What Happens to the Mortgage if (when) the Home Owner Dies?

Most people expect to pay off their mortgage and live in their house during retirement. Unfortunately, life doesn’t always go according to plan. If a homeowner dies before paying off the mortgage, it could have implications for the estate and the person’s heirs. Discussing the future and preparing for that possibility can make the transition easier on family members.

When the owner of a property dies, the handling of the mortgage depends on various factors, including the laws and regulations of the specific country or state where the property is located, the terms of the mortgage contract, and the deceased owner's estate planning arrangements.

Contact an attorney and probate court: Consulting with an attorney experienced in estate matters is highly recommended. The attorney can help navigate the legal process, which might include going through probate court to settle the deceased owner's estate and transfer property ownership.  

The heirs should also have the property appraised to determine the real value of the property.  There may be more equity than they originally expected. 

Here are the general steps that heirs typically need to consider:

Notify the lender: The first step is to inform the mortgage lender of the owner's death. Lenders usually have specific procedures for handling such situations, and they will likely request documentation such as a death certificate.

Review the mortgage contract: The heirs should carefully review the mortgage contract to understand the terms and conditions, including any clauses related to the death of the borrower. Some mortgages may have provisions for transferring ownership to heirs or beneficiaries, while others may require the loan to be paid off immediately upon the owner's death.

Who Is Responsible for Mortgage Payments After the Borrower’s Death?
After a homeowner dies, the loan still needs to be repaid. Heirs who were not party to the mortgage are not financially responsible for making payments, but those payments will still need to be made in one way or another to avoid having the house go into foreclosure.

If the homeowner has a surviving spouse who co-signed the mortgage, he or she becomes responsible for payments. Another individual who co-signed the loan will be responsible for making payments, regardless of whether that person has an ownership stake in the house.

If there is no co-signer, other family members can choose to take responsibility for the mortgage.  They may want to refinance the loan to get better terms (if that is an option with rates changing frequently up or down.)

If they’re unable or unwilling to take on the mortgage, the executor can use funds from the estate to pay off the loan, or the house can be sold. If the house sells for more than the amount owed on the mortgage, the balance can be used to pay off debts or can be passed on to heirs.

If the house is worth less than the amount owed, the executor may negotiate a short sale or allow the house to go into foreclosure  The lender may be willing to accept a deed in lieu of foreclosure, which means the heirs voluntarily transfer the property to the lender to satisfy the mortgage debt without going through the foreclosure process.  Again - the heirs should talk to an attorney and a realtor before taking this step.  They may not fully understand the implications of a deed in lieu of foreclosure and they may also not understand the full value of the property.  There may be more value there than realized. 

If the owner had a reverse mortgage, the loan will need to be paid off after all borrowers have died or moved out of the house. If family members pay off the loan, they can keep the house.

Estate Planning Options
If possible, the homeowner can set aside money in a savings account or another financial instrument that family members can access after his or her death. That will help them continue to make mortgage and tax payments until they decide whether to keep or sell the house.

Life insurance can provide funds that can be used to pay off a mortgage in the event of the homeowner’s death. That can allow heirs to stay in the house debt-free or to move out and start over.

In some cases, it might make sense to put the house in a trust or an LLC or to add relatives’ names to the title to avoid the time and expense of going through probate. It’s important to discuss the legal and tax implications with an attorney and an accountant.

Death is inevitable. The better family members plan for it, the smoother the transition will be for surviving relatives. Whether you own a home or a loved one does, have an honest discussion and seek advice from professionals so you can make the best decisions as a family.