wills and trusts

Did You Inherit a House with a Mortgage?

When a loved one dies, there are always questions about wills, inheritances and how to manage all of their legal and financial affairs. It’s worse if there’s no will and no estate planning has been done. This recent Bankrate article, “Does the home you inherited include a mortgage?,” says that things can get even more complicated when you inherit a house with a mortgage.

inherit a house with a mortgage
There are several options available to anyone who inherits a house with a mortgage.

Heirs often inherit the family home. However, if it comes with a mortgage, you’ll want to work with an estate planning attorney. If there are family members who could become troublesome, if houses are located in different states or if there’s a lot of money in the estate, it’s better to have the help of an experienced professional.

Death does not mean the mortgage goes away. Heirs need to decide how to manage the loan payments, even if their plan is to sell the house. If there are missing payments, there may be penalties added onto the late payment. Worse, you may not know about the mortgage until after a few payments have gone unpaid.

Heirs who inherit a house with a mortgage have several options:

If the plan is for the heirs to move into the home, they may be able to assume the mortgage and continue paying it. There may also be an option to do a cash-out refinance and pay that way.

If the plan is to sell the home, which might make it easier if no one in the family wants to live in the home, paying off the mortgage by using the proceeds from the sale is usually the way to go. If there is enough money in the estate account to pay the mortgage while the home is on the market, that money will come out of everyone’s share. Here again, the help of an estate planning attorney will be valuable.

Heirs who inherit a house with a mortgage also have certain leverage when dealing with a mortgage bank in an estate situation. There are protections available that will provide some leeway as the estate is settling. More good news—the chance of owing federal estate taxes right now is pretty small. An estate must be worth at least $11.58 million, before the federal estate tax is due.

There are still 17 states and Washington D.C. that will want payment of a state estate tax, an inheritance tax or both (Florida is not one of them). There also might be capital gains tax liability from the sale of the home.

If you decide to take over the loan, the lender should be willing to work with you. The law allows heirs who inherit a house with a mortgage to assume a loan, especially when the transfer of property is to a relative. Surviving spouses have special protections to ensure that they can keep an inherited home, as long as they can afford it. In many states, this is done by holding title by “tenancy by the entireties” or “joint tenants with right of survivorship.”

When there is a reverse mortgage on the property, options include paying off or refinancing the balance and keeping the home, selling the home for at least 95% of the appraised value, or agreeing to a deed in lieu of foreclosure. There is a window of time for the balance to be repaid, which may be extended, if the heir is actively engaged with the lender to pay the debt. However, if a year goes by and the reverse mortgage is not paid off, the lender must begin the foreclosure process.

Nothing changes if the heir is a surviving spouse, but if the borrower who dies had an unmarried partner, they have limited options, unless they are on the loan.

What if you inherit a house with a mortgage that is “underwater,” meaning that the value of the inherited home is less than the outstanding mortgage debt? If the mortgage is a non-recourse loan, meaning the borrower does not have to pay more than the value of the home, then the lender has few options outside of foreclosure. This is also true with a reverse mortgage. Heirs are fully protected, if the home isn’t worth enough to pay off the entire balance.

If there is no will, things get extremely complicated. Contact an estate planning attorney as soon as possible.

Reference: Bankrate (Oct. 22, 2020) “Does the home you inherited include a mortgage?”

Do I Need to Name a Guardian for My Children in the Will?

Many young couples with children and bills, when asked about estate planning and say, “what estate?”  However, a critical part of having a will—one frequently overlooked—is naming a guardian for minor children. If you don’t name a guardian, it could result in issues for your children after your death.

Naming a Guardian
Naming a guardian for your children can only be done through your estate planning documents.

For a young family, naming a guardian is one of the most important reasons to draft a will. If you and your spouse die together with no guardian designated in a will, the guardian will be chosen by the court.

In a worst-case scenario, if you have no close family or no one in your family who can take your child, the court could even send them to foster care until a permanent guardian can be named.

The judge will collect as much information as possible about your children and family circumstances to name a guardian for your children.

However, the judge won’t have any intimate knowledge of who you know or which of your relatives would be good guardians. This could result in a choice of one of the last people you might pick to raise your children.

Try to find common ground by agreeing to a set of criteria you want in a guardian. This could include:

  • The potential guardian’s willingness to be a guardian
  • The potential guardian’s financial situation
  • Where the child might live with that person
  • The potential guardian’s values, religion, or political beliefs
  • The potential guardian’s parenting skills; and
  • The potential guardian’s age and health.

Next, make a decision, get the chosen guardian’s consent, write it all down, and then set out to create a will so you can legally name a guardian.

Ask an experienced estate planning attorney to help you do it correctly.

Reference: Lifehacker (Oct. 27, 2020) “Why You Should Name a Guardian for Your Kids Right Away”

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