Heir of home must notify mortgagee
Q:
My aunt passed away recently and left me her small vacation cottage in Hyannis. There is still a fairly large mortgage on it. If I decide to keep it, what should I do about the mortgage?
A:
When a property owner dies, lenders generally allow a year for the estate to be probated and settled without exercising their right to “call in” the mortgage.
Most mortgages have a “due on sale” clause giving the lender the right to demand payment in full of the outstanding loan if the property is sold or ownership is transferred.
During the one-year grace period that lenders typically grant following the death of the mortgage holder, the owner’s estate takes over the mortgage payments. When all of the details have been finalized, the estate then transfers ownership to the designated heir. At that point, the “due on sale” clause kicks in.
I should point out, however, that it’s really up to the heir to notify the lender of the change in ownership. As long as the mortgage payments are being made regularly and on time, the lender probably won’t notice, or much care, that the property is in the hands of a new owner.
But if the heir ever went to refinance or defaulted on the loan, or the lender found out some other way that the heir was the owner of record, the heir could wind up in big trouble.
The lender would exercise its right to call in the loan and might even sue the heir for fraud, attorney’s fees and any other costs related to the deception.
There’s a reason why lenders care about a change of ownership. If you’ve ever applied for a mortgage, you know that lenders investigate a borrower’s credit history and ability to afford the mortgage.
If the original borrower secretly transfers his ownership to another person, the lender has no way of knowing whether this new person is able to afford the mortgage.
Instead of simply taking over the mortgage payments, an heir should always notify the lender that he is the new owner and ask to be allowed to assume the loan.
If the mortgage is being held in-house, the lender would most likely be willing to consider the proposal.
If the mortgage has been sold on the secondary mortgage market, the lender has less flexibility, but it may still be possible for the heir to assume the loan or to refinance it, provided, of course, that the heir can qualify for the mortgage.
