Death isn’t on the minds of most homeowners on closing day, naturally, unless it’s a fear of drowning in paperwork. But it’s really never too early to consider what happens to your mortgage should you pass away.
The financial obligation of a home loan does linger after death. There’s a host of scenarios regarding the mortgage’s ultimate disposition, all colored by a homeowner’s estate planning (or lack thereof) and other legal issues.
It isn’t a particularly pleasant topic, but a little bit of planning and paperwork can save your loved ones from considerable headache and hassle during an already difficult time.
“If you’re really thinking about your family’s long-term interests, purchase insurance so they can stay in your home upon your death, and have a will to make everything administratively easy,” said David Reiss, a law professor at Brooklyn Law School in New York.
Keeping the House
Nearly seven in 10 recent homebuyers are married couples, according to the National Association of Realtors, so we’ll focus on them. The co-borrowing spouse will typically be financially liable for the mortgage moving forward.
A spouse who plans to continue living in the home will need to keep current on payments. If you have a life insurance policy in play, your spouse may be able to use the payoff to keep up with or completely wipe out the mortgage balance.
Reiss recommends homeowners consider term life plans rather than actual mortgage term insurance, which can be more expensive.
Your spouse needs to show creditworthiness and ability to handle the payments in order to assume the loan or to seek a refinance. Spouses who aren’t on the mortgage may still be able to assume the loan, either because they were added to the deed after closing or the home was left to them in a will.
Be aware that lenders and servicers may look to invoke a “due on sale clause” that requires the mortgage to be fully paid when the property is sold or otherwise changes hands. Federal law restricts their ability to demand payment or initiate foreclosure proceedings after a death, but that certainly hasn’t stopped some lenders from trying.
Over the years, many bereaved family members have faced harassing phone calls and the threat of foreclosure in the immediate aftermath of a loved one’s passing. New mortgage servicing rules that took effect this month should help curb the practice and ensure family members and heirs have ample opportunity to assume a mortgage (even if a modification may be necessary).
Dealing with Delinquency
If your spouse doesn’t want or can’t afford the home, then it’s typically a matter of keeping the mortgage, taxes and insurance current until the home is sold. What can complicate things is a mortgage that’s delinquent or underwater.
Dealing with delinquency at the time of death will often be a matter of duration. A mortgage that’s 30 or 60 days behind might be salvageable, but foreclosure proceedings could already be underway once you’re beyond 90 days.
Family members can allow an underwater mortgage to lapse into foreclosure, but a better plan might be to work with the servicer on a short sale. Otherwise, lenders could look to claim assets from the estate to cover the balance.
About a third of people 65 and older have a mortgage, according to the U.S. Census. For older homeowners, it’s important to talk with family members about the property’s long-term future.
Children and grandchildren may not share the same desire to keep a house in the family.
“Do you see it as something your family wants to keep?” Reiss said. “You want to make that as financially easy for them as possible.”
Despite the difficulty, these are critical conversations for homeowners, both new and veteran. It’s also a good idea to find an estate planning attorney who can help you safeguard your investment and your family.
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