Inheriting a Property with a Mortgage: What Are Your Options?

It is never easy to put up with the loss of a loved one, and things can become even more difficult if you inherit a mortgaged property. For most folks, a home is the most valuable asset they have to pass on to their loved ones after their demise. However, the real question is – inheriting a property with a mortgage and what are your options?

There is no point in sugarcoating things. Inheriting a mortgaged property means you have to make a few tough decisions. You can either choose to sell it to pay off the loan or keep it and decide how to manage the mortgage situation. Understanding all available options will help you make the best choice for your situation.

What to Expect After Inheriting a House with a Mortgage?

Usually, most people inherit assets either through a last will and testament or probate. If you inherit a mortgaged property, you have two choices: sell it or keep it and assume the mortgage responsibility. Of course, both decisions have exclusive advantages and disadvantages.

Selling the Asset

Do you need the home? If you have a place to stay, you can sell your inheritance and pay off the existing home loan. Also, keep any remaining cash as part of your inheritance. The best thing about this option is that it frees you from having to worry about the mortgage or maintaining the house. However, you might have to pay capital gains taxes on any money you receive unless you qualify for an exclusion.

Keeping the Asset

If you decide to retain your inheritance, you have to assume responsibility for the mortgage and start making payments sooner rather than later. The Garn-St. Germain Depository Institutions Act lets most heirs assume the mortgage without any closing costs or credit checks. Then again, taking this route means you have to take over the mortgage payments along with the taxes, insurance, and other expenses. Additionally, you will have to oversee upkeep and maintenance.

Also Read: Refinancing an Inherited Property: What You Need to Know

4 Steps to Take After Inheriting a Mortgaged House

Inheriting a property with a mortgage: what are your options? Well, it is a complex situation and needs equally complex solutions. You also need a proper understanding of what you are getting into. Below, you will find a list enumerating and explaining four steps to take after inheriting a mortgaged property.

1. Get in Touch with the Loan Servicer

You have to keep making monthly mortgage payments while weighing your options. If the mortgage payments stop altogether, you will be heavily penalized. You will even be at risk of losing the home to foreclosure.

Therefore, the first thing you need to do is to find out the loan servicer. Reach out to notify them of the death. The mortgage servicer will possibly ask you to provide them with a copy of the death certificate and will. After verifying this information, the servicer can brief you about the remaining loan balance and monthly payments.

2. Calculate the Equity

Before you decide what to do with your inheritance, you have to ascertain its worth. Consider getting the house appraised. It should give you an idea of what price you could list it for on the market.

Once you know the value of the property, you will subtract any first or second mortgages or outstanding liens. The final number you get is the asset’s equity and the amount you can expect to receive after selling it.

Make sure to calculate the potential cost of selling the house as well. For instance, does it need any major or minor repairs before you can put it on the market? Even if no additional work is necessary, you have to pay the closing costs and additional fees if you decide to sell.

3. Consider Your Expenses

If you are planning to keep the house, remember to do the math to determine how much it will cost you. Apart from mortgage payments, you have to think about property taxes, utilities, landscaping, and a few other costs.

While inheriting a mortgaged home can be quite a windfall, it does come with risks. A house needs ongoing maintenance and maybe a few significant repairs. These things will only add to the financial strain. Property inheritances can also have tax implications, such as property tax reassessments and potential capital gains taxes if the house is sold at a profit.

4. Consider Other Heirs

If the deceased willed the entirety of the property to you, you get to decide what to do with it. However, if other beneficiaries inherit a portion of the house, you must work with them to decide what to do. For instance, siblings may inherit the house with a mortgage after a parent dies.

If you wish to move into the property yourself, you can buy out the other heirs of their shares. This process is called an estate buyout, which requires an appraisal to determine the home’s exact value. You and the other heirs can also agree to sell the home and split the remaining proceeds.

Is Refinancing an Option

Inheriting a property with a mortgage: what are your options? You already have a few to consider, but what about refinancing the mortgage? Is that an option, too? Refinancing will prove to be worthwhile only if you can lower the interest rate or make the monthly mortgage payments more affordable.

However, if you decide on refinancing, you have to qualify for it first. It depends on your credit score, debt-to-income ratio, and home equity. If you have planned to sell the house within the next few years, remember that the refinancing costs will possibly outweigh all benefits.

Whatever you decide to do, know that our services can be of great use when you inherit a property with a mortgage. We are ALT Financial Network, Inc., and we can assist individuals who inherit mortgaged property by offering tailored mortgage refinancing solutions. Our licensed mortgage professionals can guide you through options like loan term adjustment or securing favorable interest rates. We will ensure the inherited property remains a valuable asset.

FAQs

Q1. Can a lender force the sale of an inherited property with a mortgage?

A1. In most cases, lenders cannot force the immediate sale of an inherited home. The Garn-St. Germain Act allows heirs to assume the mortgage, preventing foreclosure as long as payments continue.

Q2. What happens if multiple heirs disagree on keeping or selling the property?

A2. When multiple heirs inherit a mortgaged property, disagreements can arise. Options include a buyout of shares, legal mediation, or selling the home and splitting proceeds to resolve disputes fairly.

Q3. Will inheriting a mortgaged home affect my credit score?

A3. Inheriting a home doesn’t directly impact credit scores. However, assuming the mortgage and missing payments could hurt your score, while consistent payments may improve your credit history over time.

Q4. Are there tax benefits to keeping an inherited home?

A4. Yes, heirs often benefit from a stepped-up cost basis, reducing capital gains taxes if sold later. Also, mortgage interest and property taxes may be deductible if the home is retained.

Q5. Can I rent out an inherited home with a mortgage?

A5. Yes, you can rent out an inherited home, but check mortgage terms and local regulations. Some loans require owner occupancy, while rental income may help cover mortgage payments and upkeep costs.