What Happens to a Home Equity Loan on Inherited Property?

What to do when inheriting property with a home equity loan

Upon the unfortunate event of a relative’s passing, you may find yourself inheriting a property. But what if that home comes with an existing mortgage, second mortgage or reverse mortgage? In this article, we’ll explore what happens to a first or second mortgage such as a home equity loan on inherited property.

However, we won’t restrict ourselves to such mortgages. We’ll also look at what happens to all sorts of debts after death. And what your options are should you discover a home equity loan on inherited property. But we’ll go further, providing tips on how to manage all sorts of inherited debt and make the most of your inheritance.

In this article (Skip to...)

• What happens to debt after death?
• Loan options for inherited property
• Tips for managing inherited debt
• The bottom line
• Inherited debt FAQ

What happens to debt after death?

When someone dies, his or her debts don’t disappear. They must be repaid, if possible, from the deceased person’s estate, which comprises his or her assets: cash savings, investments, real property, jewelry, artworks, cars and similar things of value.

However, there’s a statutory exception to this general rule under the Garn-St. Germain Depository Institutions Act of 1982. Those finding themselves with a mortgage, home equity line of credit (HELOC) or home equity loan on inherited property may be able to assume (take over) that debt, providing the deceased was a family member.

In other words, the relative inheriting the home can carry on making the same payments at the same interest rate to the lender on the mortgage or second mortgage until the loan is fully paid off.

If the deceased and the inheritor aren’t from the same family, this doesn’t apply. You’ll have other options, which we’ll describe in the next section. However, the due-on-sale clause that almost all mortgage agreements contain is triggered by the borrower’s death, meaning the balance on the loan falls due at once. Of course, mortgage lenders are highly likely to give you a reasonable time to make alternative arrangements.

You don’t have to pay most of the deceased’s debts

The situation we just described applies to real estate because the mortgage or second mortgage was secured by the home. It might apply to other secured debt, too.

For example, if you inherit a car with an outstanding auto loan balance, that debt will be secured by the vehicle. So, you can pay off or refinance the remaining debt or let the lender repossess the car. The lender might send you a check for the difference between the sale price and the loan balance.

Providing the deceased’s estate has enough funds once its assets have been sold, it must pay off all debts, both secured and unsecured. Unsecured debts are ones that aren’t tied to a particular asset, such as a home or car, and include credit card balances and personal loans.

But if the estate doesn’t have enough money to pay all the dead person’s debts, the lender(s) must walk away, writing off the balances they can’t collect.

Federal regulator the Consumer Financial Protection Bureau (CFPB) is very clear about this: “For survivors of deceased loved ones, including spouses, you’re not responsible for their debts unless you shared legal responsibility for repaying as a co-signer, a joint account holder, or if you fall within another exception.”

The main other exceptions are if you’re a surviving spouse living in:

1. A community property state
2. One in which state law says surviving spouses are liable for certain debts

Of course, the fact you don’t owe the money won’t stop unscrupulous debt collectors from trying to collect from you. Tell them to take a hike.

Options for a mortgage, HELOC or home equity loan on inherited property

We’ve already explored your first option. Providing you’re inheriting from a family member, you can transfer the outstanding loan into your name. There may be a small fee for that but none of the usual closing costs on a fresh loan.

After that, you continue to pay down the balance on the same terms the deceased had. So, you make the same monthly payment for the remaining loan period at the same interest rate.

But suppose you can’t afford that. Or perhaps the deceased had a terrible deal with a sky-high interest rate. Then you have the same options as someone inheriting from a deceased person to whom he or she isn’t related.

Pay the loan out of pocket

This might be practical, depending on the size of the outstanding balance and the extent of your savings. You simply write a check or transfer enough funds to the lender to clear the debt.

Even if this isn’t possible now, it may be soon if you’re expecting a worthwhile amount of cash as part of your inheritance. If there’s a delay, be sure to stay in touch with the lender to keep it on your side. It may want you or the estate to make monthly payments while the will is going through the probate process, which involves confirming the validity of the will.

Refinance the mortgage, HELOC or home equity loan on inherited property

Chances are, you won’t have too much trouble refinancing your loan(s), though you’ll likely need a fair, good or excellent credit score. As long as that’s the case, and you don’t have an unusually heavy burden of existing debts, it should be easy to find a lender.

