What Happens to a Mortgage in Probate?

Video

Hi folks, it’s Andy Stautz at Stautz Law. We are back for another talk about probate and estate planning topics. Today is a very practical one. And that is: what happens to a mortgage?  

Common Situation: Decedent Still Owes on Home Mortgage

So in a situation where someone has a house with a mortgage on it. They’re paying off their mortgage, but they die before the mortgage is paid off. What happens?  

There could be a will. There might not be a will. Either way the house is expected to go to the heirs, or the beneficiaries: you know, family members, usually. 

But the person who was on the loan, right, the homeowner, the mortgage payer, is now deceased, so does the mortgage just go away? You know, what? What happens?  

Handling Mortgages after Death

Basic Rule: Mortgage Not Extinguished

Well, the basic answer is no, the mortgage doesn’t go away. It’s still a debt that has to be repaid. And so it is potentially a creditor claim against the estate, just like any other debt that the decedent had still owing.  

Before you can distribute the property to the heirs and the beneficiaries, you have to pay the debts and expenses of the person who passed.  

Keeping the House: Avoiding the Due on Sale Clause

Now in the mortgage case, sometimes you don’t want to… You know, you might not be able to pay off the mortgage all at once, right? And let’s say you don’t want to sell the house. It’s like, OK well, Do you have to?  

And the answer is no, you don’t have to.  

There’s a federal law from way back in 1982, I think (although I should probably look that up) called Garn Saint Germain. [EDIT: Yes, I was correct: 1982. You can read the wiki here and the text of the statute here.] And what that law says is that the mortgage lender can’t force you to sell the house basically to pay off the mortgage. So Garn St. Germain lets heirs, family members, so a surviving spouse or children, move into the house and keep paying on the mortgage.  

You know it’s an inherited mortgage at that point, so it doesn’t become immediately due and payable. So that’s really nice if you’re trying to just keep everything like it was. 

Selling the House

Alternately, if you’re willing to sell the house, obviously you can sell the house, pay off the mortgage, just like you do any time you sell a house normally, and then distribute the net proceeds in the estate. So that’s the other option.  

But the key point is the debt doesn’t go away. The bank can’t accelerate it as long as it’s a family member, you know, staying current on the payments and moving in, and if you do sell and make a distribution, obviously any estate proceeds are net of the mortgage balance.  

Conclusion

So if you need specific advice on how to handle an inherited mortgage, or you know a decedent who has a mortgage that you need to deal with… it depends on what you and the other heirs and beneficiaries want to do, so you can call me because I handle probate cases like this all the time, and I’d be happy to help you with it.  

But this was just a quick talk to let you know basically how it works. I hope you’ve enjoyed it and hope to talk to you soon. Bye now.