What Happens If You Inherit a House with a Mortgage?

When a family member passes away, their relatives may inherit both the home and its accompanying mortgage, which can create a complex and stressful situation. Questions often arise, such as: Does the mortgage still need to be paid? What if the home’s value is less than the mortgage balance? And what happens if there’s no will?

This guide will cover what happens when you inherit a home with a mortgage, the choices you have (buying, selling, or renting), and how unique situations—such as inheriting a home with a reverse mortgage—might impact your options.

What to do when you inherit a house with a mortgage

When inheriting a home along with its associated debt, you have several options, from selling the property to assuming the mortgage payments yourself. Each decision brings its own financial implications.

Before deciding what to do, review the mortgage terms thoroughly. Key factors to examine include the remaining loan balance, the monthly payment amount, the interest rate, and whether the rate is fixed or variable.

Step 1: Seek the assistance of an attorney

Start by seeking advice from an attorney who specializes in elder law or estate planning. This is particularly important if multiple heirs are involved, properties are located in different jurisdictions, or the estate has significant assets. An attorney can guide you through the legal process and ensure compliance with any requirements related to inheriting a mortgaged home.

Step 2: Keep making mortgage payments

Even after the original borrower’s passing, the mortgage must still be paid to keep the account current. Missed payments could result in late fees or, if too much time passes, foreclosure.

Determine the necessary details: the mortgage lender or servicer, how statements are received (mail or email), and the payment method (manual or auto-pay). Adjust any arrangements as needed to keep payments on track.

Step 3: Move in and assume the mortgage

One option is to move into the home and assume the mortgage in your name, continuing the payments yourself. Heirs often have the legal right to assume a mortgage without lender objection under the Garn-St. Germain Depository Institutions Act of 1982, which protects them in estate situations. If you choose this route, you’ll need to work with the lender or servicer to transfer the deed and formally take over the loan.

Step 4: Buy out other heirs

If multiple beneficiaries inherit the property, and you want to keep the home for yourself, you may need to buy out the other heirs. This process, known as an estate buyout, typically requires an appraisal to determine the current market value. Once the value is established, you can negotiate a fair price for each heir’s share.

You might need to secure financing to complete the buyout. Probate or estate loans are special types of financing designed for this purpose, helping you access the funds needed to pay off the other heirs.

Step 5: Sell the home

Another option is for all beneficiaries to agree on selling the inherited property. This can simplify managing the outstanding mortgage, as the sale proceeds can be used to pay off the loan. Any remaining funds after the sale can then be divided among the heirs.

The will may provide instructions on how to distribute the proceeds, but state laws may also govern this process. Before selling, it’s important to understand any potential tax implications. Capital gains taxes could apply if the sale yields a profit above the home’s original purchase price (or tax basis).

When you inherit a home, its tax basis is generally “stepped up” to reflect its current market value. This adjustment often minimizes or eliminates capital gains taxes. Additionally, costs like major repairs or renovations can increase the tax basis, further reducing any taxable gains. However, if you wait several years and the property appreciates, you could be liable for capital gains taxes on any profit.

Step 6: Research “death tax” consequences

The estate executor typically handles federal estate tax, which applies to estates worth more than $13.6 million in 2024. Most estates fall below this threshold, making the likelihood of owing federal estate taxes fairly low. In 2021, only 2,584 taxable estate returns were filed nationwide, according to the Tax Foundation.

In addition to federal taxes, some states impose their own estate or inheritance taxes. Inheritance taxes, paid by the heirs, apply in a few states. In total, 17 states and Washington, D.C., have either an estate tax, an inheritance tax, or both. It’s wise to consult an attorney to determine any state-level tax obligations.

Inheriting a house with a reverse mortgage

When you inherit a home with a reverse mortgage, the options available depend on the circumstances of the borrower who passed away. Mike Roberts, founder of MyHECM.com and author of The Reverse Mortgage Revealed: An Industry Insider’s Guide to the Reverse Mortgage, outlines several choices:

• Pay off the balance: If you’re able to pay the remaining loan balance in full, you can take ownership of the home.
• Refinance: You can refinance the reverse mortgage into a traditional one, using the new loan to pay off the outstanding balance.
• Sell the home: You can sell the home for 95% of its appraised value.
• Deed in lieu of foreclosure: By transferring the deed to the lender, you can walk away without owing any remaining debt.

Time is a critical factor when inheriting a home with a reverse mortgage. You typically have six months to repay the loan, though this can be extended if you’re actively working to settle the balance. If the debt isn’t repaid within a year, the lender is required by HUD to initiate foreclosure, says Roberts. Though foreclosure often carries negative connotations, it’s a standard process for settling reverse mortgages after the last borrower or non-borrowing spouse passes away.

If you’re a surviving spouse and listed on the reverse mortgage, your situation remains unchanged. However, if you’re a “non-borrowing spouse,” you may still be able to remain in the home. For other scenarios, such as an unmarried partner or a new spouse not on the loan, the options become more limited.

Roberts also notes that when a reverse mortgage is taken out, the borrower is responsible for maintaining homeowners insurance, property taxes, and the overall condition of the home.

Inheriting a house with an underwater mortgage

If the value of the inherited home is less than the outstanding mortgage debt, the home is considered “underwater.” This can be a key factor in deciding whether to keep or sell the property.

First, verify the home’s appraised value. If it’s lower than the mortgage balance, you might explore options like a short sale or deed in lieu of foreclosure with the lender. If the mortgage is a non-recourse loan (meaning the borrower isn’t required to pay more than the home’s value), foreclosure may be the lender’s only option, particularly in the case of a reverse mortgage.

Who inherits the mortgage if there isn’t a will?

If the deceased passes away without a will, known as “dying intestate,” managing a home with a mortgage becomes more complex and costly. In this case, it’s best to consult an attorney to navigate the legal process of handling both the property and the mortgage.

To protect your own assets and ensure your wishes are carried out, estate planning documents like wills, living wills, and trusts are essential. If you’re looking for legal assistance, the National Academy of Elder Law Attorneys (NAELA) provides resources to help you find attorneys in your area.