Heirs have a right to assume an existing mortgage on an inherited property
Did you know that heirs have a right to assume an existing mortgage on an inherited property? Many people inherit a residence when a loved ones pass away. However, most people do not know that they have a right to assume the existing mortgage, without needing credit approval or paying closing costs for a new loan.
Source of Confusion: Do I need to refinance to take over an Inherited property?
When a loved one passes away, their estate and assets are typically distributed to their heirs according to their will or state laws. One of those assets that can be conveyed “in-kind” is the decedent’s house or other real property.
When this happens, however, outstanding mortgages – loans on the property – can be a source of confusion and concern for their heirs. In some cases, the heir can very likely assume the mortgage of the deceased person, but it depends on other heirs and the circumstances surrounding the loan.
Secured debts, such as a mortgage, are typically tied to a specific asset that can be repossessed or foreclosed on if the loan is not paid. In the case of a residence, that secured debt is known as a mortgage. When an heir receives an inheritance of property, the heir may choose to take over the remaining payments and assume ownership of the property under the The Garn-St Germain Depository Institutions Act.
The Right of an Heir to Assume a Mortgage of an Inherited Property.
The Garn-St Germain Depository Institutions Act, which was passed by Congress in 1982, includes provisions that may impact the ability of an heir to assume a loan of a deceased person. Under this act, certain loans may be assumed by a qualified heir without triggering a due-on-sale clause in the loan agreement.
A due-on-sale clause is a provision in a loan agreement that allows the lender to demand immediate payment of the loan if the property securing the loan is sold or transferred to a new owner. This can be a significant hurdle for an heir who wishes to assume a loan on a property, as the lender may require them to pay off the loan in full before allowing the transfer of ownership.
However, the Garn-St Germain Act includes an exception to the due-on-sale clause for certain loans. Specifically, the act allows a qualified heir to assume a loan secured by a residential property without triggering the due-on-sale clause, as long as certain conditions are met.
To qualify for the exception under the Garn-St Germain Act, the following conditions must be met:
- The loan must be secured by a residential property with four or fewer units.
- The borrower (i.e. the deceased person) must have been a natural person.
- The loan must have been in place prior to the borrower’s death.
- The heir must inherit the property from the borrower.
- The heir must occupy the property as their primary residence.
If these conditions are met, the qualified heir may assume the loan and continue to make payments without triggering the due-on-sale clause. This can be a significant benefit for heirs who wish to keep the property in the family and avoid the need to refinance or pay off the loan in full.
Should You Assume a Mortgage on a Inherited Property?
Just because you can assume a mortgage on an inherited house does not mean that you necessarily can or should.
At the outset, there may be other heirs who have an equal right to the house and you will have to pay them for their interest in the house. Sometimes this can be done from other assets you inherit. However, if you do not inherit sufficient assets (other than the house) to pay other heirs off, then you will likely be required to refinance the property to obtain a loan against it with sufficient cash to pay the other heir’s interests off.
Regardless, assuming a loan is not a decision to be taken lightly. You must be able to to make the loan payments on time and in full. Any default can adversely affect your credit. Additionally, assuming a loan may come with other legal and financial responsibilities, such as taking on the insurance and property taxes associated with a mortgaged property.
Similarly, you may be able to secure a better interest rate or more favorable terms than the original loan. While, this can be a complex and time-consuming process, it may be worthwhile if you have sufficient credit-worthiness. For more information on the pros and cons of obtaining a new loan, websites such as this one are a good tool to provide you with useful information on what to consider making such decisions.
It is also important to understand that not all debts can be assumed by an heir. For example, credit card debt and personal loans are generally considered unsecured debts, meaning that there is no collateral that secures the debt. In these cases, the debt typically dies with the debtor, and the heir is not responsible for paying it off. However, the deceased person’s estate may be responsible for paying off the debt before any assets are distributed to the heirs.
Overall, the ability of an heir to assume the loan of a deceased person depends on the type of loan and the specific circumstances. While assuming a loan can be a significant financial responsibility, it can also be a way for an heir to keep a valuable asset, such as a home, in the family. If you find yourself in this situation, it is important to seek the advice of a financial professional and to carefully weigh your options before making any decisions.
Such professionals can carefully review the loan agreement and other relevant documents to understand your rights and obligations and advise you on potential options.
If you are interested in discussing your options regarding the inheritance of a property, feel free to contact the Law Offices of Spence Brierley to discuss your case at 410-823-5003. Our firm regularly handles estate administrations where one heir acquires a property, while arranging to buy other heirs out to remain in possession of the property.
For more information on the Garn-St Germain Depository Institutions Act relating to assumption of mortgages, check out this link.
For more information on the rights of heirs to obtain mortgage information (which can often difficult when administering estates), check out this link.