What Happens If You Inherit A House With A Mortgage?

When a loved one dies, it's normal to go through a range of emotions, including shock, anger, and guilt. It can be even more difficult to process your emotions when you are also trying to arrange a funeral and deal with the distribution of the deceased's estate. Additional grief or guilt can be a complex part of receiving an inheritance, and it can be confusing and stressful to understand your obligations related to the assets you inherit — especially if it involves property like a house. And if that home still has a mortgage attached to it, that could add even more complication into the mix.

Inheriting certain assets can feel like a curse in disguise, but the processes required to take care of an inherited mortgage aren't as confusing as they may seem at first. For starters, continue making the required mortgage payments to avoid late fees or even foreclosure. It can take several months or longer for an inherited home to go through probate and for the deed to get transferred into your name, but heirs can still make mortgage payments while the title's in the decedent's name. And once the property officially transfers to you, there's still a lot more to consider.

Most mortgage loans are assumable mortgages, meaning the heir is able to assume the same interest rate, outstanding balance, and loan term that the decedent had. The Garn-St. Germain Depository Institutions Act generally allows you to assume the mortgage without a credit check against you. You won't have to pay closing costs, either. You simply have to eventually transfer the home's deed and the loan into your name.

Always review the loan terms and interest rate on the mortgage. You might determine that refinancing the mortgage can lower the interest rate. If you have the right credit score to unlock the best interest rates, it'll be easier to afford the monthly mortgage payments. If you choose to refinance, though, you'll be subject to the normal aspects of refinancing a mortgage, including a credit check, potential closing costs, and a home appraisal.

If your loved one got behind on payments because of illness before passing away and the home loan is in arrears, you can still assume and keep the mortgage. However, it's important to bring the payments current as soon as possible to avoid foreclosure. The heirs should be able to apply for a loan modification that can help with bringing the payments current. If you're ever unsure, contact the lender to explain the situation and ask for help.

Another option is to sell the house you inherited, even if it has an outstanding mortgage. This can be emotionally difficult — especially if you have a sentimental attachment to the property or familial pressure to maintain the decedent's legacy. Before making a decision on what to do, take time to process your emotions and study your financial options to figure out your priorities and make the best decision for you.

If you choose to sell the house, you'll have to pay the remaining balance on the mortgage loan with the proceeds from the sale. You also must make mortgage, tax, and insurance payments until the sale is finalized. If you can wait to market and sell the inherited home until the best time of year to sell your house for the best price, which is typically between mid-March and the end of July, you may receive a higher price and more proceeds to pay off the mortgage.

If the home is underwater, meaning it has a value that's lower than the outstanding loan amount, you can still sell. You could consider a short sale, though that requires the lender's approval to accept the lower payoff to settle the mortgage. Another option is to let the lender foreclose on the house. Though it could cost you your inheritance and hurt your credit score, foreclosure will save you the stress of owning an inherited house that's underwater.