How do I hang onto an inherited property with a mortgage?

Question

I will inherit a property from relatives when they pass on, but there is still a sizable mortgage on the property. If they were to both die sooner accidentally, I believe that the mortgage would become an issue. I do not plan to move into the home, so I'm told I would have to qualify for the loan. I believe they need to have a will that leaves the property to me, and I could have them file a quit claim deed? If I cannot qualify at that point in time, I would lose the house. Is there anything that I can do now to position myself to keep the property? I suppose I could place a tenant, wait until the mortgage company notices the death, and hope that the rental income in the meantime will help me qualify for a new loan. Or possibly refinance with a hard money lender for 1-2 years while establishing the income stream? Any other ideas?

Steve Vaughan · Answer

My Aunt and Uncle died suddenly in a car crash last Christmas.

Their (or my cousin's) probate attorney mailed the mortgage co a letter to inform them.  My cousins were given 6 months to settle the estate mortgage payment free.

If your relatives pass the house down to their heirs prior to death, the heirs will receive their cost basis.  Instead of inheriting it at then current market value, there may be a (huge) taxable gain to pay in addition to the mortgage.

DO NOT HAVE THEM QUITCLAIM PRIOR TO DEATH unless they bought at the absolute peak of the market and it's worth way less now than when they bought.

Scott L. · Answer

Assuming no other debts of the estate to be settled by the equity in the house, you should NOT have to re-qualify for the mortgage, or re-mortgage the property. You will take over the mortgage at the same terms as the decedents. This is for standard FNMA mortgages and specified by Garn-St. Germain Act

George Skidis · Answer

First check into the legality of placing the property in a land trust in your state. If ok then get the realatives to place the home in a land trust for "Estate Planning Purposes" now with yourself as trustee. If handled properly this avoids probate . As long as the home is owner occupied the bank is controlled by the Garn Saint Germain Act and should allow your relatives to do this. Once done with you as trustee the bank should get used to dealing with you. Check with an attorney and get your documents ready before your relatives get ready to place it in trust.

John Nachtigall · Answer

Out of the box suggestion.    You could take out an insurance policy that would be worth most if not all of the mortgage at the time of death.

Simple 20 year term life insurance  is 100-200 a year for 250k coverage, so ~$15 a month.   Seems like a cheap way to ensure you eventually get the house mortgage free.

Stephanie P. · Answer

@Sarah Lorenz

The real answer is actually a question.

What do the numbers tell you to do?

If there is sufficient equity and you want to refinance it, then refinance it and put it into your name after probate (if you have to wait that long).

If there is insufficient equity, but it cash flows, keep the current mortgage (if allowed).

If it won't cash flow and there is no equity, contact the bank and tell them the keys are in the mailbox.

You should probably get a decent estate planner, in your area, to spend an hour batting around the different scenarios.  Have a good all around lender, one that works with portfolio loans as well as bank loans review what the estate planner says before you proceed with anything.  Seasoning is different for FNMA than it is for a portfolio lender.  Hope that helps.

Best of luck.

Stephanie

Vincent J DeVito · Answer

check with someone but sometimes the acceleration clause is not utilized if on death of borrower(s) , the property is transferred to a relative.

THEY NEED TO GET A WILL....and maybe you should just move to immediately sell the property on their death....it would be ashamed

In French v. BMO Harris Bank, 65 the Illinois bankruptcy court held that the Chapter 13 debtor, the nephew of the deceased title holder of the property who was the mortgagor under a mortgage with a due-on-sale clause and received title to the property pursuant to an Independent Executor’s Deed, was not in violation of the due-on-sale clause because, as the court stated: Under the Garn–St Germain Act and its implementing regulations, a mortgage lender, among other restrictions, “shall not exercise its option pursuant to a due-on-sale clause upon ... [a] transfer to a relative resulting from the death of the borrower.” 12 C.F.R. § 591.5(b)(1)(v)(A) (implementing 12 U.S.C. § 1701j–3(d)(5)).

Steve K. · Answer

@Sarah Lorenz , I see from your profile that you're already are experienced REI. I'd encourage you not to use the vocabulary "....I might lose the house".

While you're likely inheriting a house with a mortgage....aren't you still inheriting the aunt's equity? I like to acquire fix/hold rentals....after the BRRR method, I have a rental with zero money down, and a 75% LTV. My first thought is, that may be what you're inheriting. (or maybe there's more equity....a 50% LTV?)

So, don't think of it going into foreclosure.....losing it.....think of selling it to extract the equity, or keep it as a rental if it will cash flow, and grow your wealth.

Hope you hear of an easy way to keep the existing mortgage. I've never done a "subject to.." acquisition...but don't those REI's love this type of "assumed loan"?

Sarah Lorenz · Answer

@Scott L. I was told that was the only true if I occupied the property. I will research the Garn-St. Germain act. Thank you.

Filipe Pereira · Answer

Sarah, do your relatives have any other debts or savings? If they have other debts, and not enough savings to cover it, you may be forced to sell the property (to capture the equity) to pay the debts (if you don't have the cash available to pay them out of your pocket).

That being said if we assume they have no other debts and no other savings, yes, you would need to be able to qualify for the mortgage. Unfortunately, I would imagine most lenders will require more than a couple months worth of rental income to qualify you for the mortgage. My experience is that they will only count a percentage of the income anyway. I would try to find a partner (mom, dad, sibling?) that is willing to go in with you on this if you are dead set on keeping the property. Good luck!Filipe

John Nachtigall · Answer

Darn x2.  There goes my brilliance award....

What about through AARP, credit union or AAA or some other organization?  For example my job gives life insurance (2X yearly income) for free, regardless of age.   Perhaps if you purchase through a group??   You see the commercials and the junk mail all the time....may not actually be cheaper but you might look at it.   The AAA offer I just got in the mail was less than $30 a month.

I also know there is something called mortgage protection insurance where it pays your mortgage if you die, but it is almost always a rip off compared to regular insurance.   However, in this case it may be cheaper.  That would be through the mortgage company I imagine.

Just throwing them out, I am not sure they would help.  Good luck.

How do I hang onto an inherited property with a mortgage?

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