If you inherit a house with a mortgage, you need to be fully aware of the different options and responsibilities involved. Of course, inheriting and taking on another mortgage will obviously impact your finances, but that’s just part of what you need to know before taking over.
What Happens to a Mortgage When You Inherit a House?
When someone passes away and leaves you a house, you’re the beneficiary. You also inherit the finances, including a mortgage. The mortgage isn’t taken off the books, but the lender usually allows the heir to assume that responsibility.
However, the whole process can take some legal twists and turns. For example, the Estate Administration Act outlines that the state’s executor must handle debts before distributing any assets. That means paying off a mortgage before the house is transferred to the person who inherited it is possible.
If the estate does not have enough money, the people who inherited it must either take over the mortgage, refinance it, or sell the house. It’s important to remember that these beneficiaries have no legal obligation to take over the mortgage unless they decide to keep the property.
Can You Assume the Mortgage After Inheriting a Property?
You can assume the mortgage after inheriting a property if you have a stable income and good credit, making the mortgage payments possible. There are a few other boxes that need to be checked as the process moves along.
- One of the first steps is to notify the lender that someone has passed and provide them with a copy of the death certificate.
- Find out about their inheritance policies. For example, if there’s enough money in the estate, the executor can use the assets to cover mortgage payments in most cases. However, payments need to be made to avoid defaulting on the mortgage while legal matters are being settled.
- It’s also a good idea to talk to a real estate lawyer to get the information you’ll need on property transfers and other agreements.
Other repayment solutions can be possible if an inheritor doesn’t meet traditional mortgage requirements. For example, a private lender can provide a second mortgage on another property with interest-only payments that can cover the transition period for the inherited home. This type of financing is based on the equity you have in the other property and the market value. These loans offer a temporary bridge-type solution while legal matters are sorted out.
The beneficiary of the property doesn’t legally need to take over the mortgage unless they make a decision to refinance or assume it. However, they need to be aware that if they don’t the lender can foreclose or require full payment
The Impact of Inheriting a Home with a Mortgage on Your Finances
If you already have a traditional mortgage in another location and are thinking about a second mortgage from a traditional bank, you need to consider the following:
- When you apply for new credit or refinance, a bank will take another look at your debt-to-income (DTI) ratio. Lenders use this ratio to assess how you manage debt and compare your monthly payments to your gross monthly income. A higher DTI can mean higher interest rates when you assume a second mortgage.
- Adding that extra money to your expenses can cause financial strain. Remember, you’ll be responsible for maintenance costs, insurance, property taxes, and the mortgage for two properties.
A private second mortgage can be a big help here, especially if you’re deciding to sell the inherited property. The interest-only payments you make here provide a bridge that can give you some money to pay down the inherited mortgage while you make the sale.
These types of private mortgages have a higher interest rate than a more traditional loan but more flexible lending criteria. You can also sign on for one of these one-year products, which can give you the money to pay for the other mortgage while you decide what to do.
Of course, selling the house is one option. You must decide whether you want to do that or keep it.
Should You Keep or Sell the Home After Inheriting a Mortgage?
Here are five things you need to consider when making this decision.
- You might be able to renovate the property and then use the rental income. Once again, a private loan can help you get the cash to add another bedroom or bathroom. These loans don’t have the same income requirements as traditional ones and accept money from contract work.
- A private loan is an excellent temporary solution if you want to keep the inherited home and your DTI is high. A second mortgage from a private lender can give you the money to reduce your other debts so you can reapply for a traditional mortgage later.
- Before you decide, you’ll need to consider the possible tax benefits. A Principal Residence Exemption can help you avoid capital gains tax. You’ll also need to determine whether you need to move into the inherited home and for how long.
- You’ll also need to consider that there might be outstanding debts on the inherited home. A private mortgage can be used to consolidate that into one payment so you can keep the inherited property rather than sell it.
- A private second mortgage is a one-year short-term investment that allows you to wait out a bad market and sell the inherited home when the market improves.
If you balance all these things out and decide to keep the property, you must consider how to make an extra mortgage payment.
How to Handle Mortgage Payments on an Inherited Home
Having a steady income to make the mortgage payment on an inherited home will ease any financial worries. Some homeowners will want to consider secondary suites that can be rented out.
There are a few other options.
- If more than one person has inherited the home, you can explore different options. A shared ownership agreement to cover the mortgage cost might not be possible. If so, one or several beneficiaries can buy the others out using a private mortgage or personal funds. Remember, a private loan has a streamlined application, and you won’t need to go through a lengthy administrative process. This can avoid what might otherwise be a forced sale or legal dispute.
- Deciding on some renovations to make the place a short-term rental, such as a VRBO or Airbnb, can also work. However, a traditional loan from a bank can take weeks or months to get approved. Securing a private second mortgage is a faster path forward so you can earn income from a rental quickly.
In the end, you might exhaust all of your possibilities and still find the mortgage on an inherited property is too much for your finances.
Options If You Can’t Afford the Mortgage on an Inherited Property
If you can’t afford the inherited property, a debt consolidation loan through a private lender can give you time to sell. This is a good solution for people with several high-interest debts, such as credit cards.
Consolidating them all into one payment uses property as collateral. Thus, you can free up some of your cash flow and make mortgage payments while you list the Inherited property.
Another option is a private lender’s home equity line of credit (HELOC). These are easier to qualify for, and even people with bad credit can get approved. Getting one of these private loans can allow you to make mortgage payments while deciding whether to refinance, sell or rent.
