If a home has an outstanding mortgage, there’s no reason that you can’t include the mortgage in your estate plan. However, there are frequent caveats to inheriting property with unpaid debts. These caveats depend on the kind of mortgage against it. So, before you simply add a home with an outstanding mortgage to your estate plan, consider some of the situations that can result.
Usually, heirs receiving a home with an outstanding mortgage can assume the mortgage for themselves and continue making payments as though they were listed on the original mortgage documents. This is thanks to federal laws passed in 2014 clarifying the Consumer Financial Protection Bureau’s ability-to-repay rule. However, they will still have to follow procedures required by the lender to ensure the transfer of the property title and assumption of the mortgage is handled correctly and documented for legal and tax purposes.
The Lender Could Seize the Home
The most unfortunate situation that can unfold is that your heirs lose the home upon inheritance due to the outstanding debts against your estate. In these situations, there are typically two outcomes. The first is when heirs seize the house, and a sale is forced to satisfy the non-mortgage debts. In such cases, it’s sometimes possible for the heirs to pay off the decedent’s debts before the home is seized and sold. However, if the payments were severely delinquent, there could be extreme outstanding debts on the mortgage itself. When the inherited property is wholly submerged in debt, your heirs could be held liable for the costs, or they could simply refuse the title and surrender the property to the lender.
Your Heirs Could Refinance the Mortgage
Another scenario that could unfold when a home is inherited with an outstanding mortgage is that your heirs could opt to refinance the mortgage to secure lower monthly payments. For example, sometimes, heirs may choose to secure a cash-out refinance. A cash-out refinance is expected if the inherited estate doesn’t have enough funds to make necessary repairs and upkeep on the property. However, there are refinancing fees associated with this option, meaning that your heirs will still need some upfront funds to cover these expenses unless they work out a deal with the lender to lump these fees into the overall mortgage.
Your Heirs Could be Forced to Pay the Remainder
The home loan that would cause the most complications for your heirs if it’s left with an outstanding balance is a reverse mortgage. A reverse mortgage on a property results in a unique circumstance where the loan is due in full upon the borrower’s or last co-borrowers passing. Unless your heirs have enough money to cover the cost of the loan, either through their means or through your estate, the house will be sold. The remaining equity will be distributed to your heirs instead of the property.
It’s essential to ensure that your inheritors know how much mortgage is remaining on the home when you include it in the will. It is also necessary to ensure they know to consult a fiduciary if you pass while the mortgage is still in repayment. Suppose your heirs are unaware of the complications that can arise or unaware of the mortgage state. In that case, they could inherit the home and ultimately have it seized from them by the lender to satisfy the debt. Having the home taken would be devastating to their credit history and, likely, their emotional well-being.
Why You Should Include the Home in Your Will
Now, after discussing all the potential complications of including a home in your will while it has an outstanding mortgage, it might seem like it would just end up causing more headaches and problems for your heirs than it’s worth. So, why would you want to include something in your will that could potentially harm your beneficiaries? The simple answer is that it does make things easier.
Thanks to some laws in place that were previously mentioned, it’s straightforward for your heirs to assume the mortgage, even if the mortgage account hasn’t been officially assumed by the heir yet. Additionally, the options that exist, such as refinancing or surrendering the home to the lender before taking possession, are relatively straightforward and can accommodate most cases of inherited homes with an outstanding balance.
It Can Create Generational Wealth
The other big reason you want to include a home with an outstanding mortgage in your will is to create, or build upon, generational wealth for your family. Real estate prices seem only to be increasing in today’s world, meaning the mortgage is likely to be lower than the property’s market value. So even if the home is sold to settle the mortgage, your heirs are likely to receive the residual value from the home’s sale.
It Ensures that Your Preferred Beneficiary Receives the Home
It’s also important to note that if the home is left out of the will, the court will determine who will inherit the property. Courts usually only consider blood relatives eligible when choosing the beneficiary of the undesignated property. This can be problematic, especially in domestic partnerships that aren’t officially recognized, because the remaining partner won’t have been related to the deceased by blood or law, thus, excluding them from the eligibility to receive any inheritance.
It Doesn’t Make Anything Harder
While it’s true that including a home with an outstanding mortgage could cause headaches for your heirs, the problems caused by including the home in your will are outweighed by the benefits. Even in situations where the home is taken by the lender, including the home in your will doesn’t affect how that plays out. Writing the home into your will makes everything easier for your heirs since there won’t be a reason for any squabbling about who gets the home. It also makes it easier for them to assume the deed and remaining mortgage.
It’s important to consider the circumstances surrounding the mortgage and what the implications of bequeathing a home with an outstanding mortgage might have on your heirs. It’s always better to start estate planning sooner rather than later, so there’s time to catch potential issues and make changes as necessary. Consult an expert in estate planning to ensure you don’t accidentally create a headache for your heirs.
Jeff is a fan of all things finance. When he’s not out there changing the world with his blog, you can find him on a run, a Mets game, playing video games, or just playing around with his kids.