Since a mortgage can last years---often 30 years or longer---a mortgage that ends with the death of a mortgagee is a common occurrence. There are several laws and lender standards that govern this process, and while the details may vary based on the lender and the state where the mortgage was created, there are several basic processes that survivors can count on if a parent dies.
Mortgage Debt
When a mortgagee dies, the mortgage debt does not follow people. In other words, it will not die along with the mortgage holder, and an heir will not immediately inherit it. Instead, the mortgage follows its collateral; in this case, the house that was used to purchase it in the first place. In some cases, if only one parent dies, the surviving spouse may have been jointly named on the mortgage, and will still be responsible for making payments. But if all people on the mortgage contract have died, the mortgage follows the house into the estate.
Debt Payment Obligation
The estate created at the death of the mortgagee has an obligation to pay off the mortgage, usually the entire mortgage debt at once. Most lenders have clauses in their contracts that require this immediate payment upon the death of the person that took out the mortgage. The executor of the estate will first use any funds in the estate, including any cash leftover, to pay off the mortgage. It is uncommon that there will be enough cash leftover to pay off the entire mortgage, so the executor then turns to the house.
House Liquidation
With part of the mortgage debt still left, the executor will sell the house that was used as collateral for the mortgage, and use the proceeds to pay off the rest of the loan. In this case, if there is any money leftover from the sale, then it will be placed back into the estate and treated like the other assets in terms of inheritance. If part of the mortgage debt is leftover, lenders may be able to apply to the estate for further payment, but with the collateral gone and the mortgagee dead, the debt is typically satisfied. The lender cannot legally pursue payment from a survivor.
Alternative Arrangements
There are many specifics that can vary when a mortgagee dies. For instance, if a parent took out a life insurance policy specifically for the mortgage, that policy will activate and pay off the rest of the mortgage upon death. Also, some lenders change contracts to allow surviving children or others to assume the mortgage at the death of the original mortgagee. This allows heirs to keep the property and start paying off the mortgage themselves.
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