What to Do If You Inherit a House With a Mortgage

Losing a loved one is never easy, and receiving an inheritance can be a bright spot in a difficult situation. For many people, a home is the most valuable asset they have to pass on to their loved ones after they die. But what happens if you inherit a house with a mortgage?

Inheriting a house with a mortgage requires you to make some tough choices. You can either sell the property and pay off the loan or keep it and decide how to handle the mortgage. Understanding all your options will help you make the best choice for your situation.

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What Happens If You Inherit a House With a Mortgage?

Most people inherit their assets either through probate or a last will and testament. If you inherit a home with a mortgage, you have two choices: Sell the house or keep it and assume the mortgage. There are pros and cons to both decisions.

Selling the Home

If you don’t need the house, you can sell it, pay off the existing home loan and keep any remaining cash as part of your inheritance. The benefit of this option is that it frees you from having to worry about the mortgage or maintaining the property. However, there’s a chance you’ll owe capital gains taxes on any money you receive (unless you qualify for an exclusion).

Keeping the Home

If you decide to keep the home, you’ll assume the mortgage and begin making payments. The Garn-St. Germain Depository Institutions Act allows most heirs who’ve inherited a home to assume the mortgage without a credit check or closing costs.

But going that route means you’ll have to take over the mortgage payments as well as the taxes, insurance and other expenses. Plus, you’ll be responsible for the ongoing upkeep and maintenance of the house.

[Read: Best Mortgage Lenders]

4 Steps to Take After Inheriting a House With a Mortgage

Inheriting a house with a mortgage is a complex situation, and you’ll want to fully understand what you’re getting into. Here are four steps you should take after inheriting a house with a mortgage.

1. Contact the Loan Servicer

You need to continue making the monthly mortgage payments while weighing your options. If the mortgage payments stop altogether, you’ll face hefty penalties and risk losing the home to foreclosure.

So your first step is to find out who the loan servicer is and reach out to notify them of the death. The mortgage servicer will likely request a copy of the death certificate and will. Once that information has been verified, the servicer can give you information about the remaining loan balance and monthly payments.

2. Determine the Equity

Before you can decide what to do with the home, you need to know what it’s worth. Having the property appraised will give you an idea of what price you could list it for on the market.

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

However, you also need to calculate the potential cost of selling the home. For example, will the home need any major or minor repairs before you can list it? Even if the house doesn’t need additional work, you’ll have to pay for closing costs and additional fees if you decide to sell.

3. Consider the Expenses

If you’re thinking about keeping the home, you need to do the math and determine how much that will cost you. In addition to the mortgage payment, you’ll need to think about the utilities, property taxes, landscaping and any other costs.

“Inheriting a home with a mortgage can be a huge windfall, but it also comes with risks,” says Andrew Latham, certified financial planner and managing editor at SuperMoney. “Homes require ongoing maintenance and possibly significant repairs, which can add to the financial strain. Inheriting a property can also lead to tax implications — such as property tax reassessments and potential capital gains taxes if the property is sold at a profit.”

4. Consider Any Other Heirs

If the property was left entirely to you, you get to decide what to do with it. But if other beneficiaries inherited a portion of the property, you’ll have to work with them to decide what to do. For example, siblings may inherit a house with a mortgage after a parent dies.

If you’re interested in moving into the property yourself, you can buy out the other heirs of their shares. This process is known as an estate buyout and will require an appraisal to determine the home’s exact value. You and the other heirs can also choose to sell the home and split any remaining proceeds.

[Read: Best Mortgage Refinance Lenders.]

Should You Refinance the Loan?

If you inherit a home with a mortgage, you may also want to consider refinancing the loan. Refinancing makes sense if you can lower your interest rate or make the monthly mortgage payments more affordable.

“Refinancing is an option for homeowners who choose to hold on to their property after the death of their spouse or other family member,” says Shelby McDaniels, managing director of specialty sales and business development at JPMorgan Chase. “A homeowner should ensure that they are able to afford the mortgage payments with just their income when planning to refinance.”

However, if you choose to refinance, you’ll have to qualify based on your credit score, debt-to-income ratio and home equity. And if you plan to sell the home in the next few years, the costs of refinancing will likely outweigh any benefits.

More from U.S. News

What Is Probate and How Does it Work?

How to Avoid Foreclosure

Home Appraisals: What You Need to Know

What to Do If You Inherit a House With a Mortgage originally appeared on usnews.com

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