Of course, if the deceased person was kin, you’ll likely prefer to avoid the closing costs of a refinance by assuming the existing loan. However, if current first and second mortgage loan rates are lower now than the one(s) currently being paid, it may be worth swallowing those costs.

Use our refinance calculator to get a broad feeling for the likely costs and savings. Then request quotes from lenders to find yourself the best possible deal. That way, you can see whether or not a refinance will benefit you.

Sell the property

You may not wish to either live in the home or rent it out. In that case, selling it is likely to be your best option.

Read our home-selling guides. They’ll help you discover the ins and outs of selling your home and how to make top dollar.

Tips for managing inherited debt

The deceased should have named an executor to administer the will. And he or she may have nominated some alternates in case the first can’t or won’t carry out the role. If nobody is doing the job, you should ask the probate court handling the case to appoint an administrator.

According to trustandwill.com, an executor’s main functions are to:

1. Pay off the estate’s debts
2. Distribute assets to the named beneficiaries
3. Ensure that the will is executed in accordance with the deceased’s wishes

So, most of the admin concerning your inheritance will be conducted by the executor. And you should keep closely in touch with him or her. In particular, you must make sure that he or she is upholding your interest in the home you’ve inherited by continuing to make payments on:

1. The mortgage, HELOC or home equity loan on an inherited home. Otherwise, you could face foreclosure before you take possession
2. Homeowners insurance and property taxes
3. Any homeowners association fees

Making sure that the executor is on top of things is the most important thing you can do while the estate is going through probate. That can last from a few weeks to a few years, depending on how large and complicated the will and estate are.

When executors turn bad

If the executor is merely slow, you may have to live with that. But, according to Sherer Law Offices, you can apply to the court for a replacement or file a civil suit against the executor in the following circumstances. When he or she has:

1. Been convicted of a felony after being named executor
2. A conflict of interest
3. Failed to carry out the wishes of the deceased or hasn’t done anything at all
4. Stolen from the estate or wasted its assets

These things are relatively rare. And you can usually speed up a slow executor, through repeated calls and perhaps by offering to help with some of the admin. But, if you’re unlucky enough to encounter one of those four issues, you should act quickly. We’d advise consulting an attorney.

The bottom line: Making the most of your inheritance

Being left a home in someone’s will is almost always a good thing. Only if that home is underwater (meaning the mortgage balance(s) secured on it are higher than the market value of the home) and the rest of the estate can’t clear the liability, is it a washout. And then you aren’t liable for the debt.

If the deceased is a relative, you can usually assume the loan, and continue paying it down on the same terms your benefactor was. But you don’t have to do that.

You could instead pay off the mortgage. Or you could refinance it if you can find a better deal at a lower interest rate. Or you could just sell the home and pocket the difference between its sale price and mortgage balance(s).

You may think that your best course is obvious. But pause to think through all the implications. There may be benefits or drawbacks that haven’t occurred to you. It may be a good idea to talk things through with a financial advisor.

FAQ

What happens when you inherit a house with a home equity loan?

So, you’ve been left a place with a first or second mortgage such as a home equity loan on inherited property. You have four main choices: Assume the mortgage, but only if the deceased was a relation; pay off the mortgage from your savings and any inherited cash; sell the home; or refinance it if you can get a better mortgage deal.

What happens when you inherit a property with a mortgage?

You only inherit the portion of the property that has been paid for. The rest of the mortgage balance must be paid off at once or over time. The deceased’s will may say the estate must pay it off. Otherwise, you’ll have to perhaps by selling the home.

How soon after a borrower’s death does a home equity loan become due?

The due-on-sale clause that almost all mortgage agreements contain is triggered by the borrower’s death. So, technically, the debt falls due instantly. But that clause doesn’t apply if you’re inheriting from a family member. And in any event lenders are highly likely to give you a reasonable time to arrange alternative funding or sell the home, providing you or the estate keep up with monthly mortgage payments.

Can I take out a home equity loan on an inherited house?

You bet. You’re free to take out a first or second mortgage, either to refinance any outstanding debt on the home or simply because you need to release some cash.