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. Maybe the inheritance was something you’ve prepared for, and maybe it wasn’t. Either way, there are decisions that need to be made and there may not be a will to offer guidance on what’s next.
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 find yourself in after inheriting real estate.
Inheriting a home with a mortgage?
For some, inheriting real estate can seem like the most incredible gift. Just don’t forget to ask if there are strings attached...like a mortgage. If the home you’re inheriting has a mortgage, you’ll want to understand how the home will be paid for — is it covered by the estate, or do you have to assume mortgage payments?
Let’s start by assuming there is a mortgage, but the estate has a plan in place for you. Ideally, there is a will involved. If you’re lucky, it may dictate you (the heir) receive the home free and clear, which means the executor of the estate needs to use investments, life insurance, and/or other assets to pay off the mortgage. So, you would be inheriting the home without any strings attached...meaning no mortgage to pay! You’re able to take your time to really think about whether or not you want to move in. This can be an ideal situation for renters, but for those who already own a home, you may want to explore other options.
Next, let’s assume it has a mortgage that needs to be paid. Under federal law, the mortgage must be allowed to remain in effect without changes when it passes from one person to another because of a death. This negates any due-on-sale clause in the mortgage, meaning banks cannot demand the full payment of the loan's outstanding balance before the property is transferred. So, you can take over the mortgage and assume the current monthly payments, or you can look to refinance the mortgage to make it a better fit for your financial situation. You may be able to get a different term or a lower monthly payment when looking into other loan programs.
Though, chances are you have your own mortgage payments to cover, so you don’t want to take on any more mortgage payments. In this case, selling the inherited home (or even your home so you can live in the inherited real estate) may be your best option.
Worried about whether or not a mortgage lender will speak with you about a loved one’s mortgage? Don’t be. As of April 19, 2018, a federal rule requires servicers to promptly identify and 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 under federal mortgage servicing rules as the original borrower. Basically, the servicer must treat the successor in interest as a borrower, even if the successor is not listed as a borrower on the mortgage loan account.
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.
This is where you, the heir, come in. It is your responsibility to pay back the reverse mortgage. This is usually done by selling the home. You never owe more than the home is worth because it is government insured. If there is equity leftover after the loan is repaid, then you — the heirs — inherit that money.
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 owned by our senior family members are a little out of date. This means a lot of work needs to happen before you want to live in the home. 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 many months or years and, during this period, mortgage payments and taxes can 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 the home’s potential and it’s overall value. When making home improvements, you are increasing the value or home equity. That equity can be used to help pay for renovations, too.
Whether there’s a mortgage on the home or not, you have options like a cash out refinance to access cash. It works by replacing your current mortgage with a new one that has a higher balance. You are refinancing for more than you owe. And, the difference between the two loans is then distributed as cash.
Inheriting a large home that’s too much upkeep?
Maintaining a home comes at a cost when you consider property taxes and insurance. But the expense can really add up when you consider the size of the home. You have to think about energy, heating and air, even furnishing the place. If you’re a small family of three or four, does it make sense to move into an inherited house that can shelter a family of seven?
Instead, you may want to consider selling the home and using the proceeds on something else. Maybe it’s a family vacation and adding more to your investments. Or maybe it’s spending the proceeds on purchasing a new home for your family.
Inheriting a home with siblings?
If there are multiple heirs to the inherited real estate, things can get messy fast. You’ll need to come to an agreement on next steps. Will one of you move in? Will you agree to sell it and split the proceeds? Who will oversee the property sale? Better yet, can you all agree to go through belongings and assets together? Whether you decide to keep the home or not, you’ll have a lot of items to sort through and possibly get rid of. These items may have sentimental value to one person, but not another.
Let’s not overlook the possibility that you cannot come to an agreement on what to do next. Because it’s a shared inheritance, there are legal matters involved and they will vary depending on whether the property was inherited as “joint tenants with survivorship” or “tenants in common.” You’ll want to seek guidance from an estate lawyer regarding your right of possession.
If you find yourself in any of the above situations, remember these options and don’t be afraid to explore others. Consult with family members, estate lawyers, and even mortgage lenders and real estate agents to help you through the decision making process.
If you choose to keep the home, you’ll want to start with a tax attorney specializing in estate tax law to help with the complex paperwork. If there’s a mortgage involved, time is of the essence because, unfortunately, mortgage payments are required on a monthly basis. 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.