Sometimes, an inheritance comes with issues or problems that the heirs have to solve. For example, 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?
If you inherit a home with a mortgage, you have two choices: Sell the house, or keep it or assume the mortgage. There are pros and cons to both decisions.
Whatever you decide, you’ll need to hop through a few legal hoops before you can do anything.
Selling the Home
If you don’t want 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.
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.
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]
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 the steps you should take after inheriting a house with a mortgage.
1. Pull a Title Report
A title report can help you decide whether you even want to accept your inheritance. Liens or other debts tied to the home become yours, and you may not want these things. They might even exceed the property value. Other problems that might cause you to disclaim an inheritance include environmental hazards, a need for extensive repairs, code violations and potential lawsuits.
“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 potentially significant repairs, which can add to the financial strain. Inheriting a property can also trigger tax implications, such as property tax reassessments and potential capital gains taxes if the property is sold at a profit. For instance, under California’s Proposition 19, heirs who don’t use the inherited home as their primary residence can face a full reassessment to current market value.”
2. Get the Property Into Your Name
Once probate is complete, the executor can help you. You’ll need a copy of the probated will, and you’ll document the decedent’s ownership. If you don’t already have one, order a copy of the death certificate because you’ll probably need it.
Next, you’ll draft, notarize and file the new deed (generally with your county recorder’s office). In the deed, include your full legal name and address, as well as the deceased’s full legal name and address. Also, provide the parcel number and a detailed property description (it will be on your title report). If you co-inherited the property, name all co-owners.
Consider working with an attorney or title company for help preparing a new deed.
3. Contact the Loan Servicer
Once you own the property, you’re responsible for making the monthly mortgage payments. If you don’t, you’ll face hefty penalties and risk losing the home to foreclosure.
Find out who the loan servicer is and reach out to notify it of the death. The mortgage servicer will likely request a copy of the death certificate and probated will. Once that information has been verified, the servicer can give you information about the remaining loan balance and monthly payments.
4. Have the Property Appraised
Whatever you decide to do with the home, you’ll need a property appraisal. This will give you an idea of its market value if you choose to sell. You calculate your potential proceeds by subtracting the balances of mortgages and liens against the property from its current value. You also need to deduct the potential cost of selling the home. For example, will it need any repairs before you can list it? You’ll also have to pay seller closing costs and possibly other expenses like real estate commissions. The final number is the amount you can expect to receive after selling the property.
Another reason to get an appraisal is that the property’s value when you inherit it becomes your basis. “Basis” is your starting point for determining your gain (and your tax liability) if you ever sell. If you sell the property right away, you won’t generally have a taxable gain. An appraisal is also important if you decide to rent out the home because you’ll deduct depreciation from your rental income — and for that, you have to know your property value.
5. Consider the Expenses
During the probate process, when the estate’s assets are distributed to the heirs, any expenses related to the property are paid by the estate. The executor of the estate should handle this.
If you’re thinking about keeping the home, you need to do the math and determine how much it will cost you. In addition to the mortgage principal and interest, consider utilities, property taxes, homeowners insurance, maintenance and other costs.
If you’re considering renting out the home, you’ll want to estimate the income it might generate — before and after expenses. You may want to speak to a tax professional about owning rental real estate.
6. Talk to 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 may be able to buy out the other heirs. 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 the proceeds.
[Read: Best Mortgage Refinance Lenders.]
Should You Refinance the Loan?
If you decide to keep the property, look into refinancing the loan. Refinancing makes sense if you can lower your interest rate or make the monthly mortgage payments more affordable.
“Most people who take out a mortgage do so intentionally after thoughtful planning and an array of life choices that culminated in the event. They plan for the payments, shop around for the best rate and choose a loan that fits their budget,” says Christopher M. Naghibi, executive vice president and chief operating officer at First Foundation Bank.
“But, when you inherit a property with a mortgage, you are suddenly responsible for someone else’s financial decision. And allow me to be clear,: Very, very few people are actually prepared to do so emotionally or logistically.”
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 may outweigh any benefits. “Refinancing can be a powerful tool to regain control, but the process isn’t easy and it is going to be an emotional roller coaster,” Naghibi says.
But sometimes it makes sense to refinance anyway. An older mortgage might have a high payment but a fairly low balance, and you’d be able to make it more affordable by stretching that balance over a new term.
“Inheriting a home with a mortgage can be overwhelming, especially if you weren’t expecting the added cost,” says Paul Miller, certified public accountant and founder of Miller & Co. “Refinancing can help you manage cash flow or access equity, and if you plan to rent it out, you may be able to deduct mortgage interest, property taxes and other expenses — turning a surprise inheritance into a potential tax-smart investment.”
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What to Do If You Inherit a House With a Mortgage originally appeared on usnews.com
Update 05/19/25: This story was previously published at an earlier date and has been updated with new information.
