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.
Read More: How to Transfer Property Title When Death Occurs
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; these clauses are one of the reasons a mortgage must be paid off in full at closing when you buy a house. Loan acceleration isn't a problem when a home is sold, as the buyer generally takes out a new loan. When a home is transferred upon a parent's death, on the other hand, there's an issue, 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. If your parent dies and the home goes to you, the mortgage lender can't accelerate the loan simply because the property transferred at death.
Mortgage Terms Stay the Same
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. You can also decide to refinance out of the mortgage to obtain a new one in your name.
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.
Read More: What Happens If I Inherit Property With a Mortgage?
- 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
- Legal Beagle: What Happens If I Inherit Property With a Mortgage?
- Legal Beagle: How to Transfer Property Title When Death Occurs
- Legal Beagle: Does a Beneficiary Need to Change the Title of a House Before Selling?
- Legal Beagle: Legal Wording for When an Heir Wants to Relinquish Interests in a Property
Robert Alley has been a freelance writer since 2008. He has covered a variety of subjects, including science and sports, for various websites. He has a Bachelor of Arts in economics from North Carolina State University and a Juris Doctor from the University of South Carolina.