What Happens to Real Estate with a Mortgage When I Die?

Wednesday, March 27, 2024

Your mortgage, like the rest of your debt, does not simply disappear when you die. If you leave your home that has an outstanding loan to a beneficiary in your will or trust, your beneficiary will inherit not only the property but also the outstanding debt. They may have the right to take over the mortgage and keep the home, or they may choose to sell it and keep the proceeds. A few different scenarios can unfold, however, depending on the mortgage terms and the estate plan instructions.

Ultimately, planning for the transfer of real estate upon your death can make the process much easier for your loved ones.

American Housing Debt Exceeds $12 Trillion

The US homeownership rate stood at around 66 percent in 2022, according to the US Census Bureau.1 The Federal Reserve Bank of New York reported at the end of September 2023 that Americans were carrying $12.14 trillion in mortgage balances.2

Housing debt makes up over 72 percent of all US consumer debt.3 A home is the largest purchase that most people will ever make, and many borrowers pass away before receiving the deed to their house free and clear. A survey from CreditCards.com found that 37 percent of Americans died with unpaid mortgages.4

The number of Americans who have received or expect to receive an inheritance has increased in recent years.5 At the same time, 73 percent of Americans are likely to die with debt, including unpaid mortgages.6

Unpaid Mortgages on Inherited Homes

A 2023 Charles Schwab survey revealed that more than 3/4 of parents intend to leave a home to their children in their estate plan. However, nearly 70 percent of those who expect to inherit a home from their parents say they will sell it due to increasing real estate costs.7

Deciding what to do with a family property that is passed down to the next generation can be an emotional as well as a financial decision. While the sentimental value of a home is typically a strong motivator for holding on to it, beneficiaries may move on from an inherited home because of financial considerations.

If a couple co-signed a home loan together and one spouse predeceases the other, the surviving spouse must continue making mortgage payments. A surviving spouse may also be responsible for paying back a mortgage taken out by the deceased spouse alone if the couple lives in a community property state such as Arizona, California, Texas, or Washington.8

Outside of co-signers and community property spouses, the loved ones of a decedent are not typically personally responsible for making mortgage payments on the decedent’s home unless they receive ownership of the property, as in one of the following scenarios.

One beneficiary inherits the property through a will, trust, or deed.

A person can leave a house to a loved one after their death under the terms of a will or trust, or with the use of a transfer-on-death deed or Lady Bird deed (in those states that permit these forms of deeds to enable real property to avoid probate and pass automatically to a beneficiary). When the home transfers, a mortgage or loan secured by the home also transfers. The person who inherits the home must pay off the mortgage with other funds or sell the property and apply the proceeds to pay off the mortgage. In certain cases, they may be able to take over (or assume) the existing mortgage and have it transferred to them, with the beneficiary continuing to make the monthly mortgage payments. Additionally, some lenders might work with the new borrower to refinance the loan and change the terms.

Multiple beneficiaries inherit the property through a will, trust, or deed.

When several beneficiaries inherit a house from a will, trust, or deed, they all have choices about the mortgage. They can share the mortgage payments, use money from elsewhere to clear the debt, or sell the house to pay off the loan. All the inheritors need to agree on the choice. They can also buy each other out, but this may not be easy if the house prices and loan rates are high. If they can't all agree, a judge might have to step in and order the house to be sold and the money from the sale to be split among them.

Heirs inherit the property through the probate process.

Gifting a home to a beneficiary or beneficiaries assumes that the original homeowner had a will or trust as part of an estate plan. This is an unreliable assumption, though, since roughly 2/3 of Americans do not have an estate plan.9

Dying without a will or trust means that the court will appoint an executor or personal representative to distribute the decedent’s money and property and settle their debts. Because the home is part of the unsettled probate estate, the mortgage on the home becomes part of the probate estate as well. The executor may use other money and property from the probate estate to make mortgage payments until the home is sold or transferred to the rightful heir. If the mortgage is not paid off during the probate process, the heir will take ownership of the home subject to the mortgage, and the options discussed in the two scenarios above will apply.

Make a Plan to Pass on Your Home

A parents’ home is often a place of cherished family memories. Leaving a home to children is a common way to keep a family legacy alive and transfer wealth. However, rising costs and evolving preferences are contributing to declining interest among children in keeping their parents’ homes.

A home with a mortgage presents additional challenges that should be accounted for in an estate plan. For example, your plan can contain provisions that dedicate funds to help loved ones pay for an inherited home or provide additional instructions about how to distribute home sale proceeds among beneficiaries. As part of your estate plan, you can even refinance your mortgage now to secure more favorable terms for your beneficiaries after your passing.

An estate planning attorney can offer advice that aligns with your legacy goals and family situation. Contact the attorneys at Pavone Law to schedule an appointment, and make the transfer of a home as seamless and efficient as possible.

1 Robert R. Callis, Rate of Homeownership Higher Than Before Pandemic in All Regions, US Census Bureau: America Counts: Stories (July 25, 2023), Link.

2 Fed. Res. Bank of N.Y., Ctr. for Microeconomic Data, Q3 2023, Link (last visited Jan. 29, 2024).

3 Id.

4 Bill Fay, What Happens When People Die with Debt: Who Pays?, Debt.org (May 16, 2023), Link.

5 Mary Ellen Cagnassola, More Americans Are Leaving Inheritances — and It’s Not Just Wealthy People, Money (Apr. 12, 2023), Link.

6 Bill Fay, What Happens When People Die with Debt: Who Pays?, Debt.org (May 16, 2023), Link.

7 Veronica Dagher, The New Math on Inheriting Your Parents’ House, Mansion Global (June 1, 2023), Link.

8 Rebecca Lake, What Are the Community Property States?, SmartAsset (Aug. 25, 2023), Link.

9 D.A. Davidson Survey Finds That Two-Thirds of Americans Do Not Have an Estate Plan, D.A. Davidson: Perspectives, Link (last visited Jan. 29, 2024).

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