A mortgage attaches to real estate and continues beyond the death of the person who took out the loan. When the last surviving parent dies and a child or children inherit the family home, they also inherit any mortgage. They're not personally liable for the debt, and they can walk away and let the home go into foreclosure without damage to their credit or financial standing. However, if the children want to keep a deceased parent's home, they must keep making the mortgage payments.
Due-on-sale simply means the entire outstanding loan balance, known as the payoff figure, is due upon transfer. Lenders place due-on-sale clauses in mortgage documents, so they can protect their interests when the property is sold or transferred. For example, if the current interest rate is higher than the rate in the prior mortgage, the lender would want a new loan with the higher rate. That works fine when a home is sold as the buyer generally takes out a new loan. When a home is transferred upon a parent's death, there's a problem since the child or children may not be able to take out a new loan.
Garn-St. Germain Act
Congress realized a problem existed and included provisions in the Garn-St. Germain Depository Institutions Regulation Act which was enacted in 1982. That law exempted certain transfers from the provisions of due-on-sale clauses. Essentially, the Act states that lenders cannot enforce those clauses against certain transfers, such as upon death of the borrower. The law also exempts transfers pursuant to a divorce where the borrower turns over the property to his or her spouse. Another exemption is a transfer to a spouse or child by the borrower while still alive.
When you inherit a parent's home and mortgage, the terms of the mortgage don't change. The monthly payments must be made in the amount agreed upon and in a timely manner. The interest rate doesn't change. If you want to renegotiate any of the terms, that would be solely up to the lender. It's also important to remember that there's no grace period following death. If a parent dies on the 1st of March without making the March payment, then you would need to make payment quickly to avoid being in default.
Insurance, Deeds and Taxes
One requirement to keep a mortgage current is a valid homeowner's insurance policy. As the new owner, you need to contact your parent's insurance agent as soon as possible after death to make arrangements for a new policy showing the current owner. That policy needs to be forwarded to the lender. Making the mortgage payments won't change title to the home. You need to contact an attorney about having a deed prepared. This is normally done as part of an estate administration. Finally, ensure the local taxing authority has the correct information so you receive the next tax bill.
- Cornell University Law School Legal Information Institute: 12 U.S. Code Sec 1701-j-3-Preemption of due-on-sale prohibitions
- Jurado Farshchian Attorneys at Law: Due-on-Sale Provisions in Loans: About the Garn-St. Germain Depository Institutions Regulation Act
- Deirdre Wheatly-Liss New Jersey Estate Planning & Elder Law Blog: What Happens to the Mortgage when Property is Transferred to Beneficiaries at Death
- Photo Credit Bronwyn8/iStock/Getty Images
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