If you die without a coborrower or cosigner, your mortgage still needs to be paid. The debt doesn’t automatically go away, but there are regulations in place that make it easier for your next of kin to take over the loan or sell your house without the lender rushing in to foreclose.
What happens to my mortgage if I die?
Unless you have a coborrower or cosigner listed on your home loan, there will be no one to legally take over the loan. But whoever inherits the home has to decide if they want to keep the house and take over the mortgage or sell the home and pay it off.
If no one continues to pay the loan and payments become overdue, the lender will be forced to take action to foreclose and settle the debt. Fortunately, there are laws in place to protect your heirs in the event of your death.
How federal laws protect your heirs
According to Nolo Law, “Many, if not most, loan contracts contain a ‘due-on-sale’ provision. This clause states that if the property is transferred to a new owner, then the full loan balance can be accelerated, and the entire loan must be repaid.”
But as Nolo Law explains, the federal Garn-St. Germain Depository Institutions Act of 1982 protects your heirs from enforcement of a due-on-sale clause for a property transfer after a borrower’s death. This means if your property transfer is covered by the Garn-St. Germain Act, your heirs can keep making payments on your loan and the transfer can’t trigger a foreclosure.
Additionally, an interpretive rule from Consumer Financial Protection Bureau (CFPB) states that when a borrower dies, the borrower’s heirs can be added to the mortgage without triggering the Bureau’s “Ability-to-Repay” rule, making it easier for them to take over the loan or request a loan modification.
How will the fate of my mortgage be decided if I die?
There are three key factors that determine what will happen if you have a mortgage when you die: your mortgage agreement, your will and your insurance policies. Let’s have a closer look at each.
Your mortgage agreement
If you have a coborrower or cosigner on your mortgage, it’s a straightforward matter to determine who will take over the loan.
- Coborrower. If you signed a mortgage agreement with a coborrower — for example, your spouse — that person can continue making payments, refinance the loan or sell the home.
- Cosigner. If you have a cosigner on your loan, the cosigner would be responsible for taking over the mortgage payments.
Tips for being prepared with your home loan
- Enter into your mortgage with your eyes wide open. Make sure you fully understand your mortgage policy and what happens in the event of death.
- Encourage any coborrowers and cosigners to address your mortgage in their own will and insurance options.
Your will
A will is the key to ensuring your wishes are carried out in the event of death. It clearly distributes your assets and gives instructions about your funeral and legal issues. Yet, a recent poll by Caring.com indicated that a staggering 68% of Americans die without a will.
If a person dies without a valid will, they are said to die intestate. In this case, the state will step in to determine how to handle your assets and debts, including your home and mortgage. Each state in the US has a different process and formula, and it may not be the formula you would choose yourself.
Tips for preparing your will
- Keep a copy of your will with your important paperwork and include a note on the front stating where the original is and who to contact if you die.
- Ensure your will is valid by updating it annually or as soon as your financial or family situation changes.
- Keep in mind that any beneficiary you name for your property will also be responsible for the debt you have remaining on it.
See how to make a will online or consult with an attorney if you need more guidance on setting up a will or living trust for your heirs.
Your insurance policy
While your death might equate to a significant amount of debt and responsibility to your loved ones, take steps to minimize or eliminate that stress altogether with an adequate life insurance policy.
A life insurance policy will pay out a lump sum to your beneficiaries in the event of your death. They can spend the money however they wish, including paying off your mortgage. For this reason, a life insurance policy can help to ensure your family can stay in their home when you’re gone.
Tips for insurance policies
- Buy the right amount and length of coverage. Ideally, your life insurance policy should match your longest financial obligation — such as your mortgage. It should also have a face value to reflect that. Let’s say you have 20 years left on your mortgage. Aim to take out a 20-year policy that has enough coverage to cover your monthly repayments.
- Don’t delay getting insurance. The younger you are, the cheaper your rates will be — which is why it’s a good idea to buy coverage as soon as you identify a need for it.
Do you need a mortgage life insurance policy?
Mortgage life insurance is a type of term life policy that’s designed to cover your mortgage if you die before paying it off. It’s often sold by lenders, and unlike traditional life insurance policies, the money doesn’t go to your beneficiaries. Instead, it’s directed right to your repayments.
While mortgage life insurance is one way to protect your loved ones from being burdened with repayments, it’s a very specific policy. If you have other financial responsibilities, it’s worth looking into a regular life insurance policy. These are more customizable, and your beneficiaries can still use the payout to cover the mortgage.
Note that mortgage life insurance is not the same thing as private mortgage insurance (PMI), which doesn’t offer any type of death benefit.
