Inheriting a Mortgage? 3 Steps to Strategize
If you’ve inherited a family home that isn’t paid off, you could be facing a number of challenging questions about what to do next – and how fast. In this article, we’ll cover some of the most common questions and approaches to managing this issue step-by-step.
Just remember, this should not be taken as legal or financial advice: for help in making decisions for your situation, we recommend working with a qualified attorney.
Where do I start?
The homeowner might have thought about this already and provided directions to their executor to liquidate estate assets to pay off the mortgage. If they haven’t and you assume ownership of the property, the mortgage becomes your responsibility.
Again, in all situations, we strongly encourage you to work with a qualified estate attorney. Each family situation is different, each estate is different, and local laws can vary widely from one place to another. We advise working with a professional who can help guide you towards the best decisions for both your estate and your family.
What to do with the mortgage?
Depending on the specifics of your situation, you might have a few possible courses of action:
- Assume the mortgage as is
- Pay off the mortgage in full or refinance it using your own assets or credit availability
- If the estate allows or provides appropriate directives, utilize estate assets to pay off the loan
- Work with your estate attorney to make mortgage payments while you plan the sale of the property
- Refuse to accept the property, sending it into short sale or foreclosure proceedings at the discretion of the lender
Assuming the mortgage
Typically, when a mortgage changes hands the lender has a right to make the loan “due on sale” by demanding immediate payment in full.
However, federal law makes an exception for bequests to joint tenants, tenants by the entirety (a type of joint ownership between spouses), and inheritance by family members.
In these situations, you are allowed to simply assume the existing loan without being forced to refinance or make full payment. However, it is important that you continue to make timely payments as the estate is settled to avoid delinquency or other problems.
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In other words, if you intend to assume the mortgage, it’s generally a good idea to treat it like your own from day one.
Paying it off or selling the home
If it’s better for your situation, you can also go through the refinancing process or simply use your own assets to pay off the loan in full. In some cases, this is might be preferable from a financial planning or estate management perspective.
For example, you might have access to better credit terms than your loved one, prefer to avoid using estate assets to deal with the issue, or want to “buy out” other family members by putting up your own capital.
Again, help from an attorney is highly advisable in any of these situations.
Professional help can also be useful if you and any co-inheritors choose to sell the property right away. When planning a sale, your estate attorney can help you communicate with the lender while the home is listed and sold.
Your attorney can also help deal with the planning issues surrounding those payments, like paying back an heir who is making improvements or payments, or helping to figure out how to best make payments from estate assets.
Refusing the inheritance
If you refuse to accept ownership of the property (assuming you are not a co-signor or joint owner), the lender will go through the standard default and foreclosure process. Sometimes, people make the decision to go this route when the property is underwater, meaning the home is worth less than the value of the mortgage.
However, while it is your right to refuse to accept the property, there are significant risks with this strategy. Namely, in this situation the lender may be able to seize other estate assets in order to pay off the mortgage.
We’ve said it before, but we’ll say it again: professional help is absolutely advisable when considering this route.
What if the property is in a trust?
If the property is held in a trust, and you’ve been named a successor trustee, you have another set of responsibilities. First and foremost is a duty to act in the best interest of the trust – a serious job that carries the possibility of significant mistakes.
Common problems can include determining which debts should get priority, failing to protect and care for assets before distribution, or (and this is a heartbreaking one) relying on everyone’s good will and good nature.
That’s why we advise successor trustees to get in touch with a qualified estate attorney and administration planning law firm – professional help can make it easier to grasp your family’s unique situation and spot any potential issues around estate planning, distribution, or probate, among others.
You’ll likely need to have a Trust Certification that shows you have authority to make decisions on behalf of the trust, and you’ll want to take control of assets and valuables to protect them as you go through the distribution process. It is also a good idea to get help with any outstanding debts and liabilities like bills to help ensure that you’re prioritizing them appropriately and covering all your bases.
While issues like financial accounts, investment assets, and other complexities are beyond the scope of this article, a professional estate attorney and qualified financial advisor should be able to help you understand your options and come to a suitable decision about next steps.
Start as soon as its feasible
Keep in mind that the mortgage issue can’t be left to “sort itself out” – not only is it a good idea to make payments until you have a strategy in place, the estate can’t be responsible for the mortgage forever. Starting sooner could also help you avoid some of the risks and pitfalls of inheriting a mortgage – potentially making it easier to either assume ownership of a family asset or finalize the process more effectively.
Family financial planning – for every generation
Inheriting from the older generation often makes us think a little harder about our plans for the next one. If you’ve been wondering about how to create a financial plan for your legacy, take a look at our free guide to multi-gen financial planning, From the Bucket List to the Bank.
This free guidebook covers some of the many considerations you’re likely facing, including estate planning, forging family bonds, and managing the risks that come with a multi-generational approach to wealth management.
Download our free guide and take the reins of your family legacy today!
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