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What Happens to My Mortgage When I Die?

Image of family home.
Pleasanton Estate Planning Attorney discusses the family's options when inheriting mortgaged real estate.

When we pass our home to our loved ones that is subject to a mortgage, many questions arise? "Will the mortgage have be paid off immediately?" "Do my children keep paying my mortgage or will the bank allow them to take it over?"

Fortunately, at least when when someone who is related to us inherits our home and intends to reside there, the answers are very straightforward.

The Mortgage Still Needs to Be Paid

When a person with a mortgage dies, the loan is not forgiven. The lender is still entitled to their money. This is not surprising, but is worthy of mention.

In the short run, after a person dies, it is imperative that someone (successor trustee, spouse, child) continue making the monthly mortgage payments. If those payments are not made, the property will eventually go into default and the lender will initiate the foreclosure process.

There is no immediate urgency to notify a lender that the owner of the home has died. As discussed in this article from SF Gate, the individuals responsible for the deceased person's affairs can simply pay the existing mortgage while settling up the estate and determining what will be done with the home before notifying the lender.

Family Members Can Continue Paying the Deceased Person's Mortgage, or Assume the Loan Themselves

When it comes time to notify the lender, family members have considerable residential mortgage protection under Federal Law. When ownership of a home is transferred to a family member, the lender cannot invoke the due-on-sale clause and require that the loan be repaid immediately.

Under a Federal Law known to as The Garn-St. Germain Depository Institutions Act of 1982, if a family member inherits a deceased person's home, they have the option to keep the existing loan in the deceased person's name and continue paying it so long as they reside in the home. This same law also allows a family member inheriting the home to "take the loan over" and assume it in their own name so that the mortgage payments appear on their credit. Moreover, as discussed in this article from The Balance, according to the Consumer Financial Protection Bureau family members are not required to prove they have the ability to repay the loan before taking over the mortgage.

Other Options and Considerations

Any person inheriting a home always has the option to pay an existing mortgage off. Whether through a refinance, life insurance, or inherited funds, if the resources are there to pay off the mortgage that option is always available to the new owner.

If the new owner decides to sell the inherited property, the existing loan will obviously be paid from the sales proceeds before net proceeds are distributed to the seller.

When making a decision to keep a particular home following a death, it is best for loved ones to factor in the total cost of home ownership, including property taxes (particularly after the passage of Prop 19), insurance, association dues (if any), utilities and maintenance to make sure keeping the home is going to be in their best interest from a financial perspective.


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