Proper Prior Planning helps when dealing with heirs and mortgages.
I recently had a call from a past client whose father had died unexpectedly a few weeks ago. His mother had died nearly ten years ago and my past client is an only child. He now finds himself as the only heir and the executor to his father's estate. He wanted some ideas about the value of his dad's condo and what his next steps should be - besides talking to his lawyer!
His dad had expected to live in the condo for many years to come and to pay off his mortgage during his retirement. Unfortunately, his life didn't go according to his plan. Even though the homeowner died before paying off the mortgage, the mortgage didn't disappear. Now my past client had a condo and mortgage to deal with.
Who Is Responsible for Mortgage Payments After the Borrower’s Death?
My past client wasn't sure what to do about the mortgage on the property. I encouraged him to talk to his lawyer about all this but also encouraged him to make sure the mortgage payments were paid promptly going forward. After a homeowner dies, the loan still needs to be repaid. Heirs who were not party to the mortgage are not financially responsible for making payments, but those payments will still need to be made in one way or another to avoid having the house go into foreclosure.
If the homeowner has a surviving spouse who co-signed the mortgage, he or she becomes responsible for payments. Another individual who co-signed the loan will be responsible for making payments, regardless of whether that person has an ownership stake in the house.
If there is no co-signer, other family members like my client can choose to take responsibility for the mortgage. If they’re unable or unwilling to take on the mortgage, the executor can use funds from the estate to pay off the loan, or the house can be sold. Of course, everyone needs to be mindful that the mortgage has to be paid while the house or condo is on the market. If the bank is not receiving the mortgage payments from someone the lender will start foreclosure proceedings.
If the house sells for more than the amount owed on the mortgage, the balance can be used to pay off debts or can be passed on to heirs. If the house is worth less than the amount owed, the executor may negotiate a short sale or allow the house to go into foreclosure. If the owner had a reverse mortgage, the loan will need to be paid off after all borrowers have died or moved out of the house. If family members pay off the loan, they can keep the house.
Estate Planning Options
My client was lucky that he was in a position to pay for the mortgage while figuring out what to do going forward. We talked about what other people do as part of their estate planning. He wanted to make sure his friends were better prepared than he had been!
If possible, the homeowner can set aside money in a savings account or another financial instrument that family members can access after his or her death. That will help them continue to make mortgage and tax payments until they decide whether to keep or sell the house.
Life insurance can provide funds that can be used to pay off a mortgage in the event of the homeowner’s death. That can allow heirs to stay in the house debt-free or to move out and start over. While there are lots of life insurance policies out there, I told him that I never hear good things about those policies that are just for the purpose of paying off a mortgage. A general life insurance policy can do the same thing and is typically less expensive.
In his case, his dad had put the condo in a trust to avoid the time and expense of going through probate. It’s important to discuss the legal and tax implications with an attorney and an accountant.
Talk to Your Family
Death is inevitable. The better family members plan for it, the smoother the transition will be for surviving relatives. Whether you own a home or a loved one does, have an honest discussion and seek advice from professionals so you can make the best decisions as a family.
My past client and I talked about the value of the condo and its rental potential. He has decided to keep the condo and rent it. The rental income will more than cover the mortgage and fees and hopefully will continue to appreciate in value. WIth luck, his dad's condo will pay for my client's children to go to college in another ten years! What a wonderful gift.
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