills do not contain such information, and will probably use general terms on debt repayment. In general, that doesn’t always mean paying off a debt secured by or attached to a certain real estate or other assets.

The Rights of the Inheritor

As mentioned earlier, someone inheriting property that is under a mortgage will also inherit the mortgage as well. As such, the new owner can take over the old mortgage and resume repaying without any change in the terms. This was made possible by the Federal Law referred to as the Garn-St. Germain Depository Institutions Act of 1982.

Set out in the Act are a number of provisions that prohibit lenders from enforcing a “due-on-sale” clauses in mortgages, called acceleration clauses. Acceleration clauses allow the lenders to demand a mortgage to be fully paid off when real estate is sold. But under the Act, the lender is not allowed to demand mortgage payments when the transfer:

•    Is due to the death of a tenant by entirety or a joint tenant

•    Is being made to a relative after the death of a borrower

This law is applicable to residential property with four or fewer dwelling units, and includes residential manufactured homes. It’s also applicable to a lien on the stock that’s allocated to any unit with a cooperative housing corporation.



What Options Does the Inheritor Have?

The new owner can keep making the mortgage payment if the law covers the inherited property, based on the existing terms of the mortgage. This is often ideal if the new owner can afford making these payments, since they don’t need to apply for a mortgage considering all the expenses and hassles it entails.

What Happens When the Beneficiary Can’t Afford the Property?

If the new owner can’t afford making the mortgage payments and/or the other expenses of home ownership like repairs, taxes, and maintenance, they must consider using other strategies, just as any homeowner in such a situation would.

When affordable refinancing isn’t available, or when the new owner doesn’t intend to live in the house or rent it out, selling it might be the best option. Keep in mind that when the property is sold within the first year after the death of  the previous owner, the inheritor will most likely not owe any capital gains tax.

Thanks to our friend, trusts and estate planning attorney in Carpinteria, Neal Bartlett, for his insight on what happens to a mortgage with inherited real estate. Neal is the founding attorney at Bartlett & Herrington, PC. He helps families in Carpinteria, Montecito, Ventura and Santa Barbara create estate plans and elder law plans to protect their families and assets. Visit the website to learn more about the law firm.

​