Some people are fortunate enough to own their homes free and clear when they die; however, many don’t. As a result, their homes pass to their intended heirs with a mortgage still attached.
While the home is in probate, the executor of a Will should continue to make mortgage payments to avoid late fees and default; however, the executor will generally not be required to use estate funds to pay off the mortgage.
Unless otherwise specified in a Will, those who inherit mortgaged property inherit the mortgage as well.
Mortgage documents often include a “due on sale” clause which allows lenders from demanding that a mortgage be paid off when a property is transferred to someone else. However, a federal law called the Garn-St. Germain Depository Institutions Act of 1982 prevents lenders from demanding that a mortgage be paid off when the transfer is residential property that has four or fewer dwelling units, and is transferred:
- As the result of the death of a joint tenant or tenant by the entirety, or
- To a relative resulting from the death of a borrower.
If a person who inherits the property is a co-owner or relative of the borrower, the law allows them to assume the mortgage under the existing terms of the mortgage.
If the beneficiary is not a co-owner or relative of the deceased owner, the lender can demand payment of the outstanding loan balance, although in practice, lenders often allow heirs capable of making payments to assume the mortgage.