The Effect of Foreclosure on Heirs

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Foreclosure can be a devastating experience for the owner of a home, but it can also impact the heirs of the homeowner in the future. When a family home is lost to foreclosure, the impact can lead to other financial problems. However, occasionally it can be a blessing to the heirs of an estate.

Foreclosure Basics

A foreclosure occurs when a homeowner can no longer afford to make his mortgage payments. After a certain amount of time, the mortgage lender moves the loan into default and begins the foreclosure process with the objective of seizing the property. In some states, the lender must take the owner to court to get a foreclosure order. In other states, it can simply post a notice of its intent to foreclose. At that point, the lender takes ownership of the property and sells it to repay the debt.

Effect on Inheritance

One of the ways that foreclosure can impact an heir is by depleting his inheritance. In many cases, one of an individual's most valuable assets is real estate. When that is taken away through foreclosure, the estate may not have much value left. When a foreclosure occurs, it can take away equity the homeowner had in the property. This money may have been used by the heir, but after foreclosure, it is no longer available.

Deficiency Judgment

In some states, lenders can pursue the homeowner for the remaining balance due after a foreclosure if the sale did not net enough money to pay off the entire mortgage debt. This is known as getting a deficiency judgment. The lender also can pursue the estate for the deficiency. If money is extracted from the estate, it can reduce the amount of money an heir can inherit.

Avoid Inheritance Taxes

In some states, heirs must pay inheritance taxes on the total amount of money they receive as an inheritance. This tax is also levied on the total value of any real estate passed on. If you live in one of the states that requires this tax, it can amount to a significant financial burden. If the property is foreclosed before it passes on to you, you can avoid taxes that would have been associated with it.

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