The Basic Guide to Inheriting a House with a Mortgage

Feb 5, 2018

The process of inheriting a home is often emotional, stressful, and overwhelming. There’s a lot to worry about – taxes, relatives, estates, etc. – and the stress only compounds when it turns out the inherited house still has a mortgage on it.

When inheriting a house with a mortgage, we strongly recommend getting legal advice from a real estate attorney. With that said, here’s a basic guide to what to expect.

How it Works: Inheriting a Home

When someone passes away, the home is usually willed to another person (or persons such as when the property is apart of an estate). That person could then take the will and use that to put the property in their name, at which time they can then refinance it, live in it, rent it out or sell the property.

If there is no will, then the property must go through probate where an executor of the estate is appointed and that person would be in charge of willing the property to another person.

No person, who has not been willed the property, can refinance or sell the property, as they don’t have legal ownership of the property. If a person is not willed the property, then the property must be purchased from the estate. All traditional purchase loan requirements would come into play at that time.

Often times, when a family member passes away (say it’s a parent) the property is usually put into an estate where the family members then decide whether they want to keep the property in the family or sell the property. It is not often that there is only on heir wherein the property would be solely awarded to them.

What to Consider When Inheriting a Home

Inheriting a home can be a long and complicated process which often occurs during an already-difficult time. With so many options and so many things to keep in mind, it can be difficult to know what to do next.

One way to start is by asking yourself a few questions:

  1. What will I do with the house?
  2. What do I need to know about taxes?
  3. What do I do with the stuff?
  4. What condition is the house in?

There’s one consideration that will have a big impact on the answer to many of these questions: whether or not there’s still a mortgage on the house. If payments still need to be made, then someone is responsible for making them.

Before you begin the process of how to handle inheriting a house with a mortgage, first look to see if the answer lies in the will. In some cases, instructions will dictate that the mortgage be paid off with the decedent’s estate and there is no mortgage to be assumed.

In other cases, you may need to figure out what your options are in handling the mortgage. This is something you certainly want to discuss with a real estate attorney. They will help you understand your options in this scenario.

With that said, there are a few likely options that you can expect.

Things to Note When Inheriting a House with a Mortgage

In some cases, if a relative of the deceased inherits the home, you may be able to assume the mortgage without having to pay it off completely. Exceptions in the Garn-St. Germain Depository Institutions Act of 1982 allow relatives to bypass the due-on-sale clause. This clause generally requires the mortgage to be paid in full before the property is sold.

Note that the only mortgage loans that are assumable these days are VA loans. That means if the mortgage loan is a conventional, reverse, or FHA loan, it will not apply.

What can you do with the inherited home? There are a few options you have with your home, and they largely depend on your financial and personal (family, life-stage, etc.) situations. Again, a real estate attorney will be able to give you formal legal advice on the right step to take. These are simply a few ideas and options that we’ve seen.

Moving Into Mortgaged Home

If you intend to move into the mortgaged home that you inherited, then taking over the mortgage is fairly simple.

The Garn-St. Germain Depository Institutions Act of 1982 includes exceptions that allow relatives and spouses to take over the house’s mortgage payments without requiring them to be paid in full. These exceptions only apply to properties with less than five dwelling units (no apartment buildings) and for those who plan on living in the home and making the payments.

It’s also worth noting that those who move into to their inherited home may receive a few tax breaks that landlords won’t get. Take a look at these Washington property tax exemptions and deferrals to see whether any of these breaks would apply to you.

Note: This only applies if you can afford to make the mortgage payments. If you cannot, the best option may be to rent or sell the property to pay off the mortgage.

Renting Out Property

In many cases, moving into the newly inherited property may not be the right option. You may not be able to afford the mortgage payments or maybe you just see the potential in being a landlord.

Note: Before you consider becoming a landlord, take these common renter problems into consideration as well as other fees and challenges that come with the role.

If you decide to rent out the property, assuming the mortgage may not be as simple as moving into the home yourself. Because you won’t be living in the home personally, the lender may require you to refinance the mortgage under your own name.

Refinancing an inherited property with a mortgage can be a costly and time-consuming process, but may lead to an investment opportunity down the line.

Paying Off Mortgage

The Garn-St. Germain Depository Institutions Act of 1982 includes a due-on-sale clause which allows lenders to call for the entirety of the mortgage due before changing hands. Depending on the amount in the mortgage, you may be able to cover this expense.

Selling Property

For many, selling the newly inherited property may turn out to be the best decision. If you can’t afford a new mortgage payment, don’t want to move into the home, and/or aren’t interested in being a landlord, selling the home may be the quickest and easiest way way out – plus you’ll make some money in the process.

It’s worth noting that if the inherited home is sold within one year after the death of the former owner, then you may not have to pay any capital gains tax.

Note that even if you’re looking to sell the home, you may not need to make any changes yourself, even structurally. If you need a solution to sell the home fast and in the condition that it currently stands in today, there are options.

Contact us today to get a quote and consultation on your newly inherited home, should you decide to sell it. We’ll give you an all-cash offer and a quick close to ensure your inheritance doesn’t empty your wallet.

425.278.HEIR (4347)