When home buyers go to the closing, it’s unlikely they’re thinking about what happens if they die before their mortgage gets paid off.
“It’s the last thing on their minds,” says Bernard A. Krooks, founding partner and elder law specialist with New York-based Littman Krooks LLP. “They’re thinking about whether or not an inspection went well or when the contractors will get repairs done.”
But while nobody wants to think about dying, borrowers should take advance steps to ensure an outstanding mortgage doesn’t become a burden for loved ones. Unlike credit-card debt, the home loan is secured by the house, says Nanci L. Weissgold, a partner in the Washington, D.C., office of Alston & Bird. Unless heirs are cosigned on a home loan, nonpayment can’t damage their credit score, but they should continue to pay the loan if they are able, since missed payments could incur penalties and/or lead to foreclosure, Ms. Weissgold says. She adds that when lenders are promptly notified of the borrower’s death, they usually are understanding about time needed to resolve estate issues to avoid foreclosure.
Policies about what happens when a borrower dies can vary widely among lenders, and terms are usually buried in the fine print of mortgage contracts, Mr. Krooks says. One of the first things to check is whether a lender will even allow anyone else to assume the loan upon the borrower’s death. When the deceased is the only borrower, most lenders won’t, says Ric Edelman, CEO of Fairfax, Va.-based Edelman Financial Services. Also noteworthy: If two people, typically spouses, are co-borrowers, don’t assume that the surviving spouse can automatically take over the same note and terms if it’s the sole breadwinner who dies.
“If that person dies, the lender may call the loan due,” Mr. Edelman says. “At the very least, they will want the surviving spouse to demonstrate equal creditworthiness.” That may not be a problem for nonworking survivors if the breadwinner bought life insurance or left a 401(k) or other inheritance. But many lenders still will require a refinance to confirm that the heir can afford payments.
One other potential snag: Once lenders are informed of a borrower’s death, they may be reluctant to release loan information because of privacy restrictions, Ms. Weissgold says. In addition to a death certificate, survivors and administrators may be required to provide additional information confirming their legal status, she adds. Required documentation will vary depending on lender rules and the location of the property, among other things, Ms. Weissgold says.
To smooth this process, the Consumer Financial Protection Bureau in 2014 introduced new borrower protections 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 require servicers to promptly communicate with heirs after being notified of a borrower’s death, with the ultimate goal of avoiding unnecessary defaults and foreclosures,” says Samuel Gilford, a CFPB spokesman.
Here are a few more considerations when estate-planning involves real estate:
• Entitled or not. Whether or not a borrower is on the property title also matters. For example, a spouse listed only on the title wouldn’t see his or her credit score affected if payments ceased, but a spouse on the loan paperwork and not on the title would have liability, Mr. Edelman says. He recommends all borrowers be on both.
• Safeguarding against family squabbles. If homeowners anticipate disagreement among heirs over the fate of the property, they should put their wishes as to who inherits and/or gets to stay in the house in the will or other estate planning document, such as a trust or partnership agreement, Mr. Krooks says. For example, a will could stipulate that a second wife can live in the house for the rest of her life, and only upon her death would the property be sold and proceeds divided among the children of the first marriage, he adds.
• Professional guidance. Because estate laws are complex and differ across states, consulting an estate attorney on all matters related to wills and inheritance is highly recommended.
Source: The Wall Street Journal