What happens to your mortgage when you die?
Having some housing debt when you die can complicate matters for those who are left behind. Consider drawing up a will or living trust to make it easier.
Majority of consumer debt in the US can be found in housing: according to the Federal Reserve Bank of New York, Americans owe more than $12 trillion in mortgage balances. This comprises over 70% of total household debt in the country, which amounts to more than $17 trillion.
So many borrowers are trapped for decades by their mortgages, and many of them pass away before they can completely call their house their own. When they die with mortgage balances left to pay off, their heirs could be left holding the bag.
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What happens to your mortgage when you die?
When a homeowner with a mortgage passes away, the mortgage does not simply disappear- it is considered a debt owed by their estate. The estate includes all the assets and liabilities of the deceased person. The executor or administrator of the estate is responsible for managing the estate’s finances, including the mortgage. The mortgage payments may continue to be made from the estate’s funds.
If there is a co-borrower or co-signer on the mortgage, that person is responsible for continuing to make the mortgage payments. This is the only scenario where a survivor will be obliged to take on the deceased person’s debt.
Some homeowners have life insurance policies that are designed to cover the mortgage in the event of their death. If the homeowner had such a policy, the insurance proceeds can be used to pay off the remaining mortgage balance.
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When the surviving family wants to keep the home
If the family of the deceased wishes to retain possession of the property, some mortgage agreements allow for a family member or heir to assume the debt and continue making payments. This option is subject to lender approval and may involve meeting certain financial and credit requirements.
If the family members are able to successfully transfer the ownership of the loan and continue making payments, the house can remain in their possession. If the family decides to sell the property, they will need to shoulder the payments until someone buys it.
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What happens if mortgage payments do not continue after the homeowner’s death?
If the mortgage goes unpaid after the passing of the homeowner, the creditor will foreclose and take possession of the house. But in the event that an heir is designated but chooses not to sell the house or meet the payment obligations, the creditor retains the authority to initiate a transfer of ownership, potentially resulting in foreclosure and significant harm to the credit score of the non-compliant heir.
When someone dies without a will, a process known as intestate succession determines the distribution of their assets, property and debts, and this would include any mortgage. The courts will designate an executor for the estate, often a close living family member, to manage the allocation of their assets and debts.