In these circumstances, the estate must sell the house to repay the loan, because it simply does not have any other means to make the required repayment of the loan balance. This does not necessarily mean that the house must be sold to a stranger, but the loan must be repaid and the house is the estate’s only means for obtaining the necessary funds.
The house may be sold for $55,000 on the open market to repay the $50,000 loan, distributing the remaining $5,000 to Harriet’s heirs along with the $20,000. The house may also be sold to one of the heirs, who must independently obtain the necessary funds required to make the purchase. If David wishes to retain the house, he must pay the balance of the loan, as well as ensure that Ricky receives payment for his share of the house’s equity.
Although David may use funds from any source to repay the satisfy the loan, these transactions are typically conducted as a purchase because the heir borrows the required funds from a bank who requires a new mortgage against the property.
Grant of House Subject to Mortgage
The phrase “subject to mortgage” means that the property is conveyed with the mortgage in place. These transactions require the grantee to satisfy the mortgage, which means that the grantee must satisfy the underlying debt. Suppose that Harriet has a will that gives this house to Ricky subject to the mortgage and the remaining estate to David. Although Harriet has given the house to a specifically named person, it is still very likely that the loan balance will need to be satisfied.
As stated earlier, the note and mortgage will each contain terms that indicate what actions by the borrower will constitute default. Most of these documents will contain a clause that indicates any transfer of an ownership interest in property will be an event of default. The average loan documents also indicate that default permits the lender to accelerate the loan, which means that the entire remaining balance is due immediately.
When Ricky receives the house from Harriet’s estate, the entire loan balance will become immediately due and require someone to repay it in full. Because the mortgage goes with the property and not the borrower, Ricky will either repay the loan or the lender will use its rights under the terms of the mortgage to foreclose the property for repayment.
Grant of House Not Subject to Mortgage
Mortgaged property may also be given to a specifically named person with the expectation that the remaining loan balance will be paid by the estate. When this is done the estate’s assets must be used to repay the loan before any assets are distributed to the remaining beneficiaries.
Using the same facts as above, Ricky would basically receive the entire estate and David would not receive any share. However, with those same facts as above, even if the house is given to Ricky with instructions that the estate pay the loan balance, the estate is still in a situation where there aren’t sufficient liquid assets to repay the loan and will be faced with the same options as before.