Inheriting Real Estate: 5 Situations You May Encounter
There’s nothing more difficult than losing a loved one. The heartache, emptiness, and sometimes financial stress can feel debilitating. While pushing through the stages of grief, you may also have responsibilities to manage, like sorting through belongings or taking on inherited real estate. You may or may not feel prepared. Regardless, there are decisions to make, and there may not be a will to provide guidance on next steps.
Your mind starts to wander. Do you have to keep the inherited real estate? Are you responsible for paying the mortgage? What happens if you can’t afford the home?
To help you better understand what’s next, we offer five situations you may encounter after inheriting real estate.
Inheriting a home with a mortgage?
When inheriting real estate, ask if a mortgage is involved. If there is, you need to understand who pays for it. Is the estate responsible, or are you?
Let’s start by assuming the estate has a plan in place for mortgage payments. Ideally, there is a will involved. It may dictate you (the heir) receive the home mortgage free, meaning the executor of the estate needs to use investments, life insurance, or other assets to pay off the mortgage. So you would be inheriting the home without a mortgage to pay! You’re able to take your time to think about whether or not you want to keep it.
Next, let’s assume you have to pay. Federal law states the mortgage must remain in effect when it passes from one person to another because of death. This negates any due-on-sale clause, meaning banks cannot demand the full payment of the loan's outstanding balance before transferring the property. So, you can take over the mortgage and assume the current monthly payments, or you can refinance the mortgage. You may be able to get a different term or a lower monthly payment when looking into new loan programs.
Though, chances are you aleady have a mortgage to pay. In this case, selling the inherited home may be best.
Afraid a mortgage lender may not speak to you about a loved one’s mortgage? Don’t be. As of April 19, 2018, a federal rule requires servicers to communicate with “successors in interest.” A successor in interest is someone who receives property:
upon the death of a relative or joint tenant
as a result of a divorce or legal separation
through certain trusts, or
from a spouse or parent.
Under the rule, successors in interest get the same protections as the original borrower.
Inheriting a home with a reverse mortgage?
Reverse mortgages are common among older adults who are looking to pay off their current mortgage and have access to cash. The way it works: the homeowner(s) can live in the home and access reverse mortgage benefits so long as they keep up with property taxes, insurance, and home maintenance. The loan becomes due when the homeowner(s) move out of the home or pass away.
As the heir, you have to pay the reverse mortgage, which requires selling the home. Because it's government insured, you never owe more than the home's worth. After the home sale, if equity is leftover, you receive it as an inheritance.
If you prefer to keep the home, you can refinance the mortgage to another loan program like a conventional loan or FHA.
Inheriting an out-of-date home?
Wallpaper, shag carpet, popcorn ceilings. Let’s face it; some homes are outdated. In cases like this, it’s not uncommon for a decedent’s real estate to be sold and the proceeds used to pay off the mortgage. However, a sale could take months or years while mortgage payments and taxes continue to accrue and accumulate. Maybe it is worth keeping the home after all?
Consider the costs of home renovation. In some states, depending on the project scope, of course, home renovations can cost as little as $5,500. Again that’s a home renovation, not a room renovation.
Before writing off an out-of-date home, think about its potential and overall value. By taking the time to make home improvements, you're increasing the home equity, which means more money in your pocket.
Inheriting a large home that’s too much upkeep?
Property taxes and insurance are expensive. Let's not forget the cost of maintaining the home. That expense can add up. You have to think about energy, HVAC, and home furnishings. If you’re a small family of three or four, does it make sense to move into a large inherited house?
Instead, consider selling the home and spending the money on something else. Maybe it’s a family vacation, or even buying a new home.
Inheriting a home with siblings?
If there are multiple heirs, you need to agree on next steps. Is someone going to live there? Will you sell? Can you go through belongings and assets together? Whether you keep the home or not, there's a lot to sort through. These items may have sentimental value to one person, but not another.
Let’s not overlook the possibility that you cannot agree. Because it’s a shared inheritance, there are legal matters involved. They will vary depending on whether the property was inherited as “joint tenants with survivorship” or “tenants in common.” Seek guidance from an estate lawyer regarding your right of possession.
If you find yourself in one of the above situations, remember these options and don’t be afraid to explore others. Consult with family members, estate lawyers, mortgage lenders, and real estate agents to help you through the decision making process.
If you keep the home, start with a tax attorney who specializes in estate tax law. They can help with paperwork. If a mortgage is involved, time is of the essence because, unfortunately, mortgage payments are required monthly. There’s no way to freeze them. On the other hand, if there isn’t a mortgage on the property, you may be able to take some time to make up your mind. Know that the salary-based mortgage consultants from American Financing are always ready to guide you through loan options, helping to customize the right fit for your financial situation.