You Might Inherit The House, But You Don’t Inherit The Loan

I am often asked about how property and loan transfers take place when an owner dies. It is important to understand that the title to the property and the loan are two separate transactions, regardless of the type of loan on the property.

Title to the property can be transferred from the deceased to another entity with a will, beneficiary deed, trust, or other legal instrument. Since I am not an attorney, I am not going to go into the relative merits of each of these methods of transfer here. If you would like to speak to an attorney, please give me a call for a referral if you need one. 303-469-1254.

As I mentioned, transferring title to a property is a separate transaction from transferring interest in a loan. Reverse Mortgages are typically due when the borrower no longer lives in the property as his/her primary residence. Traditional “forward” mortgages typically have a “Due on Sale” clause that causes the loan to come due when ownership transfers for any reason.

This means that when a property is transferred due to a death, the new owner gets title to a property that is subject to a loan that must be paid off. The recipient of the property can choose to pay off the loan(s) by 1) refinancing the property with a new loan, 2) selling the property and paying off the loan, or 3) paying off the loan with other monetary resources.

The recipient of the property should expect minimal cooperation from the old mortgage lender if prompt action is not taken to pay off the existing mortgage. The lender is typically under no obligation to extend a loan to the new owner and it is up to the new owner to find a way to pay off the old loan. Otherwise, the new owner should expect the old lender to foreclose on the property.

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