No home buyers go to the closing thinking about what happens if they die before their mortgage gets paid off, says The Wall Street Journal in "What Happens When a Homeowner Dies before the Mortgage Is Paid?" Even so, borrowers should take advance steps to make sure that an outstanding mortgage doesn't become a problem for their loved ones.
The mortgage is secured by the house. Nonpayment can't damage an heir's credit score unless he or she is a co-signer on the mortgage. Nonetheless, they should keep paying on the mortgage if possible because missed payments could incur penalties and lead to foreclosure.
Lenders who are notified of the borrower's death right away are usually understanding about resolving estate issues to avoid foreclosure.
Postmortem mortgage policies vary depending on the lender. These terms are usually in the fine print of the mortgage.
See if the lender will permit anyone else to assume the mortgage upon the borrower's death. If the deceased is the only borrower, most lenders typically do not do this. In addition, if spouses are co-borrowers, don't assume that the surviving spouse can just take over the same note and terms when it's the sole breadwinner who passes away.
There is a federal law that places restrictions on lenders' ability to cancel or call loans due to death; however, the prohibitions exist only if certain conditions are satisfied.
When a lender is informed of a borrower's death, it may be reluctant to release loan information because of privacy restrictions. Along with a death certificate, survivors and administrators may be required to provide additional information to show their legal status.
The Consumer Financial Protection Bureau introduced new borrower protections in 2014 to make it easier for heirs to acquire account information, pay off the loan, or request a loan modification after the death of a homeowner. The new rules mandate that loan servicers promptly communicate with heirs after being notified of a borrower's death.
The goal is avoiding unnecessary defaults and foreclosures.
In addition, when estate planning involves real estate, whether a borrower is on the property title also matters. If homeowners anticipate issues among their heirs over the fate of the property, they should put their inheritance wishes regarding who inherits and/or gets to stay in the house in their will or other estate planning document.
Finally, estate laws are complex and are not the same in each state. You should consult with an estate planning attorney.
Reference: The Wall Street Journal (April 6, 2016) "What Happens When a Homeowner Dies Before the Mortgage Is Paid?"