What to Do If You Inherit a Home with a Mortgage
In addition to their retirement accounts, many people consider their homes to be among their most valuable assets, and some choose to leave their homes to loved ones when they die. Homes can represent so much, including family memories, historical significance, or simply a link to happier times. But inheriting a home can be a bittersweet experience for the receiver. On one hand, the asset itself could provide long-term financial stability. On the other, it could be a source of stress – especially if the home you inherit comes with a mortgage.
If you’ve recently inherited a home with a mortgage, you may be wondering what to do next. Luckily, you have choices, which could include keeping the home and assuming the mortgage payments, selling the home, refinancing the mortgage if it makes sense to do so, or allowing it to pass into foreclosure. Before making any decisions, however, consider these steps:
- Understand what you’ve inherited. In some cases, parents may leave their family home to their children with the expectation that they’ll sell the home and split the proceeds after paying off the mortgage. The home may also be in a trust, which may come with specific conditions or different tax treatments, depending on the type of trust. Before you do anything, consider meeting with the fiduciary of your loved one’s estate or trust, as applicable, and an estate attorney, to learn details of what you’ve inherited and to understand when and how you must make decisions. An attorney could be especially helpful in complex situations involving property in more than one state, or in contentious relationships with other inheritors. You’ll also need to understand the type of mortgage your loved one had (conventional, adjustable rate, reverse, etc.) and how much the payments are.
- Determine the home’s value. You should be able to receive information on the home’s fair market value from the person(s) handling the estate or trust administration, but you could also seek information from a real estate agent as to what an appropriate fair market value asking price might be for the home. You’ll also need to understand how much the mortgage balance is and whether any other secured debt exists, such as a lien or a home equity line of credit. If you plan to sell, you’ll also need to factor in closing costs and Realtor® commissions.
- Keep paying the mortgage. According to Rocket Mortgage, most mortgage contracts have an “alienation” or “due-on-sale” clause that requires a mortgage balance to be paid during a sale or transfer. However, the terms of the mortgage might allow the heirs to take over a title and continue making payments without triggering the alienation clause.
- Don’t forget about taxes. When you inherit a home that was owned by an individual or, generally, by a revocable trust that the decedent was the grantor of, your basis in the home is equal to the fair market value of the property at the time of such decedent’s death (generally assumed to be a “step up” in basis). You’ll be responsible for property taxes on the home. Consider consulting a tax professional to determine the tax implications and ways to mitigate their impact.
- Probate could slow a sale. If you decide you would prefer to sell the home, you’ll need to discuss your options and the ability to sell it as part of the post-death administration process with the executor or trustee, as applicable, and your attorney. If the home was owned by an individual at the time of death and is subject to probate, be aware that the probate process may be lengthy, depending on the situation.
Inheriting a home from a loved one can be a positive, but sometimes complicated, experience, so don’t be afraid to seek professional help from an attorney and/or an advisor to help ensure you’re making the best possible decisions for yourself. It’s also important to keep open lines of communication with other affected family members and the executor or trustee who is administering the probate or trust estate. Finally, be patient – the process may not be fast, but understanding the timeline and necessary decisions may make things easier to handle in the meantime.