What Happens to Your Mortgage When You Die?

If you die owing money on a mortgage, the mortgage remains in force. If you have a co-signer, the co-signer may still be obligated to pay back the loan. A spouse or other family member who inherits a house generally has the right to take over the payments and keep the home. Alternatively, terms of a will may direct that the estate’s assets be used to pay off the mortgage, and sometimes a life insurance policy will pay off the mortgage if the original borrower dies. If no one will assume the mortgage and there is no provision to pay it off, the lender may foreclose on the property and sell it. A financial advisor can help you deal with mortgage challenges during the estate planning process.

What Happens to Your Mortgage After Your Death?

Mortgages, unlike most other debts, don’t usually have to be paid back from the estate of a deceased person. With credit cards, car loans and similar debts, family members generally aren’t directly responsible. Instead, debts will be settled with funds from or generated by sales of assets in the estate before anything is distributed to heirs.

When the deceased person was married, the situation is different in community property states. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, surviving spouses may be responsible for paying back mortgages as well as other debts assumed by a deceased spouse during the course of the marriage. Note that debts assumed before the start of the marriage are normally not the responsibility of the surviving spouse. The specifics vary significantly from state to state, however.

With a mortgage, only the specific property that secures the loan is affected. Unless the will specifies otherwise, the other assets in the estate can be distributed to beneficiaries through probate rather than being applied to the mortgage.

While the mortgage debt survives the deceased person, the responsibility for paying it back doesn’t automatically transfer to anyone other than a surviving spouse in a community property state, again unless there is a co-signer. If there is a co-signer, that person remains responsible for the mortgage debt after the death of the other co-borrower.

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While spouses are protected against lenders demanding full payment of a mortgage if the original borrower dies, the same is not true for unmarried partners. A live-in or other unmarried partner may have to move out of a home if the original borrower dies without a will naming him or her as the inheritor of the property.

Situations Related to Mortgages After Death

The main thing to know about mortgages taken out before your death is that no one will be required to repay the loan unless they signed up to do it. However, your heirs and beneficiaries will have the option to keep the property and keep paying the mortgage. If the home is worth more than the mortgage, it can be sold and the proceeds used to pay off the loan. Then whatever is left can be distributed to beneficiaries named in the will. If the proceeds from the sale are less than the loan balance, it may represent a loss to the lender, but it’s not the responsibility of the heirs or estate to make up the difference.

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If there is a co-signer, the mortgage will still be in force just as it was before the death of the other co-borrower. The co-signer will therefore be responsible for taking over the payments or otherwise fulfilling the terms of the mortgage.

If the co-signer doesn’t want the property or the loan, the property can be sold and proceeds devoted to paying off the mortgage. If the proceeds aren’t enough to pay the mortgage, it will be up to the co-signer to make up the difference or work it out with the mortgage company.

Mortgage documents typically contain a due-on-sale clause. This clause requires the full amount of the loan to be paid if the ownership of the property transfers, as it would when a will grants the house to a beneficiary. However, legal protections afforded to spouses and the lender’s self-interest mean that heirs who want to keep a house often can.

If there is no co-signer, one or more of the heirs may want to keep the property and take over the mortgage. This will require notifying the lender of the original borrower’s passing and, potentially, renegotiating the terms of the mortgage to make the payments more affordable.

If the heir who wants to keep the home can’t afford the payments, the lender may be willing to consider modifying the loan, such as extending the length, in order to make the payments more affordable. Of course, if more than one beneficiary is entitled to a share of the property, this will likely require more discussions among the heirs to settle on an acceptable way to share ownership.

If no one has co-signed the loan and no one wants to take over the payments, the lender will be able to start the foreclosure process. After taking possession of the home through foreclosure, the lender can sell it to recoup the loan.

Some loans include a life insurance policy that will pay off the loan if the borrower dies. If such a policy exists, the heirs will own the house free and clear, absent any other liens. Sometimes spouses may also purchase life insurance policies on each other in order to provide funds to pay off mortgages and other debts.

Bottom Line

A mortgage lives on after the death of the borrower, but unless there is a co-signer or, in community property states, a surviving spouse, none of the deceased person’s heirs are responsible for paying the mortgage. Those who are in line to receive an inheritance may be able to take over payments and keep the house. A life insurance policy may pay off the loan, or a will may specify that assets of the estate pay it off. Otherwise, the lender can foreclose and sell the home.

Tips on Mortgages

• Careful planning with the help of a financial advisor can significantly reduce the costs of settling an estate. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Use SmartAsset’s no-cost mortgage calculator to get an estimate of your monthly mortgage payment with taxes, fees and insurance.

• Use SmartAsset’s mortgage comparison tool to compare mortgage rates from top lenders and find the one that best suits your needs.

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