Can a Bank Foreclose on a Deceased Person's Home If the Spouse Is Alive?
When you take out a mortgage, you receive a lump sum of money from a lender and you agree to repay that debt over a specific period of time. If your spouse dies, your bank cannot immediately foreclose on your home. However, depending on the loan agreement and your state's laws, your bank may demand immediate repayment of the loan.
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Joint Mortgage
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If you and your spouse jointly apply for a mortgage, the loan underwriter verifies your income and checks your credit scores. Thereafter, if you continue to pay your loan on time, your bank cannot normally foreclose on the loan. If your spouse's death causes you a financial hardship and that leads you to miss loan payments, then your bank can foreclose if you actually default on the debt. In most instances, the death of one spouse has no impact on a loan agreement as long as the surviving spouse has the ability and the willingness to continue making the monthly loan payments. However, review your loan documents because some lenders include a provision that requires the surviving spouse to pay off the loan if the other spouse dies.
Due on Sale
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Most loan documents include a "due on sale" clause. This means that the lender can demand full repayment of a loan if the owner who financed the home dies. If your name does not appear on the deed of your home, the home changes hands upon the death of your spouse because it either becomes part of your spouse's estate or passes to you or another beneficiary. Before this occurs, the bank can demand full repayment of the loan. If you or your spouse's estate cannot afford to repay the debt, the lender can foreclose and use the sale proceeds to settle the debt.
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Insurance
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Many lenders encourage borrowers to buy credit insurance on mortgages and home loans. Credit insurance comes in many varieties, but in many instances it protects your loved ones in the event of your death. If your loan includes credit insurance, you make monthly premium payments during the loan term. If you die before you repay the debt, your family can submit a claim with the insurer and the credit insurance covers the remainder of the debt. Therefore, your spouse can pay off the debt rather than having to contend with foreclosure or repayment demands. Alternatively, you can take out a life insurance policy that can cover the balance of your home loan.
Considerations
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Banks regard mortgages as income-generating assets. Like any other investor, a bank has no incentive to get rid of a performing asset. Therefore, banks foreclose on homes only if foreclosure represents the bank's best chance of collecting some or all of the debt. Even if your loan contract gives your bank the option to demand full repayment of your loan if your or your spouse die, your bank may opt not to activate that clause if you continue to make your payments on time.
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References
- AXA Equitable: Death of a Spouse
- Bankrate.com; Credit Insurance Come-Ons Raise Capital Concerns; Laura Bruce; February 2002
- HUD.gov: Glossary
- Boston.com; Managing Your Money - Importance of Disability Coverage; Cheryl Costa; July 19, 2010
- Loan.com: What to Do If a Co-Borrower on a Joint Mortgage Dies
