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Who pays the deceased’s mortgage?
An average mortgage transaction can be considered in terms of two main parts: The note and the mortgage.
The document that evidences the terms under which parties agree to lend, borrow, and repay an amount of money is a note or promissory note. The note is a contract between the lender, typically a bank, and the borrower that outlines and defines each party’s obligations with respect to that loan. In addition to stating the terms of repayment, the note typically indicates the different actions of the borrower that will be considered a default of the note.
As part of the borrower’s obligation under the note, specifically identified property must be given as collateral for the loan. The document that identifies this property and evidences its use as collateral is a mortgage. In addition to the terms of default found in the note, the mortgage also indicates terms that will constitute default. An important aspect of the mortgage is its continued validity against the described property until the lender takes official action to indicate that it is no longer effective.
Another way to consider this is that the mortgage goes with the property, not with the borrower. If a borrower sells the secured property without ensuring that an existing mortgage is satisfied, the secured property continues to remain collateral for the borrower’s debt and can be foreclosed by the lender. The lender has the right foreclose even though the secured property has a new owner and even though the new owner did not borrow or receive any money from the lender.
Mortgage After Death
Just as with the deceased’s unsecured debts, a note associated with a mortgage is not forgiven simply because the borrower dies. However, unlike the deceased’s unsecured debts, a note associated with a mortgage has a claim to specific property for repayment.
When the deceased’s estate does not have enough assets to fully pay the note, the lender can take the mortgaged property to the extent necessary to fully satisfy the remaining amount of the loan. According to the same concept stated above, the mortgage goes with the property, not with the borrower: even though the borrower dies and is not longer associated with the property, the property continues to remain collateral for the borrower’s debt.
In other words, the deceased still owes the loan, the property is still subject to the mortgage, and the property can be sold to repay the loan if necessary.
Insufficient Liquid Assets
Harriet takes a loan, granting a mortgage to her individually owned house. Harriet later dies without a will and is survived by her two sons, David and Ricky. At the time of her death Harriet owes $50,000 on the note and has a $75,000 estate, of which $55,000 represents the value of her house. Although Harriet’s total estate ($75,000) has a value greater than the loan balance ($50,000), only $20,000 is available as cash, because her house value ($55,000) represents a portion of the total estate value.