What Happens to the Mortgage on Inherited Real Estate?

When someone inherits a home or similar property, the mortgage obligation is usually part of the deal.

If someone inherits real estate, do they also inherit the mortgage? Or must the executor or trustee pay it off before transferring it to the new owner? Generally, the answer is that the mortgage stays with the property.

Executors, Keep Current on Mortgage Payments

While the real estate is in the estate or trust—before you transfer title to the person who inherits it—you should keep making mortgage payments, using estate or trust funds. You don’t want to incur late fees or worse, default on the mortgage and possibly trigger a foreclosure proceeding.

What Does the Will or Trust Say?

As always, look first to the will or trust document for guidance. If the document directs you to use estate or trust funds to pay off the mortgage, your path is clear. Most wills, however, don’t contain such an instruction; instead, they have general language about paying debts. That’s generally not construed to mean paying off a debt that’s attached to (secured by) a specific piece of property, such as real estate or a car.

The Inheritor’s Rights

Someone who inherits real estate that’s subject to a mortgage generally inherits the mortgage as well. The new owner can simply take over the old mortgage, without any change in terms. This is possible because of a federal law known as the Garn-St. Germain Depository Institutions Act of 1982. (12 U.S.C. section 1701J-3)

The Act sets out several situations in which lenders cannot enforce "due-on-sale" clauses in mortgages. These provisions (also called acceleration clauses) allow lenders to demand that a mortgage be paid off in its entirety when property is sold. But under the Garn-St. Germain Act, the lender cannot demand that the mortgage be paid off when the transfer is:

The law applies to residential property that has four or fewer dwelling units, including a residential manufactured home. It also applies to a lien on the stock allocated to a unit in a cooperative housing corporation.

The Inheritor’s Options

If the law covers the inherited property, the new owner can keep making the payments, under the existing terms of the mortgage. This can be a good deal if the new owner can afford the payments; the new owner doesn’t have to reapply for a mortgage, with all the hassle and expense that process entails.

What If The Beneficiary Can't Afford The Property?

A new owner who can’t afford to keep up the mortgage (and all the other expenses of home ownership, including property taxes, repairs, and maintenance) must consider another strategy, like any other homeowner in that situation. If an affordable refinance isn’t available, or if the new owner doesn’t want to live in the house or rent it out, selling it may be the way to go. If the property is sold within a year after the death of the former owner, the inheritor probably won’t owe any capital gains tax.

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