What Happens to the Mortgage When Someone Dies?
This can be one of the scariest issues that come up in the administration of an estate. Regardless of whether an estate (or part of an estate) goes through probate, when a piece of real estate passes from a decedent to a beneficiary, the question remains: what will happen to the underlying mortgage? This can raise quite a bit of uncertainty where the beneficiary poses a significantly higher credit risk to the bank than the previous homeowner, who is on the mortgage.
What complicates the matter more, is the presence of a "due on sale" clause that nearly all mortgage contracts contain, which states that when the title of a property is transferred, the remaining balance on the mortgage is due in full. On its face, such language would require that upon any transfer of ownership (e.g., upon the death of the mortgagee), the balance of the loan is due on sale, regardless of the amount of liquidity of the estate. This lack of liquidity quite often results in the need to sell other assets to raise the necessary funds, or at last resort, to sell the underlying property. But in reality, the situation is not nearly as grim, and thanks little known law passed in 1982, there are a tremendous amount of protections for beneficiaries in these types of situations.
. . . Enter the "Garn-St.Germain Depository Institutions Act of 1982." Without going into the ins and outs of the entire act (primarily focused on Savings and Loans reform), a very relevant provision of the act states that so long as a a relative of the mortgagor/property owner takes residence in the property, then such relative can continue the original mortgage. This also applies to joint tenant, where the death of one tenant results in sole ownership by the other....regardless of how the mortgage is held. Note that this all would only apply if the new owner is residing in the property, and if the property has no more than four units (think apartment buildings, etc.) This is really good news. However, there are a few planning considerations that should be looked at.Same-Sex Couples should be real careful in this area, as they will unlikely be considered "relatives" for the purposes under this act. Some form of joint ownership should be considered."Just because you can, doesn't mean you should." Consider the financial resources available to the beneficiary to continue the mortgage payments.Last, consider the benefits and options available to actually pay off the mortgage. Even if you would like to keep a certain amount of your estate liquid, life insurance can be an inexpensive alternative to infuse a substantial amount of liquidity into your estate. In conclusion, don't worry! If you find yourself inheriting a property from a relative or joint tenant, that you will be residing in, the mortgage is yours without fear of being required to refinance or triggering any type of due-on-sale clause. So what do you do should you find yourself in this situation? Call your bank, and ask them for how best to handle the relationship moving forward. They will be able to advise you on their particular processes and procedures, but just know the mortgage is yours.