What's the normal course of events when someone who owes on a mortgage dies?

Question

Alice owns a house she lives in and has a mortgage on it. She unfortunately dies, owing money on the mortgage. Her son Bob inherits the entire house.

Assuming nothing too far out of the ordinary, what happens to the mortgage? Is it automatically transferred to Bob? Is Bob expected to pay it off at once? or continue payments? If Bob simply decides not to pay it, can the house be foreclosed on (remember it's no longer owned by the person who took the mortgage out)? Can the lender force sale (or payment) as part of probate?

I realize there may be slight differences between jurisdictions, but I'm not interested in subtleties (or taxes). Best answer from any jurisdiction gets my vote.

Answer 1

The house becomes an asset belonging to the estate of Alice. The debt also goes with the estate. The executor of the will should arrange for the debt to be paid off as part of sorting out the estate - they can't just hand out all the assets and leave nothing to pay off the debts.

This could be done by selling the house. But in practice, the executor and the mortgage lender may both be happy if Bob takes out a mortgage, uses that to pay the debt, then inherits the house.

Answer 2

I can answer this question for my jurisdiction (Florida, USA), because I lived through it.

My Dad ("Alice") passed away in 2008, just as the housing crisis was starting to heat up.

What happened to the Mortgage?

My Dad had a will in place. It was an old will (from the 1980's), but never-the-less, a will. We had to provide paperwork to the court that my Mom had already passed away, and my oldest brother was living out-of-state (he would have been the executor, otherwise). With the proper paperwork, I became the Executor, and the property passed in to probate. At this point, the "Estate" was responsible for the house and the mortgage on it (meaning me, as I was the Executor).

We decided to sell the house, so we hired a realtor, and set an asking price about $40k over what was owed on it. As we waited for it to sell, I had to make monthly mortgage payments, and payments to the HOA (otherwise the HOA could put a lien on the property, making it more difficult to sell, should we find a buyer).

Is it Automatically Transferred?

In most jurisdictions, I would say not "automatic". I definitely had get an estate lawyer and file the proper legal paperwork with the local county courthouse. Some states have an easier probate process ("Summary Administration" in Florida), that eases the requirements for small estates.

Is Bob expected to pay it off all at once?

No, the mortgage holder was happy for me to make payments (out of other estate assets) in lieu of my Dad. The were earning interest, after all. This is probably true in most cases.

Can the House be Foreclosed on?

Yes. In our case, being 2008, we had a hard time selling the property. The asking price quickly went from $40k over what was owed, to $20k over, to $10k over, then to being equal to the mortgage value. Finally, I approached the bank about options. They suggested a "Deed in Lieu of Foreclosure" process. It was easier for us, and the bank had to pay less lawyers and such. Otherwise, a "Deed in Lieu" is effectively the same as a Foreclosure. At that point, we stopped making payments. Eventually, me and all my siblings (the "heirs") had to sign the proper paperwork giving the house over to the bank.

In our case, the bank did not pursue us (or rather, the Estate) for the difference between final (auction) sale price and the mortgage balance (it was an FHA loan, so the US Government wound up picking up the difference). From what I understand, this could have happened, and we would have wound up with basically nothing out of the Estate.

Can the Lender Force the Sale?

I can't give a definite answer on this, but it probably depends. If you don't pay? Yes they sure can--it's usually part of the standard mortgage contract! I see 2 other options:

1. Bob decides to keep the house and make payments. Before the Estate closes, he will likely have to "close on the house" with the bank in order to get the Mortgage in his name.
2. Bob decides to buy the house in cash (think large estate assets). That's easy, it's just like a normal person paying off a house, except it's via the estate. If there are no other heirs, it should be very easy. If there are multiple heirs, then a lawyer probably has to get involved.

Answer 3

In the US, a surviving family member that inherits the entire property may also assume the mortgage. If the new mortgagee fails to uphold the terms of the mortgage (i.e. make timely payments), the mortgagor can begin foreclosure proceedings. There is generally no requirement to pay off the mortgage quickly.

This is obviously the simple case where one person inherits the entire property. If the estate is split and no one person inherits the house, or if the house is left to a non-relative, things get more complicated. Effectively in that case the house is either sold to pay off the mortgage or the inheritor needs to take out a new mortgage to pay off the old one.