While grieving over a loved one’s recent death can be emotionally draining, being given an inheritance comes as a godsend during these difficult times. According to a New York Life Survey, 15% of American adults anticipate receiving an inheritance, with 43% hoping it will be their loved one’s house. However, a mortgage still remains on nearly two-thirds of homes, so you will probably find yourself in the most common situation of inheriting a home that is in debt.

The following guide will help you understand what happens if you inherit a house with a mortgage and your options for proceeding.

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Understanding the Mortgage Transfer

It is essentially your responsibility to keep up with the monthly payments when you inherit a home with a mortgage. Secured loans, such as mortgages, use the house as collateral. If you fail to keep up with the mortgage payments, the lender has the right to foreclose on the property, regardless of who owns it.

What Are My Options?

Once you have a clear understanding of the mortgage and your financial situation, there are several options for how to move forward:

1. Assume the Mortgage

If the mortgage terms allow, you can assume the mortgage. This means you take over the existing loan and continue making the payments. This option can be beneficial if the mortgage has a favorable interest rate.

2. Refinance the Mortgage

Refinancing can be a good option if you want to take advantage of lower interest rates or if the existing mortgage terms are unfavorable. Refinancing may also allow you to consolidate other debts or access equity in the home.

3. Sell the Property

If you don’t wish to keep the property, selling it is a practical option. The money you make from the sale can be used to pay off the remaining mortgage balance. If any amount remains, you can distribute it according to the terms of the estate plan.

4. Rent the Property

If you prefer to keep the property but cannot live in it or make the mortgage payments, renting it can help you generate income. This will allow you to not only cover the mortgage but other expenses as well, such as repairs. This is a great option if your property is in a desirable rental market.

5. Walk Away

Sometimes, the property inherited might become more of a burden, especially if it has negative equity (when the mortgage balance is more than the property value). Walking away, which may involve letting the lender foreclose on the property, is a last resort that can impact your credit score. However, if your financial situation does not allow you to carry this responsibility, it is better to walk away.

Don’t Forget About the “Death Tax” Consequences

The estate executor is responsible for handling federal estate tax, which is deducted from the deceased relative’s assets. However, you may also wish to consult with an attorney. In order to be exempt from estate tax in 2024, an estate must be valued at least $13.6 million. Therefore, the likelihood of having to pay federal estate taxes is low. According to the Tax Foundation, only 2,584 (just over half) of the 6,158 federal estate tax returns filed in 2021 were found to be taxable.

Financial and Tax Implications

Inheriting a house with a mortgage also has financial and tax implications that should be carefully considered. Apart from the interest, which you are likely to pay if the loan terms are not favorable, here’s what else you should include in your budget:

Property Taxes: As the new owner, you will be responsible for paying property taxes.
Homeowners Insurance: You must maintain homeowners’ insurance on the property. The mortgage lender typically requires this, and it is essential for protecting your investment.
Estate Taxes: Depending on the size of the estate and the jurisdiction, estate taxes may be owed. Consulting with a tax professional can help you understand any potential tax liabilities and how to manage them.
Capital Gains Taxes: If you decide to sell the property, you may be subject to capital gains taxes on any profit from the sale. However, inherited properties typically receive a stepped-up basis, meaning the property’s value is reset to its fair market value at the time of the original owner's death, which can reduce the taxable gain.

What to Do If There’s No Will?

Let’s say your loved one passed away without leaving a will. When managing a house with a mortgage, the requirement of “dying intestate” practically guarantees complexity and expense. Thus, it’s wise to consult with an attorney about your particular case.

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Your Rights as the Successor

You are entitled to continue living in the house and making payments as long as the mortgage servicer verifies your identification and ownership of the property. In addition, the service provider must communicate regarding every facet of the loan clearly.

A successor may also apply for a modification in the loan if there are mortgage arrears and one is required to alter payments in order to bring the loan current. You might be able to send a “notice of error” and a “request for information” to the mortgage servicer. Last but not least, if necessary, a successor may file for Chapter 13 bankruptcy.

To take over an existing mortgage, you don’t necessarily need to have excellent credit. The mortgage company must add the successor to the same loan plan without confirming the borrower’s income, credit history, and other details.

Wrapping Up

In conclusion, the answer to the question “What happens if you inherit a house with a mortgage” depends on your financial situation.

Inheriting a house, especially one that has been a family home, can be an emotional experience. It’s important to take the time to process your feelings and to communicate with any co-heirs or family members involved. Making rushed decisions about the property can become a financial burden later down the line. It’s often helpful to seek support from friends, family, or a counselor. Don’t forget to consult an experienced professional in this field to ensure the option you choose works best for you.

Are you feeling overwhelmed by your current mortgage payments? If you are looking for ways to reduce your monthly expenses and free up some cash, now is the perfect time to consider refinancing your mortgage! With interest rates at historic lows, refinancing could save you thousands of dollars over the life of your loan. Fetchrate connects you with top lenders offering competitive rates and personalized service, making the refinancing process simple and stress-free.