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What happens to your mortgage after you die?

What happens to your mortgage after you die? (FG Trade via Getty Images)

For most of us, our home is the largest asset we can pass on to our heirs when we die. But not everyone is able to pay off their mortgage before the end. The average mortgage debt carried by homeowners ages 59 to 77 is $192,000, according to recent data from Experian.

How you write your will and set up your estate plan can make a big difference in what happens to your mortgaged home after you die — and how much of an asset you’re able to leave for your surviving family.

Your mortgage is treated a little differently from your other debt, which is typically settled through your estate before any assets are passed along to your heirs. Most mortgages aren’t transferable, which means the home must be paid off in full to transfer the property title.

But that also means that only those who signed on to the loan can be held liable for a mortgage. Your estate isn’t obligated to pay off the loan — and neither are your heirs, whether you name them in your will or not. So, what happens to your mortgage depends largely on who cosigned the loan, on your will and on your surviving family.

If you have a cosigner on the mortgage, that cosigner is solely responsible for the mortgage after you die. As long as the cosigner is a co-owner and willing to keep the home, the cosigner should notify the lender of the coborrower’s death and take over financial responsibility for the loan, continuing to make payments according to the repayment schedule.

If the cosigner isn’t able to afford the payments on their own, they can apply for a loan modification or sell the home.

The mortgage company is only interested in receiving payment for the home loan. And so it’s up to survivorship details in the property’s deed, your will and other documentation to determine who actually owns the home after your death.

If you willed the home to an heir, the executor of your estate will continue to make mortgage payments until the deed is signed over to the person inheriting your property.

A death also triggers certain protections. For instance, federal law doesn’t allow your lender to call the loan — a term that means to demand full payment for the loan — or foreclose on the property.

The lender is required to give your heir the opportunity to assume the loan under its current terms and offer a loan modification, if they can’t afford the current loan payments. The heir can also choose to refinance the home, pay off the loan in full or reject the inheritance of the home — also called disclaiming the inheritance, in which case any contingent beneficiaries, state laws or federal laws determine what happens next.

If you willed the home to multiple heirs, each person — as owners of equal shares in the property — must agree on what happens to the home. They might agree to sell the home and split any profits from the sale, or one or more heirs may want to buy out the others based on the home’s current appraised value.

If an heir disagrees with other heirs on what to do with the property and the home is still in probate, next steps may be up to the executor of your will. After transfer of the property, co-owners can decide whether it’s worth taking the issue to court.

If you don’t have a will — and only 32% of Americans do — the process can take longer, but the results tend to be the same. In this case, the court appoints an executor to assess the estate and determine the heir or heirs for your property. The executor can be a family member, a trusted family friend or an appointed legal professional, and heirs then typically have the same options as a willed inheritor.

If you don’t have a surviving family member willing to take over the loan, the lender can start the process of foreclosure. The process differs by state, but in most cases, the lender takes ownership and sells off the mortgaged property in a public auction to recoup some of its money.

Related reading: What happens to your bank account after you die?

🔍 Community property laws might supersede your will

If you live in a state with community property laws, your spouse is likely to inherit the property and the responsibility for the debt, whether or not they’re jointly listed on the mortgage. Laws vary by state, but most agree that assets and debts acquired while married are considered joint property. And even if the homeowner names another beneficiary in their will, the homeowner’s spouse is entitled to half of the house as an asset.

The US has nine community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — and one state where community property is optional, Alaska. The laws governing community property are complicated, so talk with an estate-planning attorney or other qualified professional as you put together your will, any trusts and other plans for your estate.

Dealing with the death of a loved one is stressful enough without worrying about how the bills get paid and assets are distributed. To ease any issues with your property for your surviving family, make sure you have a legal last will and testament in place, and consider these three estate plan options.

When deciding how much life insurance you need, consider what you may still owe on your home. That way, you can ensure your family has enough money to pay off the mortgage after you’re gone.

A traditional life insurance policy is the optimal way to be sure your loved ones can keep the family home, if you can qualify and sustain the policy into your retirement. Unlike a mortgage life insurance or mortgage protection insurance, your beneficiaries aren’t restricted to using your policy’s benefit toward the mortgage only.

If you can’t qualify for a traditional life insurance policy, consider mortgage protection insurance (MPI). MPI pays your lender what you owe on your mortgage when you die, so your family can receive the asset free and clear. Depending on the policy, this insurance can also offer limited coverage if you become disabled or lose your job.

You are guaranteed acceptance for an MPI policy, which means you aren’t subject to a physical or medical screening exam. Your premiums are based on factors like how much you owe and the home’s value, not your health. But that also means an MPI policy’s premiums are higher than a similar-size life insurance policy for a healthy person.

A downside to this policy is that the benefit decreases over time. You’ll pay the same premium for the life of the policy, but the more you pay on your mortgage, the less the policy is worth. If you end up paying off your house before you die, you may have paid years of premiums for no benefit.

If you want your family to avoid probate court altogether, contact an attorney or estate professional to help you create a living trust. Trusts offer a full menu of options that can cover a variety of assets, including one that allows you to place a mortgaged home in a revocable trust — a type of trust that can be amended up until your death.

A trust is more expensive to set up than a will, but it can save your family money and time, allowing them to receive your assets, including your house, without having to go through lengthy probate court.

Learn more about mortgages and inherited property when considering your estate planning.

A cosigner can continue on with the reverse mortgage according to the contract. But any spouse or heir not listed as a coborrower must pay off the reverse mortgage if they want to keep the house. Otherwise, the bank will send a due and payable notice, which gives the heirs 30 days to sell the house. That timeline can be extended, depending on the type of reverse mortgage used.

If the loan amount is less than the home’s value, any money left after the loan is repaid belongs to the heirs. If the home value is less than the loan amount, the house must be sold for 95% of its appraised value, and the mortgage insurance will cover the rest.

But as with other mortgage loans, any heir that isn’t a cosigner is under no obligation to repay the mortgage. So heirs can walk away from the house if there’s no potential value in selling it.

Not until you sell it. If you inherit a property and then sell it, you’ll have to pay capital gains taxes, but only on the increase in value from when you inherited the property to when you sold it. That means if you sell the property right away, you’ll pay no capital gains taxes on the profit you make from the sale.

There are other ways to get around paying taxes on the sale, including making the home your primary residence for a set amount of time or using the house as a rental property. But you should contact a tax professional to make sure you qualify for those exceptions and get any other questions answered before you decide.

Each lender has a different process for inherited property. You’ll most likely be required to submit a death certificate and proof that you are the “successor in interest” of the property. The lender should be able to walk you through the rest of the process.

Heather Petty is a finance writer who specializes in consumer and business banking, personal and home lending, debt management and saving money. After falling victim to a disreputable mortgage broker when buying her first home, Heather set on a mission to help people avoid similar experiences when managing their own finances. Her expertise and analysis has been featured on MSN, Nasdaq, and Finder, among other financial publications. When she's not breaking down the complexities of finance, she's a young adult mystery writer of an internationally acclaimed series — and counting.