In meeting with clients, a common question that
surfaces is what happens to my home if I pass away and still owe a lender
money. The easy answer is that the
mortgage still needs to be paid, whether by a surviving joint owner of the
property, personal representative of the estate of the decedent, or by the
trustee of a trust if the property was owned by a trust. This is the case because the mortgage follows
its collateral, the real estate, and not the person that has passed away.
Unless there is a surviving joint owner who is also
on the mortgage, the estate created at the death of the borrower has an
obligation to pay off the mortgage. Most
lenders have language in their mortgages and notes that call for immediate
payment upon the death of the person that took out the mortgage. However, the reality of the matter is that
most estates do not have the liquid funds available to pay off the mortgage
debt in full. The personal
representative of the estate will first use any funds in the estate to pay off
the mortgage or at least keep the payments current. In most instances, unless someone is
continuing to live in the home, the house will then be sold in order to
discharge the mortgage debt, if possible.
In this case, if there are any excess funds from the sale, then they
will be placed back into the estate and treated like other estate assets. If after the sale, part of the mortgage debt
is still remaining, lenders may be able to apply to the estate for further payment,
but with the collateral gone and the borrower deceased, the debt is typically
satisfied after the sale of the real estate.
Alternative arrangements - Some people take out a
life insurance policy that is effectively deemed mortgage insurance. Its purpose is to discharge the mortgage in
the event that the owner/borrower passes away prior to the mortgage being
discharged. This is a relatively
inexpensive way to insure that your beneficiaries are not burdened with an
encumbered property should someone die prematurely. Also, some lenders are willing to alter notes
and mortgages to allow surviving children or others to assume the mortgage at
the death of the original borrower. This allows heirs to keep the property and
start paying off the mortgage themselves.
In either case, it is a more desirable scenario than being forced to
sell real estate in order to satisfy a mortgage obligation.