mortgage-debt

What happens if you inherit a house with a mortgage?

What happens if you inherit a house with a mortgage or other lien? We’ll explore several options to help you navigate through these bittersweet times.

Lindsay VanSomeren
January 23, 2024
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Dealing with the recent passing of a loved one can be tough, but receiving an inheritance can be a blessing in a dark time. A 2023 New York Life survey showed that 15% of U.S. adults expect to receive an inheritance, with 43% expecting it to come in the form of their loved one’s home. Yet, nearly two-thirds of homes still have a mortgage on them, which means you may find yourself in the relatively common position of inheriting a house with a mortgage. 

Luckily, you have several options for what to do, and you may be protected by federal laws that can make certain choices easier. We’ll explore common considerations and options if you find yourself in these shoes.

What happens if you inherit a house with a lien?

Receiving an inheritance in the form of a home is a loving and generous final act. However, you’ll have to sort out several details first, and it helps to understand a key concept: the home’s title — and any liens filed against it, such as from a mortgage — are not the same thing. 

Your loved one may have left you the title to the home, but there’s still an outstanding debt in their name that needs to be paid. New arrangements must be made to deal with that debt, during which time the creditor still has a legal claim to your house and can foreclose on it.

Your options for what to do generally depend on the type of debt you’re dealing with. We’ll cover the most common lien inheritance scenarios first, and then go over your options in more depth below. 

Inheriting a house with a mortgage

It’s not uncommon to inherit a house with a mortgage lien still attached to it, given that it’s one of the most common types of household debts. 

If your loved one voluntarily purchased mortgage protection insurance (a different product than “private mortgage insurance” or a “mortgage insurance premium,” which some lenders charge), the remaining balance of the mortgage will be forgiven and you can inherit the home debt-free. However, these policies are fairly rare.

Inheriting a house with a reverse mortgage

Many seniors have a lot of equity built up in their home, and it’s not uncommon for them to use a reverse mortgage when they need to borrow money. Nearly 64,500 senior homeowners took out a Home Equity Conversion Mortgage (HECM) in 2022, the most common type of reverse mortgage. 

Reverse mortgages are unlike any other type of debt in that the balance actually grows over time, sometimes even more than the value of the home itself. However, as we’ll see, there are special provisions to limit how much heirs have to pay to keep the home. 

Inheriting a house with a home equity loan

Home equity loans and their flexible cousins, home equity lines of credit (HELOCs), are two other ways for homeowners looking to borrow against their home equity. The home you inherit may have a home equity loan/HELOC and a mortgage taken out against it; in which case, you’ll have two separate debts to resolve if you wish to keep the home. 

Home Equity Investments (HEIs) such as those from Point work similarly to home equity loans and HELOCs in that they take a backseat to any other liens that the home has, usually from a mortgage. However, as we’ll see, Point has special provisions to make it easier to inherit a home than with most home equity loans or HELOCs. 

Inheriting a house with another type of lien

If your loved one wasn’t able to settle their bills before passing, there may be other types of liens filed against the home for things such as:

  • Tax debts
  • Unpaid HOA dues
  • Unpaid contractors
  • Lawsuit judgements
  • Unpaid child support or alimony
inheriting-mortgage-debt

What are my options for dealing with an inherited lien?

Most people who inherit a house with liens on it deal with it by selling the home, paying off the debt, or allowing it to go into foreclosure. Depending on the type of lien filed against the home you inherited, there may be special provisions that can help you. Here are your options:

Refuse the inheritance

Just because your loved one named you in their will doesn’t mean you need to accept the inheritance, particularly if the amount of the debt is more than the home is worth. You always have the option to disclaim an inheritance, in which case it’ll go to the next person in line. 

Assume the debt

Most mortgages have an “acceleration clause,” meaning the full remaining balance becomes due in one fell swoop if the title is transferred to someone else. However, federal law makes it easier for heirs to assume the deceased person’s mortgage, particularly if they’re already living in the home or if they’re a relative who plans to move in.

If you assume the mortgage, you’ll be listed as the new primary borrower and will continue making the same monthly payments as your loved one. You also don’t need to apply for the mortgage; lenders can’t deny you regardless of your financial or credit details, making it a good option for people who can’t otherwise qualify for homeownership. However, you’re still obligated to make those payments, and lenders are encouraged to work with heirs on affordable loan modifications if needed. 

If you inherit a home with an HEI from Point, you also have the option to take over and assume the agreement; something that many other HEI providers don’t allow. In this case, you’ll need to learn when the HEI becomes due and develop a plan so you’re ready to pay it off when the time comes.

You may be able to assume other types of lien debts, such as home equity loans. However, there aren’t any federal rules that require lenders to allow this as per mortgages, so you may need to come up with other options. 

Pay off the debt

Many people choose other ways to pay off the debt attached to their inherited home. Often, heirs choose to sell the home, paying off the debt and keeping any remaining cash proceeds for themselves. Other options to pay off the debt on an inherited home include:

  • Take out an HEI
  • Take out a personal loan
  • Use your existing savings
  • Apply for a mortgage refinance

A special note applies if you inherit a home with a reverse mortgage. If you’re a spouse and you weren’t listed as a co-borrower on the reverse mortgage, you’ll get to continue living in the home for as long as you like — provided that you uphold the tenets of the original agreement such as keeping up with maintenance and property taxes. 

Other heirs can choose whether they want to sell the home or keep it. If they opt to keep it, they’ll need to pay off the remainder of the reverse mortgage balance or 95% of the home’s actual value, whichever is less. This protects heirs in case the reverse mortgage balance swells far beyond the home’s actual value, with many heirs opting to take out a mortgage refinance loan to pay off the debt. 

Foreclosure, deed-in-lieu of foreclosure, or short sale

If you don’t do anything, the lienholder will eventually foreclose on the home. Depending on when your loved one passed on and when they made the last payment, it’s possible that the home could already be in foreclosure proceedings by the time you receive it. 

If you wish, you can speed this process up by seeing if the lender will agree to a “deed-in-lieu of foreclosure,” where you voluntarily offer the title in exchange for the debt being forgiven. You can also see if the lender will allow a short sale, where you try selling the home for less than the remaining balance of the debts in exchange for the loan being forgiven. 

In any case, as long as you don’t assume the debt or otherwise take it on in your own name, your credit won’t be damaged by these options. That’s because the original debt was in your loved one’s name, not yours; you’re simply settling the debt for them. 

Rent out the home

Many people choose to sell their inherited home because they don’t want to live there. However, if you can take advantage of one of the options above to clear the debt from your loved one — such as by taking out a mortgage in your own name, for example — a good alternative is to simply rent out the home. 

This can help cover the cost of repaying the debt you took on to clear the lien, but allow you the freedom to keep the home in your family in case you’d like to move into it later or use it as a long-term wealth-building strategy. 

Final thoughts and considerations for inheriting a house with a mortgage

If you inherit a home, it’s important to act fast and reach out to the lender. In some cases, such as for reverse mortgages, you’ll have as little as 30 days to decide what to do unless you file an extension. If necessary, make sure that the debt payments continue to be paid from your loved one’s estate to prevent the house from going into foreclosure. 

It’s a good idea to work with a tax advisor or real estate attorney in some cases, especially if you’re inheriting a high-value home that may be subject to an estate or inheritance tax, if you’re selling a home in a trust, or if your loved one left the home to several people in their will. You may all need to meet and negotiate a buyout for the shares of other heirs, for example, if someone will be living in the home. This ensures that everyone has an equitable outcome. 

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