Inheriting a property can come with a financial burden especially if the property comes with a mortgage. When you inherit property with a mortgage you inherit the mortgage too. In some circumstances, you may even be required to pay the loan in a very short time. There are many options available but they all depend on the terms of the mortgage that was signed and your relationship with the property owner or the person who named you as a beneficiary. Here is how that works.
- Due on Sale
When borrowing a mortgage loan you’re required to sign some mortgage documents which includes the due-on-sale clause. The clause states that the loan is payable or due when the borrower transfers the property to someone else. When the property owner dies and the property ownership is legally transferred to you, you can either sell the property or pay off the mortgage.
The federal law allows a close relative (a surviving spouse) inheriting the property to assume the mortgage, a joint tenant sharing a title to the house is also allowed to assume the mortgage. If the property is inherited by someone who is not a relative to the owner, the mortgage lender executes the due-on-sale clause.
If the new owner isn’t a close relative to the original owner the mortgage should provide notice of acceleration to the new owner. The new owner is given at least 30 days to satisfy the accelerated loan. You can only assume the mortgage if the inherited apartment or home has less than 5 dwelling units. A property with an apartment having more than 5 dwelling units is liable for the enforcement of due-on-sale clause no matter who inherits it.
A lender is allowed to foreclosure an inherited property if the new owner is unable to maintain payments or sell the property to satisfy an outstanding mortgage. Improving real estate markets and rising interest rates can motivate the lender to foreclosure your newly inherited home. To avoid foreclosure make sure to meet all the credit guidelines that were imposed on the original property owner.
- Reverse Mortgages
Inherited property is subject to the reverse mortgage agreement if the owner agreed to receive money for equity and agreed that he will pay the loan on moving out. When the owner passes away you are required to repay the loan within a limited time (6 months). Failure to pay the reverse mortgage within the set time you’ll be required to sell the property or obtain a new mortgage to satisfy the reverse mortgage.