How to Make Sure Your Castle Finds a Good Home Post-Mortem

Your home is your castle, as the saying goes. It's a BIG responsibility that often has a large bill (mortgage) attached. So how do you handle estate planning for your castle without placing undue burden on your heirs? NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Your Castle's Destiny

A home is often the primary asset to be disposed of by the executor of an estate, whether or not a will directing such disposition exists. When a homeowner dies leaving an unpaid mortgage (secured by the property it covers), the lender of record retains the right to any unpaid balance. This situation offers three likely scenarios:

• The estate pays off the mortgage

• A beneficiary inherits the home and continues to pay off the mortgage

• The house is sold to pay off the mortgage and/or other debts

If your home is not already mentioned in your will, some legal work is in order. Make certain it clearly states who will inherit the home whether or not a mortgage exists on the property. Legally, the matter is simplified a bit if a mortgage does in fact exist. Why? Such matters of future ownership are often not fully clarified in the absence of a mortgage. In such instances, the assistance of a good lawyer is advised.

Assuming a Mortgage

If a mortgage is co-signed, as is often the case when an individual borrows money with a spouse to buy a house, the surviving co-signer or co-borrower is obligated to make the remaining payments on the mortgage. If there is no co-signer or co-borrower, but the homeowner designates an heir in his/her will, the beneficiary can take over the mortgage without applying for and being approved for a home loan by virtue of federal law.

Here's how it works: Mortgages and most other liens on a real property's title survive the death of the property's owner. Heirs of real property aren't generally responsible for such liens unless they are co-borrowers or co-signers. There's no law requiring an individual to accept anything passed to him or her by a deceased person. Under a 1982 federal law, relatives can continue making payments if they plan to live in an inherited home. Government-backed loans (FHA, VA, USDA) usually qualify for a mortgage assumption. Conventional mortgages often do not permit loan assumption, since many include a “due-on-sale” clause, which permits a lender to declare the loan balance due and payable if the mortgage is sold or transferred without the lender’s consent. However, lenders can’t legally exercise such clauses under a handful of circumstances, which usually involve a transfer of ownership between relatives in a will or divorce versus a third-party homebuyer desiring to assume a mortgage.

If the new owner (heir) fails to make said payments, the lender of record has the right to foreclose. Why? Because mortgages are secured by the properties against which they are drawn whether “owned” by the original signee or an heir. In short, a lender can force the sale of a secured property on which payments are owed.

It’s common for homes to be sold after owners die in order to pay off debts, particularly if an heir chooses not to keep the home. Further, if the deceased homeowner has debts apart from the home mortgage that can’t be paid without selling the home, certain states require a home sale to resolve these other estate obligations.

What? No Mortgage?

If there is no mortgage contract, it’s important that the homeowner's will specify who shall inherit the home. And again, if the deceased homeowner has debts that can’t be paid without selling the home, certain states require a home sale to resolve such other estate obligations.

When a property is owned outright by the deceased person with no mortgage, an heir might think it’s an easy process to become the new owner. However, a home is considered an asset of the estate and must be treated like other assets until probate is completed. If the deceased person owed debts and didn’t have enough other assets to satisfy those debts, the house may need to be sold to pay creditors. If this isn’t the case, the executor of the will can focus on transferring the property to its new owner.

Sharing Amongst Heirs

Other issues arise if an individual inherits a home along with other siblings or heirs, who also have a say in what happens next. Thus, it's necessary to determine what all heirs wish to do with the property before exploring disposition options (perhaps even before the death of the original owner).

If one heir wishes to keep the property and other heirs want to sell, the solo heir can buy the other heirs out. If all heirs want to keep the property, a compromise must be reached regarding the home’s ultimate disposition. For example, if one heir wants to live in the house, an agreement must be reached regarding compensation…if any…to those heirs unable to enjoy their respective ownerships in the home.

In Sum

Because death can come without notice to young, old, rich or poor, leaving a last will and testament for the proper disposition of an individual’s estate is always a wise thing to do. Families are in a vulnerable position following the loss of a loved one, so a smooth transfer of assets - particularly the transfer of a home - makes things a little bit easier.