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Nothing lasts forever, including our debts due or, for that matter, our lives.
If you currently have a mortgage loan, it’s natural to wonder: What happens to your mortgage after you pass away? Will my spouse or inheritors be obligated to repay it? What if they can’t? And how can I make it easier for my beneficiaries to inherit my property and pay off the mortgage?
This article will help answer these and other questions and address your concerns when it comes to the relationship between your mortgage loan in your estate.
If you pass away, what happens to your mortgage debt?
If you die and your home is not yet paid off, your mortgage loan will remain as part of your estate. This “estate” consists of any property—including real estate, possessions, and funds—you leave behind after you, the “decedent,” pass away.
Your mortgage debt will not be forgiven by the lender just because you are no longer alive. It will need to be repaid, per the terms of your original loan agreement, or your home may end up in foreclosure and taken away from any spouse, children, beneficiaries, or heirs due to take possession of your home and estate.
Note that a “beneficiary” is someone you specifically designate in a will, trust, or other legal document to inherit your assets, while an “heir” is an individual legally entitled to your property in the absence of a will.
If your state goes to probate
Most estates enter probate after the person who owns that estate dies. According to the American Bar Association, probate is a formal legal process that acknowledges the validity of the will and designates the executor or personal representative responsible for managing the estate and distributing assets to the designated beneficiaries.
Every state has different laws regarding probate, although many states have streamlined or simplified their probate processes.
If you have already lined up an executor to handle your estate after your death, and you have a will in place that indicates how your property should be distributed, probate should be a quicker and smoother experience. But most experts say probate can take at least six months to complete, assuming no one contests the estate.
During this time, the mortgage lender will require continued punctual repayment of the debt, which falls on the shoulders of your executor.
“The estate, as directed by the executor, must continue making mortgage payments until the property is distributed to the beneficiaries, as directed in your will. Once the property is distributed to the beneficiaries, they assume the mortgage under its original terms,” says Crystal West Edwards, an attorney with Porzio Bromberg & Newman.
However, if your inheritors are unable to repay the mortgage, “the property will be sold by the lender and any remaining equity, after repayment of the loan, will be given to the rightful inheritors,” explains Philadelphia attorney Min Hwan Ahn.
Personal finance expert Tim Connon with ParamountQuote Insurance Advisors points out that, if probate happens, the lender should be willing to work with the executor, beneficiaries, or heirs to find the best solution for repaying the mortgage debt.
“There needs to be open communication of both sides. The executor or beneficiaries should reach out to the mortgage lender, inform them of your passing, and ask about options available,” says Connon.
» MORE: See today’s refinance rates
Your survivors’ responsibilities
Typically, when an individual dies with an unresolved mortgage, the estate takes on the responsibility of settling any remaining debts, including mortgage loan debt.
“If there is a will, the executor to the estate is tasked with using any remaining assets from your estate to pay off these debts,” Ahn continues.
Noelle Kimble McEntee, co-founder of Legado, agrees, says if there aren’t enough liquid assets, the executor may need to arrange for payments, “potentially selling other assets or having to pay out-of-pocket. If there still aren’t enough assets, the property may need to be sold.”
Of course, if you leave behind a surviving spouse or other beneficiaries, they can continue making mortgage payments on your behalf to keep the home. They aren’t necessarily required to have their names on the mortgage loan, although the lender may insist on retitling the loan in the name of the beneficiaries if they agree to assume the loan.
Note, however, that your beneficiaries are not automatically required to continue making your mortgage payments.
“If they wish to retain your home, they could try to negotiate new repayment terms with the lender, possibly including refinancing,” Ahn adds. “If they cannot establish new terms or afford the monthly mortgage payments, they may have to sell the property or relinquish it to the lender for foreclosure.”
If there was more than one name on the mortgage loan before you died, meaning you left behind a co-borrower, this person would assume full responsibility for repayment of the entire mortgage loan after your death.
The pros and cons of placing your estate into a living trust
One way to avoid probate and ensure that your estate transitions smoothly and swiftly to your beneficiaries is to create a living trust. This legal instrument empowers you to determine the management and distribution of your assets, both while you are alive and after your demise.
A living trust will automatically take ownership of the assets placed within it, enabling you and your beneficiaries to retain control over the assets within the trust.
“This is the best way to bypass probate and save your loved ones time, money, and heartache. Trusts are also not a public record, so it offers much more privacy,” says McEntee. “Setting up a trust is a bit more work, but it’s likely less work than your executor would have to go through if you only have a will.”
When you have a living trust in place, your executor will have immediate access to your funds and assets, allowing him or her to continue repaying the mortgage loan without delay.
But be forewarned: According to data from ContractsCounsel, the average cost of enlisting an attorney to create a revocable living trust is $1,500 to $2,500.
If you have no inheritors
What happens if you pass away without beneficiaries involved, especially if you don’t have an executor? In this case, the lender typically takes over completely.
“They would likely sell your home to settle the mortgage. If there is any extra money left over from the sale after paying off the mortgage, usually goes through legal channels, like state laws, to determine where those funds should end up,” says McEntee. “Even if you don’t have a spouse, children, or individual beneficiaries, you can still leave your assets to charity instead of letting them work their way through court.”
The bottom line
Things can get messy and complicated if you pass away without clear directives on how you want your assets to be distributed and inherited. That’s why it’s crucial to spend time on estate planning matters by creating a will, naming an executor who agrees to oversee your estate after you die, and having important conversations with your loved ones so that they understand your wishes—including what will happen to your home and your mortgage loan after you’re gone.
To make better-informed decisions and ensure a simpler transition following your death, consult with an attorney and/or estate planning professional.