Titles are an element that I struggle with in writing these articles. For this one, I vacillated between “How to Keep the Family Home from Going into Foreclosure,” and “How to Avoid Foreclosure while Dealing with a Death in the Family.”
Both of these were too long. I liked the following title but it seemed a little morbid: “What Happens to the Family Home if the Borrower Dies?”
“Lender policies regarding borrower deaths vary widely” is not exactly a catchy title, but it certainly cuts to the heart of the matter. Part of the reason I’m writing this is to encourage people to read the fine print.
After all, nobody wants to think about the house they grew up in suddenly becoming the property of a bank. Death is an uncomfortable subject as it is, so when the time comes to talk about a loved one’s disposition of assets, it’s understandable that most people run for the exit.
In a perfect world, maybe lenders would express condolences when a borrower dies, and then let the surviving heirs know the debt was forgiven. Maybe it sounds good on paper but I doubt it would work in practice, unless the goal is to make the economy grind to a halt. The reality is that since mortgage debt is secured by the house, the ownership of the property could be jeopardized if a borrower dies before the loan is paid.
For the surviving heirs, one of the first questions that would need to be answered is whether or not the existing mortgage can be assumed after the death of the borrower. Unfortunately, most lenders will not permit an assumption if the deceased was the only borrower named on the loan. Even if two spouses were both on the same loan it may not be possible to assume the mortgage, unless the surviving spouse was the sole breadwinner.
Regardless, if it is at all possible for the heirs to continue paying the mortgage, they should do so. Missing the payments could lead to penalties and the possibility of foreclosure. In a worst-case scenario where the heirs could not afford to continue making payments, they could at least take comfort in the knowledge their credit score would not be affected, if they weren’t on the loan.
It’s worthwhile to point out that, when lenders are given prompt notification of the death of a borrower, they are often willing to be lenient about time frames, as well as any other issues that might affect the estate. As it goes with many other things in life, the key is communication.
Congress in 1982 enacted the Garn-St. Germain Act, which allows lenders to enforce due-on-sale clauses when the title to a property changes hands. The act specifies a number of situations where a due-on-sale clause cannot be enforced, most significantly when title is transferred to a relative through inheritance.
A due-on-sale clause is also unenforceable when a property’s title is transferred into a living trust. As with anything to do with estate planning, a qualified attorney who specializes in the field should be consulted.
This article would be remiss without mentioning term life insurance, which can be used to provide surviving heirs with the means – and the option – to either pay the remaining mortgage or use the funds as they see fit.
A comprehensive analysis of the Garn-St. Germain Act can be found here. A good article about how to prevent debt from negatively impacting your heirs can be found here.
For additional questions or more information, contact me at the number below.
Patrick Stoy (NMLS Numbers 39527 and 39166) has 16 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or (910) 509-7105.