What Happens if I Inherit a House with a Mortgage?

If you have inherited a house with a mortgage, you may be wondering what your options are. This is especially the case in light of today’s high interest rates. Will it be necessary to refinance the house, which may result in higher monthly payments? Or is it possible to assume the loan?

This is an issue many beneficiaries of real estate face. Although some people are fortunate enough to own their homes free and clear when they die, many do not. As a result, their homes pass to their intended beneficiaries or heirs with a mortgage still attached.

Mortgage Payments During Probate

While the inherited house is in probate, the executor should continue to make mortgage payments to avoid late fees and default. However, the executor will generally not have to use estate funds to pay off the mortgage. Rather, unless otherwise specified in a Will, those who inherit mortgaged property also inherit the mortgage.

“Due-on-Sale” Clause and the Garn-St. Germain Act

Mortgage documents often include a “due on sale” clause. This clause allows lenders to demand that a mortgage be paid off when a property is transferred to someone else. However, a federal law called the Garn-St. Germain Act prevents lenders from exercising the due-on-sale clause in certain circumstances. Lenders can’t demand full payment of the mortgage when the transfer is of a residential property that has four or fewer dwelling units and transfers:

1. As the result of the death of a joint tenant or tenant by the entirety, or
2. To a relative resulting from the death of a borrower.

If a person who inherits the house 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 not, it is possible that the lender may demand payment of the loan balance. However, in practice, lenders often allow beneficiaries and heirs capable of making payments to assume the mortgage payments.

Photo courtesy of Free Stock Photos by Vecteezy.