The moment you close on your home, you should make sure that your heirs will not be stuck with a no-win situation that leads to a home being abandoned, according to "What Happens When a Homeowner Dies before the Mortgage Is Paid?" in The Wall Street Journal. It may not be the first thing on your mind when you take possession of the house, but it should be dealt with as soon as possible.
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.
Speak with an estate planning attorney shortly after buying and moving into your new home, regardless of your age and stage in life. State laws vary when it comes to estate planning, so if you have moved from another state, you need to meet with an estate planning attorney in your area to ensure that your family and your new home are protected.
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Reference: The Wall Street Journal (April 6, 2016) "What Happens When a Homeowner Dies Before the Mortgage Is Paid?"