Mortgage and deathNo homebuyers go to the closing thinking about what happens if they die before their mortgage gets paid off.  Even so, borrowers should take advance steps to make sure that an outstanding mortgage doesn't become a problem for their loved ones.

I was discussing this topic the other day with clients that had just inherited a home from their father and were worried that the mortgage company would learn of his death and 'call the loan'.  After I determined that they were continuing to make the mortgage payments, which is essential because missed payments could incur penalties and lead to foreclosure, we were able to discuss what the likely outcome of this situation would be.  

In all likelihood, the mortgage to the home is secured by the house itself (and the property is sits on). Lenders who are notified of the borrower's death right away are usually understanding about resolving estate issues to avoid foreclosure.  Postmortem mortgage policies vary depending on the lender. These terms are usually in the fine print of the mortgage. One possible solution is to see if the lender will permit an heir to assume the mortgage upon the borrower's death. Unfortunately, if the deceased is the only borrower, most lenders typically will not allow this option. Nor should it be assumed that, as the co-borrower, the lender will allow the surviving spouse to just take over the same note and terms especially if it was the sole breadwinner who passed away.

There is a federal law that places restrictions on lenders' ability to cancel or call loans due to death; however, the prohibitions exist only if certain conditions are satisfied. When a lender is informed of a borrower's death, it may be reluctant to release loan information because of privacy restrictions. Along with a death certificate, survivors and administrators may be required to provide additional information to show their legal status.

The Consumer Financial Protection Bureau introduced new borrower protections in 2014 to make it easier for heirs to acquire account information, pay off the loan, or request a loan modification after the death of a homeowner. The new rules mandate that loan servicers promptly communicate with heirs after being notified of a borrower's death. The goal is avoiding unnecessary defaults and foreclosures.

In addition, when estate planning involves real estate, and the owner anticipates issues among the heirs over the fate of the property, they should put their inheritance wishes regarding who inherits and/or gets to stay in the house in their trust or will.

Finally, estate laws are complex and are not the same in each state. You should consult with an estate planning attorney.  Call to schedule your complimentary consultation or register online for one of our workshops on this and other topics of interest to you and your loved ones. 

Reference: The Wall Street Journal (April 6, 2016) "What Happens When a Homeowner Dies Before the Mortgage Is Paid?"


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Update to our Process

The unprecedented coronavirus pandemic has taken our entire country by surprise. We understand how difficult this time is for America’s businesses and families.  However, we believe it is vitally important that we make every effort possible to continue to offer solutions that avoid disrupting our important partnership with you, your family and friends.  As you know, estate planning is not something that should wait for a more convenient time, therefore the opportunity to address your important goals both during and after this crisis should not wait.  To that end, we have added the option of a ‘virtual consultation’ to our office process.  You will now have a choice of either meeting with us in our office or in the comfort of your own home.